Yearly Archives: 2011

The Latest Word on 2011 Say on Pay Vote Recommendations

Posted by Charles M. Nathan, Latham & Watkins LLP, on
Thursday, January 13, 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 Commentary by James D.C. Barrall, Alice M. Chung and Samuel T. Greenberg.

Dodd-Frank and Proposed Say on Pay Vote Rules

On October 18, 2010, the Securities and Exchange Commission (SEC) published proposed rules (Proposed Rules) implementing Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act). Section 951 generally requires US public companies to provide their shareholders the right to cast three types of pay votes: (i) a vote to approve the compensation of the named executive officers (say on pay vote); (ii) a vote on the frequency with which shareholders should be entitled to cast votes on the company’s executive compensation (frequency vote) and (iii) a vote to approve certain payments made in connection with an acquisition, merger or other specified corporate transaction (golden parachute vote). As of this date, the SEC has not adopted any final rules on the say on pay votes, but they are expected any day.

This Commentary provides a brief overview of the Proposed Rules and their effective dates, the current institutional and public company say on pay trends and what companies should be doing now to prepare for their 2011 say on pay votes. For a more detailed overview of the Proposed Rules, please see our Client Alert: SEC Announces Preliminary Say on Pay Rules, dated November 4, 2010.

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Proxy Voting and the Supply/Demand for Securities Lending

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, January 12, 2011
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The following post comes to us from Reena Aggarwal, Professor of Finance at Georgetown University; Pedro Saffi of the Finance Department at the University of Navarra; and Jason Sturgess, Assistant Professor of Finance at Georgetown University.

In the paper Does Proxy Voting Affect the Supply and/or Demand for Securities Lending? which was recently made publicly available on SSRN, we provide a comprehensive analysis of the securities lending market during a period of tremendous growth in the market. In the past, understanding the securities lending market has been limited partly due to the lack of transparency in this fragmented market. To study the securities lending market in the United States during the period 2005-2009, we use a proprietary data set consisting of shares available to lend (supply), shares borrowed (demand), and loan fees. The data covers most of the securities lending activity in the United States.

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Harvard Corporate Faculty Lead SSRN Rankings

Posted by Scott Hirst, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Tuesday, January 11, 2011
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Statistics released by the Social Science Research Network (SSRN) indicate that, as of the end of 2010, Harvard Law School faculty members associated with the Program on Corporate Governance featured prominently on SSRN author rankings. These faculty captured six of the top 100 slots – including the number one slot – among the top 100 law school professors (in all legal areas) in terms of readers’ use of their work.

Professor Lucian Bebchuk was ranked first among all law school professors, as he was at the end of each of the preceding three calendar years. Professor Bebchuk was also ranked sixth among authors from all fields on SSRN. Bebchuk’s papers (available on his SSRN page here) have attracted a total of more than 149,000 downloads, with forty-four of his papers having been downloaded more than 1,000 times each.

In addition, the top 100 law professors on SSRN at the end of 2010 included the following faculty members associated with the Harvard Program on Corporate Governance:

  • Reinier Kraakman, ranked 14 among law school professors and 72 among all authors;
  • Allen Ferrell, 24 among law school professors, 129 among all authors;
  • Jesse Fried, 26 among law school professors, 135 among all authors;
  • Alma Cohen, 29 among law school professors, 143 among all authors; and
  • Mark Roe, 39 among law school professors, 174 among all authors.

SSRN is the leading electronic service for social science research. As of the end of 2010, its electronic library contained over 254,600 full-text documents by more than 150,000 authors.

Does Shareholder Proxy Access Improve Firm Value?

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, January 10, 2011
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The following post comes to us from Bo Becker of the Finance Unit at Harvard Business School; Daniel Bergstresser of the Finance Unit at Harvard Business School; and Guhan Subramanian, Professor of Law and Business at Harvard Law School and Professor of Business Law at Harvard Business School.

In our paper, Does Shareholder Proxy Access Improve Firm Value? Evidence from the Business Roundtable Challenge, which was recently made publicly available on SSRN, we use a natural experiment to assess the shareholder wealth implications of shareholder proxy access. We study stock returns on October 4, 2010, when the SEC unexpectedly delayed proxy access for U.S. public companies. The October 4 announcement makes a particularly useful event for empirical work because it was both material and unexpected. We identify firms most likely to be affected by proxy access as those with significant ownership by institutions with a history of attempts to change corporate policy (“activist institutions”).

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E-Proxy Reform, Activism, and the Decline in Retail Shareholder Voting

Posted by Scott Hirst, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Sunday, January 9, 2011
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Fabio Saccone works with the Bank of Italy as part of the unit that supervises the restructuring and resolution of distressed financial institutions.

Shareholder voting is a hot button issue for regulators and policy makers in the United States as well as in Europe. However, amending the proxy system can be challenging, given the many unintended consequences of single changes on the system as a whole. The recent e-proxy reform by the U.S. Securities and Exchange Commission (SEC) is a case in point. Adopted by the SEC in 2007 and effective for all companies starting from the 2009 proxy season, the e-proxy rules require issuers to post all proxy materials on a public website and to choose between the “full set delivery” option and the “notice only” option to deliver such materials to shareholders. While the former is substantially similar to the traditional means of providing proxy materials in paper, the latter allows issuers, in lieu of mailing hard copies of the proxy materials to shareholders, to send them a notice informing that the proxy materials are available on a web site. The new delivery system has brought significant savings on printing and mailing costs but, at the same time, has shown some flaws.

