Monthly Archives: May 2011

One Dollar CEO Salaries

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, May 13, 2011
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The following post comes to us from Sophia Hamm of the Accounting Department at Ohio State University, Michael Jung of the Accounting Department at New York University, and Clare Wang of the Accounting Department at the University of Pennsylvania.

In our paper, One Dollar CEO Salaries: An Empirical Examination of the Determinants and Consequences, which was recently made publicly available on SSRN, we examine a sample of 278 CEO-firm-years (87 firms and 88 CEOs) between 1995 and 2009 where the CEO’s salary is $1. First, we analyze the determinants of a firm’s (or CEO’s) decision to reduce annual salary to $1. We explore characteristics related to the firm, stock, market following, CEO and board of directors, and find that larger firms, higher growth firms, more heavily-traded firms, firms with greater leverage, and firms with lower lagged return-on-assets are more likely to have $1 CEO salaries. We also find positive associations with retail investor ownership in the firm, CEO ownership in the firm, and when a CEO is also the chairperson of the board. Overall, these findings suggest that relatively more powerful CEOs at visible firms with high retail investor ownership are more likely to set a $1 salary, particularly following poor firm performance.

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May 2011 Dodd-Frank Rulemaking Progress Report

Posted by Margaret E. Tahyar, Davis Polk & Wardwell LLP, on
Thursday, May 12, 2011
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Margaret E. Tahyar is a partner in the Financial Institutions Group at Davis Polk & Wardwell LLP. This post discusses a Davis Polk report which is available here. A post about the previous progress report is available here. Other posts about the Dodd-Frank Act are available here.

This posting, the Davis Polk Dodd-Frank Rulemaking Progress Report, is the second in a new series of Davis Polk presentations that illustrate graphically the progress of the rulemaking work that has been done and is yet to occur under the Dodd-Frank Act. The Progress Report has been prepared using data from the Davis Polk Regulatory Tracker™, an online subscription service offered by Davis Polk to help market participants understand the Dodd-Frank Act and follow regulatory developments on a real-time basis.

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New Challenges and Strategies for Designating Delaware as Jurisdiction for Corporate Disputes

Posted by Charles M. Nathan, Latham & Watkins LLP, on
Wednesday, May 11, 2011
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Charles Nathan is Of Counsel at Latham & Watkins LLP and is co-chair of the firm’s Corporate Governance Task Force. This post is based on a Latham & Watkins Corporate Governance Update by Mr. Nathan, Patrick E. Gibbs, Michele F. Kyrouz and Derrick B. Farrell. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

Since the Delaware Chancery Court’s opinion in In re Revlon, Inc. Shareholders Litig., [1] where Vice Chancellor Laster endorsed a Delaware entity’s right to mandate in its governance documents a chosen forum for the resolution of intra-corporate disputes, numerous boards of public companies have determined that such a provision is in the best interests of the corporation and its shareholders.

At least 36 boards of public companies have enacted bylaw amendments seeking to designate Delaware’s Chancery Court as the exclusive jurisdiction for intra-corporate disputes, [2] and at least 37 companies have included such provisions in their charters. [3] In addition, at least 11 public companies have included an exclusive jurisdiction provision for their charter or bylaws in proxy materials for their 2011 annual meetings. As of April 28, 2011, three of those proposals have been voted on and approved and the remaining eight will be voted on later in this proxy season. [4]

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Can Firms Build Capital-Market Reputation to Substitute for Poor Investor Protection?

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, May 11, 2011
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The following post comes to us from Jie Gan, Professor of Finance at Cheung Kong Graduate School of Business, Beijing, China; Michael Lemmon, Professor of Finance at the University of Utah; and Martin Wang of Hang Seng Bank.

In the paper, Can Firms Build Capital-Market Reputation to Substitute for Poor Investor Protection? Evidence from Dividend Policies, which was recently made publicly available on SSRN, we provide empirical evidence of one particular commitment mechanism that firms use to establish a reputation for good treatment of shareholders. Specifically, we show that in countries where legal protection of shareholders is weak, firms with good growth prospects establish capital-market reputation through commitments to generous dividends so that they can gain better access to the equity market in the future. To qualify for a credible commitment, two conditions need to be satisfied. First, it has to be costly so that other (bad) firms do not want to mimic. Second, it has to be “credible” in the sense that there is significant gain from the (costly) commitment. Dividends are costly because they reduce the amount of earnings that can be retained to fund future growth and, because external financing is more costly than internally generated funds. Moreover, dividends are particularly costly to insiders in countries with weak legal protection of shareholders because in these countries it is easy for insiders to expropriate corporate profits and paying out profits as dividends reduces the opportunity for expropriation. Dividend payouts also bring potential benefits by exposing companies to the need of raising new money in the capital market in the future, thus precipitating monitoring from the outside investors, and reducing future financing costs (Easterbrook, 1984).

