Yearly Archives: 2011

Moving Twenty-Two S&P 500 Companies towards Board Declassification

Posted by Lucian Bebchuk and Scott Hirst, Harvard Law School, on
Tuesday, June 28, 2011
, , , ,
More from: , ,

Lucian Bebchuk and Scott Hirst are Professor of Law, Economics and Finance and Lecturer on Law, respectively, at Harvard Law School. Their earlier post about the work of the ACGI is available here.

This post provides a summary of work to declassify corporate boards done during the 2010-11 proxy season by the American Corporate Governance Institute (ACGI). This work contributed to moving 22 S&P 500 companies toward board declassification, which could result in as much as a 15% reduction in the incidence of board classification among S&P 500 companies from the beginning of the 2010-11 proxy season.

During the 2010-2011 proxy season, the ACGI worked with two institutional investors, the Florida State Board of Administration (SBA) and the Nathan Cummings Foundation (NCF), on the submission of shareholder declassification proposals. The ACGI assisted these institutional investors with designing and drafting proposals, selecting companies for submission of proposals, communicating with the Securities and Exchange Commission with respect to no-action requests, engaging with companies to reach negotiated outcomes, and, when such negotiations were not successful, presenting proposals at shareholder meetings.

This work on behalf of the SBA and the NCF during this proxy season resulted in: (i) seven S&P 500 companies passing charter amendments to declassify their boards; (ii) six S&P 500 companies committing to submit management declassification proposals for shareholder approval at their 2012 shareholder meeting; and (iii) passage of shareholder declassification proposals, with average support of 82.2% of votes cast, at nine S&P 500 companies at which SBA and NCF proposals were voted on. We provide further details of each of these results below.

Charter Amendments to Declassify in Seven Companies

Following the submission of proposals, the ACGI assisted the SBA and NCF in negotiating and reaching agreements pursuant to which management agreed to bring charter amendments to declassify their boards of directors to a vote of shareholders. In addition, following the submission of one of the proposals (to Watson Pharmaceuticals, Inc.), the company announced a plan to bring a declassification proposal to a vote at its 2011 annual meeting. Altogether, the ACGI’s work contributed to the passage of seven charter amendments to declassify the boards of directors of S&P 500 companies. Those companies, with the percentage of votes cast and the percentage of outstanding shares supporting the declassification amendment, were as follows:

READ MORE »

A Plan to Tax the Foreign Income of U.S. Companies

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Monday, June 27, 2011
, , ,
More from:
Editor’s Note: Robert Pozen is a senior lecturer at Harvard Business School and a senior fellow at the Brookings Institution. This post is based on an op-ed that appeared today in Bloomberg.

The current system for taxing foreign source income of U.S. corporations makes no sense. In theory, income earned by controlled foreign subsidiaries of American companies is taxed at the U.S. corporate rate of 35 percent; in practice, the Treasury receives no taxes on that income as long as it is held overseas. U.S. corporations now have overseas cash holdings of almost $2 trillion, which they are encouraged to deploy by acquiring companies and building facilities outside the U.S.

As an alternative, business lobbyists have advocated a so-called territorial system under which foreign source income would be taxed only in the country where it is earned. These lobbyists correctly argue that almost all advanced industrial countries now follow this system, though many don’t allow tax havens to take advantage of it.

This alternative is based on the premise that foreign source income is being taxed once somewhere, at a reasonable rate by a credible tax-enforcing government such as Germany. But this premise doesn’t apply to tax havens, like the Cayman Islands, where the tax rate is minimal, or a reasonable official rate isn’t enforced.

READ MORE »

Do Independence and Financial Expertise of the Board Matter for Risk Taking and Performance?

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, June 27, 2011
, , , , ,
More from: , ,

The following post comes to us from Bernadette Minton of the Department of Finance at Ohio State University, Jérôme Taillard of the Department of Finance at Boston College, and Rohan Williamson of the Department of Finance at Georgetown University.

