Yearly Archives: 2011

Compensation Season 2011

Posted by Jeremy L. Goldstein, Wachtell, Lipton, Rosen & Katz, on
Saturday, January 22, 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, Michael J. Segal, Jeannemarie O’Brien, Adam J. Shapiro and David E. Kahan.

For many public companies, the new year marks the beginning of compensation season. Setting pay and targets for the new year, determining achievement of performance objectives for the past year and preparing the annual proxy statement contribute to a busy first quarter for compensation committees and management teams working with them. In 2011, companies will undertake these activities in a fluid environment, with executive compensation continuing to receive significant attention from shareholder activists, the government and the media. As companies prepare for the upcoming compensation season, they should consider the following items.

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Board Interlocks and Earnings Management Contagion

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, January 21, 2011
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The following post comes to us from Peng-Chia Chiu, Merage School of Business, University of California, Irvine; Siew Hong Teoh, Dean’s Professor of Accounting, Merage School of Business, University of California, Irvine; and Feng Tian, School of Business, University of Hong Kong.

In the paper, Board Interlocks and Earnings Management Contagion, which was recently made publicly available on SSRN, we test whether earnings management (like a virus) spreads from firm to firm via board connections of shared directors (virus carriers).

We use earnings restatements to identify firms that managed earnings and to identify the period when these firms manipulated earnings. We consider firms as infectious in the period when they manipulated earnings. We test whether the directors of the infected firms carry these earnings management behaviors to susceptible firms on whose boards they also sit on.

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SEC Submits Brief Supporting Validity of Proxy Access

Posted by Scott Hirst, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Thursday, January 20, 2011
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This post relates to the case of Business Roundtable and Chamber Of Commerce v. SEC; additional posts regarding the case are available here. Additional posts regarding proxy access are available here.

The Securities and Exchange Commission (SEC) yesterday submitted its initial brief in the widely-followed case of Business Roundtable and Chamber Of Commerce v. Securities And Exchange Commission. The litigation was commenced by the Business Roundtable and the Chamber of Commerce to challenge the validity of the proxy access rules adopted by the SEC in August 2010.

The brief of the SEC is available here.

The SEC’s First Non-Prosecution Agreement

Posted by Wayne M. Carlin, Wachtell, Lipton, Rosen & Katz, on
Thursday, January 20, 2011
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Wayne Carlin is a partner in the Litigation Department at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton firm memorandum by Mr. Carlin, Theodore A. Levine and David B. Anders.

The SEC yesterday announced its first use of a non-prosecution agreement, one of the new investigative tools that the agency unveiled nearly a year ago. The SEC simultaneously filed an enforcement action against a former sales executive of Carter’s, Inc. See SEC v. Elles, Civ. Action No. 1:10-CV-4118 (N.D. Ga.). The Commission did not bring any enforcement action against the company.

At first blush, this appears to be the sort of case in which the SEC historically would likely have brought charges against a public company. According to the complaint, the executive granted and concealed substantial unauthorized discounts to the company’s largest customer. By misrepresenting the facts and creating false documents, the executive allegedly caused the company to delay recognizing these discounts until later periods, thereby inflating the company’s reported earnings in the earlier periods. When the company discovered the scheme, it conducted an internal investigation, self-reported the matter to the SEC and ultimately restated its financial statements covering a five-year period.

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The Role of Dynamic Renegotiation and Asymmetric Information in Financial Contracting

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, January 19, 2011
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The following post comes to us from Michael Roberts of the Finance Department at the University of Pennsylvania.

In the paper, The Role of Dynamic Renegotiation and Asymmetric Information in Financial Contracting, which was recently made publicly available on SSRN, I show that frequent renegotiation is an integral part of bank lending. Its role is as a complement to restrictive lending agreements that place significant constraints on borrowers’ behaviors. Indeed, it is precisely because borrowers are able to renegotiate the terms of their contracts that they are willing to accept such restrictive contracts in the first place. Thus, the ex post renegotiations have several important implications for our understanding of bank lending.

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Some Thoughts for Boards of Directors in 2011

Posted by Martin Lipton, Wachtell, Lipton, Rosen & Katz, on
Tuesday, January 18, 2011
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Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton firm memorandum by Mr. Lipton, Steven A. Rosenblum and Karessa L. Cain.