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Making Sense of Executive Compensation

Posted by Scott Hirst, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Saturday, January 8, 2011
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The following post comes to us from Simone M. Sepe, Associate Professor of Law at the University of Arizona College of Law.

In the attempt of promoting financial stability and better risk-management practices, the Dodd-Frank Act has introduced a number of significant executive compensation rules affecting all public U.S. companies. In my paper, Making Sense of Executive Compensation, which was recently made publicly available on SSRN and is forthcoming in the Delaware Journal of Corporate Law,  I argue that the Congress has failed to accurately answer three basic questions in enacting the new legislation:

  • (i) what are the key problems that plague executive compensation,
  • (ii) what is the possible solution, and
  • (iii) what is the role of regulation in implementing the solution?

Addressing these questions, I come to three conclusions.

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The Effect of Tax Authority Monitoring and Enforcement on Financial Reporting Quality

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, January 7, 2011
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The following post comes to us from Michelle Hanlon of the Accounting Department at MIT, Jeffrey Hoopes of the Accounting Department at the University of Michigan, and Nemit Shroff of the Accounting Department at the University of Michigan.

In the paper, Uncle Sam Is Watching: The Effect of Tax Authority Monitoring and Enforcement on Financial Reporting Quality, which was recently made publicly available on SSRN, we examine the relation between tax enforcement and financial reporting quality. We proxy for financial reporting quality using the extent to which earnings map into cash flows and the magnitude of the absolute value of discretionary accruals. After controlling for firm level characteristics and industry membership, we find that accrual quality is positively associated with IRS audit probability and that discretionary accruals (unsigned) are negatively associated with IRS audit probability. These results collectively suggest that an increase in IRS enforcement leads to an improvement in financial reporting quality. We also find that IRS enforcement generally has a more prominent effect on financial reporting quality when agency problems are more severe.

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The Window Closing Pill – One Response to Stealth Stock Acquisitions

Posted by Scott Hirst, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Thursday, January 6, 2011
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The following post comes to us from Peter S. Golden, a corporate partner resident in Fried, Frank, Harris, Shriver & Jacobson LLP’s New York office.

The recent announcement of accumulations of stock in J.C. Penney and Fortune Brands substantially in excess of the five percent Schedule 13D reporting threshold prior to any public disclosure has focused attention on possible inadequacies in the regulatory system in providing companies, their stockholders, and the trading markets with advance notice of significant ownership by activist investors or bidders. Although the reporting requirements of 13D, the ownership limitations of the Hart-Scott-Rodino Antitrust Improvements Act, state merger moratorium statutes, and traditional rights plans afford US companies some protections against rapid and secret stock acquisitions, the current state of law may provide opportunities for activists or raiders to obtain a sizable stake in a US company before they are obligated to make any disclosure:

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Inside Debt and the Design of Corporate Contract

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, January 5, 2011
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The following post comes to us from Divya Anantharaman of the Accounting Department at Rutgers University, Vivian Fang of the Accounting Department at Rutgers University, and Guojin Gong of the Accounting Department at Pennsylvania State University.

In the paper, Inside Debt and the Design of Corporate Contract, which was recently made publicly available on SSRN, we investigate whether debtholders recognize the incentive effects of executive debt-like compensation when contracting with the firm. Top executives in the United States are commonly compensated with both equity and debt. While prior research has examined the incentive effects of equity-based compensation extensively, most academic work has ignored the incentive effects of debt-like compensation. The greater the ratio of CEO debt-to-equity compensation to corporate leverage, the more aligned the CEO’s interests should be with debtholders vis-à-vis stockholders. If debtholders recognize these implications, we expect firms with higher CEO relative leverage to have lower cost of debt and fewer covenants restricting managers’ activities after debt issuance.

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Value Judgments: Tried and True Techniques Bridge Divergent Valuations

Posted by Edward D. Herlihy, Wachtell, Lipton, Rosen & Katz, on
Tuesday, January 4, 2011
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Edward Herlihy is a partner and co-chairman of the Executive Committee at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton firm memorandum.

Valuation is usually the fundamental issue in getting to agreement on a bank deal. Persistent high unemployment, the housing slowdown and significant and changing government policy have combined to exacerbate uncertainty over future performance of bank assets. This can create challenges for parties to get to agreement on how to value a bank’s balance sheet and accordingly on a deal price.

Some recent bank deals have brought back traditional solutions, seen in prior generations of bank deals, to bridge the valuation gap. To account for portfolio performance in the period between signing and closing, parties to recent deals have included purchase price adjustments tied to a target’s loan portfolio and/or shareholders’ equity. In other deals, the buyer has negotiated the ability to exit the deal if the target’s loan portfolio deteriorates beyond a specified level, or the target bank suffers a decline in core deposits below a threshold level – offering a potentially more objective exit trigger than the traditional “material adverse effect.”

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