Yearly Archives: 2011

SEC to Allow Shareholders to Submit Proxy Access Proposals for 2012 Season

Posted by James Morphy, Sullivan & Cromwell LLP, on
Thursday, September 8, 2011
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James Morphy is a partner at Sullivan & Cromwell LLP specializing in mergers & acquisitions and corporate governance. This post is based on a Sullivan & Cromwell client memorandum. More posts about proxy access, including several from the Program on Corporate Governance, are available here.

The Securities and Exchange Commission has announced that its revisions to the proxy rules to allow shareholders to propose proxy access bylaws and other election or nomination procedures will become effective shortly. The SEC had stayed the effectiveness of these changes to Rule 14a-8 pending the outcome of a judicial review of its mandatory proxy access rule, Rule 14a-11. On July 22, 2011, the U.S. Court of Appeals for the D.C. Circuit vacated Rule 14a-11, but the Rule 14a-8 changes were not litigated. The SEC’s stay order will automatically expire when the court decision is finalized, which is expected to occur on September 13, and the Rule 14a-8 changes will therefore become effective at that time absent further SEC action. The SEC stated that a notice of effective date will be published.

The SEC also confirmed that it will not seek a rehearing of or appeal the decision vacating Rule 14a-11. A statement by the SEC Chairman indicated that she remains committed to facilitating shareholder nominations of directors and that the SEC will continue to review the court decision and the comments received on their proposed rules in order to “determine the best path forward” on mandatory proxy access.

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Legislative Developments in Delaware’s “Alternative Entities”

Posted by A. Gilchrist Sparks, Morris, Nichols, Arsht & Tunnell LLP, on
Thursday, September 8, 2011
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A. Gilchrist Sparks is Of Counsel at Morris, Nichols, Arsht & Tunnell LLP. This post is based on a Morris Nichols update by David A. Harris, Louis G. Hering, and Walter C. Tuthill, and summarizes a survey of changes in Delaware law, available here. This post is part of the Delaware law series, which is co-sponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

In its latest session, the Delaware legislature enacted several amendments to Delaware’s four “alternative entity” statutes – the Delaware Limited Liability Company Act (“DLLCA”), the Delaware Revised Uniform Limited Partnership Act (“DRULPA”), the Delaware Revised Uniform Partnership Act (“DRUPA”) and the Delaware Statutory Trust Act (“DSTA”). [1] Among other things, the amendments (i) provide a statutory default rule for the amendment of LLC agreements which requires the consent of all members; (ii)that a standard “supermajority amendment provision” applies only to supermajority provisions in an LLC agreement or partnership agreement and not to supermajority provisions under the applicable alternative entity statute; and (iii) modify the language relating to action by written consent by members, managers and partners to eliminate the requirement that the written consent set forth the action so taken thereby facilitating action by consent, particularly by electronic means.

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Avoiding Shareholder Suits Challenging Executive Compensation

Posted by Jeremy L. Goldstein, Wachtell, Lipton, Rosen & Katz, on
Wednesday, September 7, 2011
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Jeremy Goldstein is a partner at Wachtell, Lipton, Rosen & Katz active in the firm’s executive compensation and corporate governance practices. This post is based on a Wachtell Lipton firm memorandum by Mr. Goldstein and Jeannemarie O’Brien.

A number of derivative suits have been filed in recent months alleging that the senior executive compensation plans at public companies do not comply with Section 162(m) of the Internal Revenue Code. Section 162(m) provides that any compensation paid to the CEO and next three highest compensated proxy officers (other than the CFO) in excess of $1 million per year is not tax deductible unless, among other things, the compensation is subject to objective performance metrics that have been disclosed to and approved by shareholders. The complaints generally allege that the performance goals established by the plans are not sufficiently objective to comply with Section 162(m) and that the purported failure of the plans to comply with Section 162(m) renders the required proxy disclosure false and misleading in violation of Section 14(a) of the Securities Exchange Act. In addition, the complaints allege that the provision of non-deductible compensation to senior executives constitutes waste, unjust enrichment of the executives and a breach of the directors’ duty of loyalty.

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The Evolution of Capital Structure and Operating Performance after Leveraged Buyouts

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, September 7, 2011
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The following post comes to us from Jonathan Cohn of the Department of Finance at the University of Texas at Austin; Lillian Mills, Professor of Accounting at the University of Texas at Austin; and Erin Towery of the Department of Accounting at the University of Texas at Austin.