In our paper, Do Independence and Financial Expertise of the Board Matter for Risk Taking and Performance? which was recently made publicly available on SSRN, we examine how board independence and the percentage of financial experts among independent directors relate to risk taking and performance of commercial banks during the period from 2003 to 2008, which includes the most recent financial crisis. During the most recent financial crisis, banks and other financial institutions have been accused of engaging in excessive risk taking. Because boards are ultimately legally responsible for all major operating and financial decisions made by the firm, the recent crisis has been viewed by many as a general failure of board governance in the banking sector.

The composition of the board of directors should be a reliable proxy of how well the board can process information provided by insiders and advise as well as monitor the bank’s risk taking practices in the best interests of its shareholders. This study highlights the fact that larger and more independent boards are associated with lower levels of risk taking. We also document, on average, low levels of financial expertise among independent directors. Although many calls for reforms pinpoint the lack of financial expertise of the board as a reason behind the crisis, we show that during the crisis both stock performance and changes in firm value are worse for large banks with more financial expertise among its independent directors. Large banks are defined in this study as those with a bigger balance sheet than the median commercial bank at the onset of the financial crisis.

READ MORE »

The Business Case for Corporate Social Responsibility

Posted by Matteo Tonello, The Conference Board, on
Sunday, June 26, 2011
, , ,
More from: ,

Matteo Tonello is Director of Corporate Governance for The Conference Board, Inc. This post is based on a Conference Board Director Note by Archie B. Carroll and Kareem M. Shabana, and relates to a paper by these authors, titled “The Business Case for Corporate Social Responsibility: A Review of Concepts, Research and Practice,” published in the International Journal of Management Reviews.

In the last decade, in particular, empirical research has brought evidence of the measurable payoff of corporate social responsibility (CSR) initiatives to companies as well as their stakeholders. Companies have a variety of reasons for being attentive to CSR. This report documents some of the potential bottomline benefits: reducing cost and risk, gaining competitive advantage, developing and maintaining legitimacy and reputational capital, and achieving win-win outcomes through synergistic value creation.

The term “corporate social responsibility” is still widely used even though related concepts, such as sustainability, corporate citizenship, business ethics, stakeholder management, corporate responsibility, and corporate social performance, are vying to replace it. In different ways, these expressions refer to the ensemble of policies, practices, investments, and concrete results deployed and achieved by a business corporation in the pursuit of its stakeholders’ interests.

This report discusses the business case for CSR—that is, what justifies the allocation of resources by the business community to advance a certain socially responsible cause. The business case is concerned with the following question: what tangible benefits do business organizations reap from engaging in CSR initiatives? This report reviews the most notable research on the topic and provides practical examples of CSR initiatives that are also good for the business and its bottom line.

READ MORE »

Too Big to Fail or Too Big to Change

Posted by Chad Johnson, Bernstein Litowitz Berger & Grossmann LLP, on
Saturday, June 25, 2011
, , , , ,
More from: ,

Chad Johnson is a partner in the litigation practice at Bernstein Litowitz Berger & Grossmann LLP. This post is based on an article by Ross Shikowitz in the Spring 2011 edition of the BLB&G publication Advocate for Institutional Investors.

Two and half years removed from the worst financial crisis since the Great Depression, the investing public has grown increasingly frustrated with the lack of criminal prosecutions of, and absence of truly significant fines levied against, the senior executives and companies responsible for igniting the subprime meltdown. Pundits have criticized the Securities and Exchange Commission (the “SEC”) and the Department of Justice (the “DOJ”) as capitulating to the interests of “big finance,” citing SEC settlements that have been characterized as mere “slaps on the wrist” and the DOJ’s failure to convict a single executive responsible for creating the “great recession” despite significant evidence of intentional misconduct.

For decades, the public’s trust in the integrity of U.S. capital markets was a source of economic stability and unparalleled prosperity. To maintain this trust, investors must believe that they compete on a relatively equal playing field and that the laws governing the markets will be strictly enforced. In furtherance of these goals, violators of federal rules face civil penalties from the SEC or criminal prosecution by the DOJ. In connection with previous corporate scandals, the government held a significant number of the principal wrongdoers civilly and criminally accountable for their misconduct. In the wake of the current financial crisis, however, many argue that the lack of such accountability has eroded the public’s faith in U.S. capital markets.