I. Introduction

In the coming year, boards of directors face a two-fold challenge: they must implement the various new legislative, regulatory and “best practice” mandates relating to corporate governance, while at the same time tailoring them to the needs of each corporation and implementing them in ways that will promote the board’s core mission of securing long-term value for shareholders. This challenge is complicated by the fact that many of the corporate governance provisions of the Dodd-Frank Act, new SEC regulations and other reforms require or put pressure on the board to adopt a one-size-fits-all approach to corporate governance. Thus, while the financial crisis and ensuing global recession have prompted boards to critically review their oversight role and consider ways in which they might function more effectively, their individualized action plans and “lessons learned” have to some extent been preempted by blunt regulatory mandates and best practices. Moreover, as boards work to craft strategies for sustainable economic recovery, they are increasingly vulnerable to shareholder activist demands for quick turnaround measures and short-term gains, particularly as hedge funds and other special interest shareholders seek to execute their own agendas for liquidity and financial recoupment.

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Classified Boards, the Cost of Debt, and Firm Performance

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, January 17, 2011
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The following post comes to us from Dong Chen of the Finance Department at the University of Baltimore.

In the paper, Classified Boards, the Cost of Debt, and Firm Performance, which was recently made publicly available on SSRN, I analyze the effects of classified boards on bondholders’ wealth and the cost of debt, as well as the implications on firm performance. The empirical results suggest that classified boards are strongly associated with a lower cost of debt, and the effect is robust to the inclusion of other governance variables the literature has shown to be relevant to the cost of debt, especially the G-index.

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Focus in 2011 Will Remain on Executive Compensation

Posted by David A. Katz, Wachtell, Lipton, Rosen & Katz, on
Sunday, January 16, 2011
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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.

This has been an eventful year in corporate governance. As companies prepare for the 2011 proxy season, it is important to review some of the legislative and regulatory events and key trends of 2010 that are expected to have an impact over the next year. Data from the last proxy season and the revised proxy policies of Institutional Shareholder Services (ISS) for 2011 both indicate that executive compensation will continue to be the main focus for shareholders in the New Year.

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UK Financial Services Authority Issues the Final-Form Remuneration Code

Posted by Scott Hirst, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Saturday, January 15, 2011
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This post comes to us from John J. Cannon, a partner in the Executive Compensation and Employee Benefits Group at Shearman & Sterling LLP, and is based on a Shearman & Sterling Client Memorandum by Barnabas W. B. Reynolds, Linda E. Rappaport and Sam Whitaker. The complete memo, including the Appendix, can be found here.

On 17 December 2010, the UK’s Financial Services Authority (“FSA”) issued the final form of the revised Remuneration Code (the “Code”). [1] The Code introduces significant restrictions on the way in which remuneration policies and structures are operated within financial institutions in the UK and beyond. The Code builds upon international standards set by the Financial Stability Board at a European level and goes beyond those standards in a number of key respects.

In this briefing, we have set out an overview of the background to the Code, a summary of the key provisions of the final form of the Code, as well as our commentary on some relevant provisions of the final-form guidance issued by the Committee of European Bank Supervisors (“CEBS”) on 10 December 2010. Finally, at the end of this briefing, we have focused in depth on some specific issues which may be of particular interest to our clients.

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Regulating Wall Street

Posted by Viral Acharya, New York University, on
Friday, January 14, 2011
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Viral Acharya is a Professor of Finance at New York University.

Investigating the Dodd-Frank Act

In our recent book, Regulating Wall Street: The Dodd-Frank Act and the New Architecture of Global Finance, my co-authors (Thomas Cooley, Matthew Richardson, Richard Sylla, and Ingo Walter) and I provide our overall assessment of the legislation in three different ways:

  • From first principles in terms of how economic theory suggests we should regulate the financial sector;
  • In a comparative manner, relating the proposed reforms to those that were undertaken in the 1930s following the Great Depression;
  • How the proposed reforms would have fared in preventing and dealing with the crisis of 2007 to 2009 had they been in place at the time.

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