In our paper, The Evolution of Capital Structure and Operating Performance after Leveraged Buyouts: Evidence from U.S. Corporate Tax Returns, which was recently made publicly available on SSRN, we study post-LBO financial performance and behavior for approximately the universe of U.S. LBO firms taking place between 1995 and 2007.  We overcome the lack of public financial data for most LBOs firms that has limited prior research by instead analyzing confidential federal corporate tax return data. Since all U.S. corporations, including those that are privately-held, must file tax returns, we can observe post-LBO income and balance sheet information for nearly all U.S. LBO firms.

We use our large, representative sample to test a number of long-standing hypotheses regarding the motivation for LBOs and their role in the economy. Arguably the most influential view on LBOs is that of Jensen (1989), who regards the LBO structure as superior to the structure of the publicly-traded firm. He argues that the concentration of ownership and high level of debt in the LBO structure disciplines managers. The high level of debt eliminates free cash flow that managers might otherwise waste on “empire-building” activities. Indeed, levering up the firm more than would be optimal from a long-term perspective puts pressure on management to earn its way out of the firm’s debt load.

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Executive Pay Through a Peer Benchmarking Lens

Posted by Scott Hirst, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Tuesday, September 6, 2011
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The following post comes to us from Subodh Mishra, Vice President at Institutional Shareholder Services, and is based on an ISS white paper by Daniel Cheng, available here.

Introduction

The enhanced executive compensation disclosures mandated by the U.S. Securities and Exchange Commission in 2006 have provided a significant new data set for investors and companies to analyze and benchmark pay practices across a broad set of U.S. corporate issuers.

Moreover, precisely how companies choose to benchmark their pay practices has received much attention following the outcry over Wall Street payouts and the recent promulgation of legislation requiring most U.S. issuers put their pay to a precatory shareholder vote.

Against this backdrop, Executive Pay Through a Peer Benchmarking Lens summarizes key findings from ISS Corporate Services’ study of almost 15,000 Def 14A filings over the past four years. Drawing on ISS’ executive compensation database, the focus of the analysis is on both pay levels as well as the processes by which companies benchmark their pay relative to peers.

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Mechanisms of Board Turnover: Evidence from Backdating

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, September 5, 2011
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The following post comes to us from Frederick Bereskin of the Department of Finance at the University of Delaware and Clifford Smith, Professor of Finance and Economics at the University of Rochester.

In our paper, Mechanisms of Board Turnover: Evidence from Backdating, which was recently made publicly available on SSRN, we examine a set of events that involve observable corporate misdeeds: stock option backdating. These misdeeds were generally revealed within a narrow window of time, required the complicity of the board, and in many cases directors benefited directly through backdated grants. Examining board turnover associated with stock option backdating thus enables us to gain more insight about the mechanisms by which directors depart their boards. Although information that would allow us to identify each of these five steps is not publicly available, events that are typically available include the following: (1) whether a director resigns, (2) whether a director appears on the proxy as nominated for reelection, and (3) whether a director is reelected. Additionally, there are press releases that sometimes accompany these decisions, but these announcements must be interpreted with care. For example, when a director does not appear on the proxy, the board and/or nominating committee might have chosen not to renominate the individual for reelection or the director might have declined to stand for reelection (an event that is frequently disclosed, especially if driven by a director retirement policy). However, a director who will not be renominated often is permitted to announce that he or she has chosen to resign or not to seek reelection.

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Corporate Governance Matters: Lessons for Practitioners

Posted by David F. Larcker, Stanford Graduate School of Business,, on
Sunday, September 4, 2011
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David Larcker is the James Irvin Miller Professor of Accounting and Director of the Corporate Governance Research Program at Stanford University. This post discusses a book co-authored by Professor Larcker; more information is available here.

Brian Tayan and I recently co-authored a book, titled Corporate Governance Matters, which takes an organizational perspective, rather than a legal perspective, on the important topic of modern corporate governance. Our purpose is to examine the choices that organizations can make in designing governance systems and the impact those choices have on executive decision-making and the organization’s performance. The book relies on an extensive body of professional and scholarly research, and aims to correct misconceptions and cut through the considerable rhetoric surrounding corporate governance. We hope the book provides a framework that enables practitioners to make sound decisions that are well supported by careful research.