READ MORE »

When It Pays to Pay Your Investment Banker

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, June 24, 2011
,
More from: , ,

The following post comes to us from Andrey Golubov of Cass Business School, City University London; Dimitris Petmezas from the School of Management, University of Surrey; and Nickolaos Travlos of the ALBA Graduate Business School, Greece.

In our paper, When It Pays to Pay Your Investment Banker: New Evidence on the Role of Financial Advisors in M&As, forthcoming in the Journal of Finance, we provide new evidence on the role of financial advisors in M&As. Mergers and acquisitions (M&As) constitute one of the most important activities in corporate finance, bringing about substantial re-allocations of resources within the economy. In 2007 alone, when the most recent merger wave peaked, corporations spent $4.2 trillion on M&A deals worldwide. Investment banks advised on over 85% of these deals by transaction value, generating an estimated $39.7 billion in advisory fees.

The investment banking industry is dominated by a group of the so-called “bulge bracket” firms. These top-tier investment banks have built up reputation as experts in capital markets transactions, which, theoretically, should ensure that they perform superior services for their clients in return for premium fees. Surprisingly, however, the pertinent empirical literature fails to support this intuitive reputation-quality mechanism, and reports a negative or, at best, insignificant relationship between bidder financial advisor reputation and bidder returns in mergers and acquisitions. This raises several interesting questions. Does the reputational capital mechanism fail in the market for merger advisory services? If so, why do firms employ top-tier advisors? Are top-tier banks employed just as execution houses to ensure deal completion for their clients? Finally, are there situations where it pays off to pay for a top-tier financial advisor?

READ MORE »

U.S. Supreme Court Clarifies the Scope of Private Liability Under Rule 10b-5

Posted by John F. Olson, Gibson, Dunn & Crutcher LLP and Georgetown Law Center, on
Thursday, June 23, 2011
, , , ,
More from: , ,

John Olson is a founding partner of Gibson, Dunn & Crutcher’s Washington, D.C. office and a visiting professor at the Georgetown Law Center. This post is based on a Gibson Dunn alert by Mark A. Perry, who led the team that won the case in the U.S. Supreme Court, Janus Capital Group Inc. v. First Derivative Traders, which is discussed below; that decision is available here. For further discussion about the Janus case see also a client memorandum from Brad S. Karp at Paul, Weiss, Rifkind, Wharton & Garrison LLP, available here.

On June 13, 2011, the U.S. Supreme Court concluded that Janus Capital Management (JCM) cannot be held liable in a private suit under the Securities and Exchange Commission’s Rule 10b-5 for drafting allegedly misleading prospectuses for the mutual funds it advises. Reversing a contrary decision by the Fourth Circuit, the Court held in Janus Capital Group Inc. v. First Derivative Traders, No. 09-525, that the only proper defendant in a private Rule 10b-5 suit is the “maker” of a statement—”the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it,” slip op. at 6—and that “[t]he statements in the [mutual fund] prospectuses were made by [the mutual funds], not by JCM,” id. at 12.

JCM is a registered investment adviser that, among other things, advises the Janus family of mutual funds; the Janus Funds are governed by an independent Board of Trustees, and are not owned or controlled by JCM. First Derivative Traders invested in the stock of JCM’s parent company, Janus Capital Group Inc. (JCG). It alleged that the price of JCG’s stock was artificially inflated as a result of misleading statements in the Janus Funds’ prospectuses, and that JCM had drafted those statements. Although the district court dismissed the operative complaint for failure to state a claim, the Fourth Circuit reversed, holding that, “by participating in the writing and dissemination of the prospectuses,” JCM “made the misleading statements contained in [those] documents.” Slip op. at 4 (emphasis in original).