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Harvard Convenes the M&A Roundtable

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Tuesday, May 10, 2011

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The Harvard Law School Program on Corporate Governance will convene its M&A roundtable later this week. The M&A Roundtable, which is supported by the Corporation Service Company, will bring together leading M&A experts, including from the judiciary, legal practice, investment banking and the investor community. The Roundtable will discuss current issues at the forefront of M&A policy and practice. In particular it will discuss (i) defenses to unsolicited offers, (ii) activism and responses, and (iii) negotiated transactions and deal protection. The participants in the M&A Roundtable will include:

  • Randall J. Baron, Senior Partner, Robbins Geller Rudman & Dowd LLP
  • George R. Bason, Partner and Global Head of M&A, Davis Polk & Wardwell LLP
  • Lucian Bebchuk, William J. Friedman and Alicia Townsend Friedman Professor of Law, Economics, and Finance, Harvard Law School
  • Richard Breeden, Chairman, Breeden Capital Management
  • Chris Cernich, Director of M&A and Proxy Fight Research, Institutional Shareholder Services Inc.
  • Warren Chen, Managing Director, Glass Lewis & Co. LLC
  • Robert Clark, Harvard University Distinguished Service Professor & Austin Wakeman Scott Professor of Law, Harvard Law School
  • Richard Climan, Partner, Dewey & LeBoeuf LLP
  • John C. Coates, John F. Cogan, Jr. Professor of Law and Economics, Harvard Law School
  • Isaac D. Corré, Senior Managing Director, Eton Park Capital Management LP
  • David Fox, Partner, Kirkland & Ellis LLP
  • Jesse M. Fried, Professor of Law, Harvard Law School
  • Eduardo Gallardo, Partner, Gibson, Dunn & Crutcher LLP
  • Mark D. Gerstein, Global Chair, Mergers & Acquisitions Group, Latham & Watkins LLP (Chicago and New York offices)
  • Mark Gordon, Partner, Wachtell, Lipton, Rosen & Katz
  • Larry Hamdan, Executive Chairman, Global M&A, Barclays Capital PLC
  • Scott Hirst, Executive Director of the Program on Corporate Governance, Harvard Law School
  • Jack B. Jacobs, Justice, Supreme Court of Delaware

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Firm Mortality and Natal Financial Care

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, May 9, 2011
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The following post comes to us from Utpal Bhattacharya, Alexander Borisov, and Xiaoyun Yu of the Finance Department at Indiana University Bloomington.

In the paper, Firm Mortality and Natal Financial Care, which was recently made publicly available on SSRN, we ask three related questions about the survival of U.S. public firms in the 1985 to 2006 period. First, what is their death rate as a function of age after their initial public offerings (IPOs)? Second, do financial intermediaries in the IPO process affect this death rate function? Third, if they do, how?

To address the first question, we adopt the econometrics from the actuarial sciences and construct a mortality table for U.S. public companies during 1985–2006. Following Queen and Roll (1987), we classify births of public companies as their appearance on the Center for Research in Security Prices (CRSP) tape, and deaths as their disappearance from the CRSP tape. We focus on bad deaths (liquidation, delisting, permanent trading halts) rather than good deaths (e.g., mergers and takeovers), since bad deaths incur substantial economic and social welfare costs. The mortality rate table reveals that the death rates of U.S. public firms increase with age, peak at three years at a level three times higher than the long-term mortality rate, and then decrease with age. This finding is an important contribution in its own right, because the mortality literature in the economics of industrial organization notes that survival risk decreases as a firm ages. With mortality rates first increasing and then decreasing, we are the first to document that U.S. public firms have to survive up to three years after their IPO—the critical age—before the survival risk starts diminishing.

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Treasury Clarifies FBAR Regulations for Private Investment Funds

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Sunday, May 8, 2011
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The following post comes to us from Betty Santangelo, Philippe Benedict, Shlomo C. Twerski and William I. Friedman of Schulte Roth & Zabel, and is based on a Schulte Roth & Zabel client alert.