Our book covers a wide range of topics regarding corporate governance. These include a discussion of the environment in which the organization competes to understand how various forces influence the mechanisms it adopts to discourage self-interested behavior by management. In addition, we spend considerable time examining the board of directors, including the structure, processes, and operations of the board, along with the board’s functional responsibilities, such as oversight and risk management, succession planning, compensation, accounting and audits, and the consideration of mergers and acquisitions. We also examine the role of the institutional investor to understand how diverse shareholder groups and third-party proxy advisory firms influence governance choices. The book also includes an assessment of commercial and academic governance ratings systems.

Many of the conclusions of the book are phrased in the negative. While the lack of positive correlations may disappoint some, this has important implications for the current debate on governance and your evaluation of the types of governance systems that organizations might require. Some of the central lessons we draw in the book including the following:

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OECD Guidelines for Multinational Enterprises Revised for 2011

Posted by The Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Saturday, September 3, 2011
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Recently, 42 countries agreed to a revised version of the Organisation for Economic Co-operation and Development’s Guidelines for Multinational Enterprises. This group includes the 34 OECD countries plus Argentina, Brazil, Egypt, Latvia, Lithuania, Morocco, Peru and Romania. The Guidelines are a non-binding code of conduct aimed at promoting more responsible conduct among the international business community.

This latest update of the guidelines was prompted by the growing complexity and globalization of the world economy. Non-adhering countries, and multinational business enterprises in those countries, have become an increasingly important part of that economy. This, along with more pressing concerns, including the financial crises, concerns over climate change, and a renewed focus on international development, helped motivate a review of Guidelines, the fourth since their initial adoption in 1976 and the first since 2000.

The initial call for review came in 2009 at the annual meeting of National Contact Points, which are entities in each country responsible for implementing the Guidelines. Consultation took place with members of the business community, trade unions, non-governmental organizations, non-adhering countries, and international organizations. The final guidelines were adopted on May 25, 2011.

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Good Monitoring, Bad Monitoring

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, September 2, 2011
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The following post comes to us from Yaniv Grinstein of the Department of Finance at Cornell University and Stefano Rossi of the Department of Finance at the Imperial College Business School. This post is part of the Delaware law series, which is co-sponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

In our paper, Good Monitoring, Bad Monitoring, which was recently made publicly available on SSSRN, we estimate the value of monitoring in publicly traded corporations by exploiting as a “natural experiment,” an unexpected and controversial decision of the Delaware Supreme Court that significantly tightened scrutiny over board decisions in Delaware-incorporated firms in 1985. We analyze the impact of the decision on stock returns using matching and differences-in-differences techniques. We find that, compared with appropriately matched non-Delaware firms, Delaware-incorporated firms in high-growth industries lost, while firms in low-growth industries gained significantly around the announcement of the decision.

These results are robust, and are further corroborated by an out-of-sample test. A later regulatory reform to the Delaware Code that essentially reversed the effects of the Supreme Court decision had opposite results: firms in high-growth industries gained and firms in low-growth industries lost significantly. We interpret these results as implying that “one-size-fits-all” models represent inadequate solutions to the corporate governance problem.

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Separation of Chair and CEO Roles

Posted by Matteo Tonello, The Conference Board, on
Thursday, September 1, 2011
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Matteo Tonello is Director of Corporate Governance for The Conference Board, Inc. This post is based on a Conference Board Director Note by Richard Leblanc of York University and Katharina Pick of Claremont Graduate University.

In light of required disclosure about board leadership structure, the decision of whether or not to separate the chairman and chief executive roles remains a hot governance topic for public companies, boards, and shareholders. This report examines some of the academic literature surrounding the debate and proposes that board effectiveness is affected by the chairman’s industry knowledge, leadership skills, and influence on board process rather than by the particular leadership structure chosen.

Since the early 1980s, much attention has been paid to corporate boards of directors and how their structures improve (or undermine) organizational performance. Among the most hotly debated structural features of the board is the combination (or separation) of the chair and CEO roles. As of February 2010, Securities and Exchange Commission (SEC) rules require listed companies to disclose their board leadership structure and explain why they have determined that such a leadership structure is appropriate, given their specific characteristics or circumstances. [1]

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