READ MORE »

Information Disclosure and Corporate Governance

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, June 22, 2011
, , ,
More from: ,

The following post comes to us from Benjamin Hermalin, Professor of Finance and Economics at the University of California, Berkeley; and Michael Weisbach, Professor of Finance at Ohio State University.

Corporate disclosure is widely seen as an unambiguous good. In our paper, Information Disclosure and Corporate Governance, forthcoming in the Journal of Finance, we show that this view is, at best, incomplete. Greater disclosure tends to raise executive compensation and can create additional or exacerbate existing agency problems. Hence, even ignoring the direct costs of disclosure (e.g., meeting stricter accounting rules, maintaining better records, etc.), there could well be a limit on the optimal level of disclosure.

The model used to study disclosure reflects fairly general organizational issues. A principal desires information that will improve her decision making (e.g., whether or not to fire the agent, tender her shares, move capital from the firm, adjust the agent’s compensation scheme, etc.). In many situations, the agent prefers the status quo to change imposed by the principal (e.g., he prefers employment to possibly being dismissed). Hence, better information is view asymmetrically by the parties: It benefits the principal, but harms the agent. If the principal did not need to compensate the agent for this harm and if she could prevent the agent from capturing, through the bargaining process, any of the surplus this better information creates, the principal would desire maximal disclosure. In reality, however, she will need to compensate the agent and she will lose some of the surplus to him. These effects can be strong enough to cause the principal to optimally choose less than maximal disclosure.

READ MORE »

Holding Steady in an Active Market

Posted by David A. Katz, Wachtell, Lipton, Rosen & Katz, on
Tuesday, June 21, 2011
, , , ,
More from: , ,

David A. Katz is a partner at Wachtell, Lipton, Rosen & Katz specializing in the areas of mergers and acquisitions and complex securities transactions. This post is based on an article by Mr. Katz and Laura A. McIntosh that first appeared in the New York Law Journal.

Favorable market conditions appear to be producing a substantial increase in shareholder activism and hostile takeover activity this year. Led by pension funds and hedge funds, activist investors have been emboldened by recent changes in corporate governance. As boards of directors and management teams address demands by regulators as well as heightened attacks from shareholder activists, directors need to be fully prepared with state-of-the-art plans ready for immediate use. When facing increased hostile takeover activity, directors should keep in mind that the fundamentals remain unchanged: the business judgment rule still applies, and takeover defenses, especially of the structural variety, are as effective as ever when used appropriately.

READ MORE »

New Insights into Calculating Securities Damages

Posted by Allen Ferrell, Harvard Law School, on
Monday, June 20, 2011
, , , ,
More from: ,

Allen Ferrell is the Harvey Greenfield Professor of Securities Law at Harvard Law School.

My co-author, Atanu Saha, and I have recently posted three papers dealing with securities damage issues. The first paper, Forward-Casting 10b-5 Damages: A Comparison to Other Methods, discusses and critiques two commonly used methods for calculating securities fraud damages under Rule 10b-5: constant dollar back-casting and the allocation method. We also present the forward-casting method, our proposed alternative to these other methods. Not only is the forward-casting method well-grounded in academic literature, but has the advantage of incorporating market expectations when determining what the stock price would have been “but for” the alleged fraud. Neither the constant dollar back-casting nor the allocation method takes these market expectations into account. We also address other issues that can arise by virtue of using these various methods. These three methods can generate substantially different 10b-5 damage estimates. We use a real world example to demonstrate these differences in the three methodologies.

The methodology used to estimate Rule 10b-5 damages is extremely important when estimating potential liability exposure and the determination of settlement value. In addition, these estimates, because they speak to the extent to which securities prices were distorted by fraudulent misinformation, can also be useful in determining whether the misinformation was “material,” an element of a Rule 10b-5 cause of action. Moreover, our analysis has implications for other causes of action, including Sections 11 and 12(2) of the Securities Act of 1933 and common law fraud actions.

READ MORE »

Page 27 of 49
1 … 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 … 49