On March 28, 2011, the Final Regulations, issued by the Financial Crimes Enforcement Network of the U.S. Department of the Treasury (“Treasury”) relating to the filing of Reports of Foreign Bank and Financial Accounts (“FBAR”) became effective. Notably, the Final Regulations do not require ownership interests in, or signing or other authority over, private investment funds, such as hedge funds and private equity funds, to be reported on FBARs, although Treasury will continue to study the issue.

The Final Regulations apply to FBARs required to be filed by June 30, 2011 with respect to foreign financial accounts maintained in the calendar year 2010, and for all subsequent years. United States persons who deferred FBAR filings for prior reporting years in accordance with guidance issued by Treasury, [1] may apply the provisions of the Final Regulations in determining their FBAR filing requirements for any deferred reports due June 30, 2011.

A revised FBAR form (Form TD-F-90-22.1) and General Instructions, which should be used for the June 30, 2011 filing deadline, were also recently released.

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An Update on Diversity and Financial Literacy

Posted by Luis A. Aguilar, Commissioner, U.S. Securities and Exchange Commission, on
Saturday, May 7, 2011
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Editor’s Note: Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Aguilar’s remarks at the Hispanic Association on Corporate Responsibility’s Corporate Directors Summit; the complete remarks are available here. The views expressed in the post are those of Commissioner Aguilar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Today, I want to spend my time with you focused on the need for corporate America and its regulators to embrace this nation’s growing diversity. It is past time to see the diversity of our nation reflected in corporate boardrooms, in the financial industry, and in the government. I also want to briefly discuss the need to improve financial literacy in minority communities.

Lack of Diversity in Corporate Boardroom

Let me start by talking about the persistent lack of diversity in our corporate boardrooms. As this group knows, many studies indicate that diversity in the boardroom results in real value both for companies and for their shareholders. [1]

Notwithstanding these studies, there is a persistent lack of diversity in corporate boardrooms across this country — and women and minorities remain woefully underrepresented. In 2008, for example, the Alliance for Board Diversity compiled statistics about the composition of the boards of directors of Fortune 100 companies and found 71.5% of all corporate board seats were held by white men, and that only 28.5% of the board seats were held by women and minorities. [2]

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Private Equity and the Resolution of Financial Distress

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, May 6, 2011
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The following post comes to us from Edie Hotchkiss of the Finance Department at Boston College, David C. Smith of the McIntire School of Commerce at the University of Virginia, and Per Strömberg of the Institute of Financial Research (SIFR) and Professor of Finance at the Stockholm School of Economics.

In the paper, Private Equity and the Resolution of Financial Distress, which was recently made publicly available on SSRN, we examine how private equity owners influence the outcome of distressed restructurings and the costs of financial distress. The impact of PE ownership on the likelihood or severity of distress is unclear. There are several reasons to expect a positive role for PE sponsors. The discipline of high leverage could lead to higher operating efficiency and lower the chance of financial distress. Further, if value declines, PE owners have strong incentives to correct this decline to preserve their equity stake, including by committing capital to support the distressed company. PE sponsors also have an incentive to preserve their reputation with lenders and future investors, even when they may lose an insolvent firm during restructuring. On the negative side, actions by aggressive private equity owners to boost their financial return, such as leveraging up a firm to pay large dividends, could drain needed liquidity from PE-owned firms and put these firms at a higher risk of default.

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Derivatives Market’s Payment Priorities in Bankruptcy

Posted by Mark Roe, Harvard Law School, on
Thursday, May 5, 2011
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Mark Roe is a professor at Harvard Law School, where he teaches bankruptcy and corporate law.

Stanford Law Review recently published my article, The Derivatives Market’s Payment Priorities as Financial Crisis Accelerator, in which I analyze the Bankruptcy Code’s role in undermining the stability of systemically-vital financial institutions.

Chapter 11 bars bankrupt debtors from immediately repaying their creditors, so that the bankrupt firm can reorganize without creditors’ cash demands shredding the bankrupt’s business. Not so for the bankrupt’s derivatives counterparties, who, unlike most other secured creditors, can seize and immediately liquidate collateral, readily net out gains and losses in their dealings with the bankrupt, terminate their contracts with the bankrupt, and keep both preferential eve-of-bankruptcy payments and fraudulent conveyances they obtained from the debtor, all in ways that favor them over the bankrupt’s other creditors.

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