Yearly Archives: 2012

A Proposal to Repeal Exclusive Forum at Chevron

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Wednesday, May 30, 2012
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Editor’s Note: The following post comes to us from Richard H. Koppes, administrative officer at the National Association of Public Pension Attorneys and former general counsel of the California Public Employees’ Retirement System. This post is based on an article by Mr. Koppes in the NAPPA Report.

When I left CalPERS in 1996 after ten years (having founded and run their corporate governance program for all ten years), I bought shares in ten companies that I felt listen to shareowners, had or were developing good corporate governance, and would be (hopefully!) a good economic investment. Of those ten companies, eight have done very well, with one doing so-so, and one not doing so good. Chevron, a Fortune Ten Company, was one of those ten companies. I have held Chevron stock for 16 years now, and it has done quite well.

Spring is proxy season and my mailbox, both postal and electronic, has filled with proxy materials and annual reports. I try to read/look over all these materials and to carefully vote my proxies. Recently, I turned to my Chevron proxy and noted item No. 4, entitled: “Shareholder Proposal Regarding Exclusive Forum Provisions.” This proposal states: “RESOLVED: The shareholders of Chevron Corporation (the “Company”) hereby ask the board of directors to repeal the Company’s “exclusive forum” bylaw which was unilaterally adopted by the board of directors and which generally requires shareholders to bring certain types of legal actions only in Delaware, the state where the Company is incorporated.”

I have fought for good corporate governance for over 26 years, first as a CalPERS “shareowner activist,” and then as a counselor to corporate boards for the last 15+ years, and as a corporate board member of various public companies for the last 13 years.

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Global Financial Inclusion Indicators

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, May 30, 2012
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The following post comes to us from Asli Demirguc-Kunt, Director of Development Policy in the World Bank’s Development Economics Vice Presidency and Chief Economist of the Financial and Private Sector Network, and Leora Klapper, Lead Economist in the Finance and Private Sector Research Team of the Development Research Group at the World Bank.

In a recent World Bank working paper, Measuring Financial Inclusion: The Global Findex Database, we provide the first analysis of the Global Financial Inclusion (Global Findex) Database, a new set of indicators that measure how adults in 148 economies save, borrow, make payments, and manage risk. Well-functioning financial systems serve a vital purpose, offering savings, credit, payment, and risk management products to people with a wide range of needs. Inclusive financial systems—allowing broad access to financial services, without price or nonprice barriers to their use—are especially likely to benefit poor people and other disadvantaged groups. Without inclusive financial systems, poor people must rely on their own limited savings to invest in their education or become entrepreneurs—and small enterprises on their limited earnings to take advantage of promising growth opportunities. This can contribute to persistent income inequality and slower economic growth.

Until now, little had been known about the global reach of the financial sector—the extent of financial inclusion and the degree to which such groups as the poor, women, and youth are excluded from formal financial systems. Systematic indicators of the use of different financial services had been lacking for most economies.

The Global Financial Inclusion (Global Findex) database provides such indicators, measuring how people in 148 economies save, borrow, make payments, and manage risk. These new indicators are constructed with survey data from interviews with more than 150,000 nationally representative and randomly selected adults age 15 and above. The survey was carried out over the 2011 calendar year by Gallup, Inc. as part of its Gallup World Poll.

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Give Credit Where Credit Is Due

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Tuesday, May 29, 2012
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Editor’s Note: Ben W. Heineman, Jr. is a former GE senior vice president for law and public affairs and a senior fellow at Harvard University’s schools of law and government. This post is based on an article that appeared in Corporate Counsel.

Federal enforcement authorities should give much more systematic credit to effective corporate compliance programs when making decisions about criminal prosecutions, including nonprosecution or deferred prosecution agreements, and when deciding the scope of civil and administrative settlements.

That is the fundamental conclusion of a recent report from an advisory group constituted in November 2011 to assess the effectiveness of the Federal Sentencing Guidelines for Organizations (FSGO) 20 years after publication by the U.S. Sentencing Commission. Organized by the Ethics Resource Center, the advisory group was composed of law enforcement officials, judges, prosecutors, academics, and compliance experts from companies and law firms. It focused on corporations, not other entities covered by the FSGO (such as unions or pension funds). (Disclosure: I was on the advisory group and approved the final report but was not involved in decisions about scope or in drafting.)

The advisory group faced a fundamental paradox at the outset. In response to the elements of a good compliance program outlined in the FSGO (and elements drawn from numerous other sources), many corporations have established strong compliance and ethics programs during the past 20 years. Yet few corporations received credit under the Sentencing Guidelines because there were so few corporate convictions as more and more corporate criminal investigations were settled outright or resolved with nonprosecution or deferred prosecution agreements (NPAs and DPAs).

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Developing Insightful Oversight

Posted by Robert Kirchstein, Corporation Service Company, on
Monday, May 28, 2012
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Robert Kirchstein is director of CSCPublishing at the Corporation Service Company. This post is an excerpt from the 2012 edition of The Directors’ Handbook, by Thomas J. Dougherty of Skadden, Arps.

So much of the architecture of corporate governance has been the subject of recent federal reforms (SOX, Dodd-Frank, FCPA expansion, etc.) that it is easy to forget that those enactments leave a lot of the governance landscape unaddressed. Clearly, federal requirements for compulsory CEO and CFO financial statement certifications, automatic clawback of senior executive stock option grants following restatement of financials, expanded MD&A and CD&A disclosures, say-on-pay voting requirements, board committee charter mandates, federal one-size-fits-all proxy access rules (that have been blocked in court from implementation), new federal whistleblowing protection schemes, and other federal reforms have reshaped many of the peaks and valleys of corporate governance and are covered at length in this handbook.

However, directors’ robust exercise of their oversight responsibilities depends on much more than taking into account those federal promontories and gullies. Arguably, some of the most important director oversight functions, such as CEO succession, conflict of interest avoidance, strategic risk assessment, capital allocation and employee retention occupy large spaces in the governance landscape that are only indirectly touched by headline-fetching federal reforms. Yet those other key oversight responsibilities might easily become neglected lacunae in the landscape if they are overshadowed by the burden and time devoted to regulators’ mandates.

Consequently, well apart from regulatory guidelines and headline pressures that structure many board tasks, directors also need to devote the self-disciplined effort requisite to fulfilling those fundamental oversight duties.

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The Impact of Regulatory Governance Mandates on Poorly Governed Firms

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, May 28, 2012
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The following post comes to us from Reena Aggarwal, Robert E. McDonough Professor of Business Administration at Georgetown University; Jason Schloetzer of the Department of Accounting at Georgetown University; and Rohan Williamson, Professor of Finance and Stallkamp Research Fellow at Georgetown University.

In our paper, The Impact of Regulatory Governance Mandates on Poorly Governed Firms, which was recently made publicly available on SSRN, we investigate the relation between regulatory governance mandates and firm value by assessing the impact of recent governance mandates on the firms that were most affected by changes in governance regulation. We exploit the cross-sectional variation in compliance with governance mandates in the pre-regulatory period to identify firms that were most affected by the governance mandates promulgated by congressional action and the associated changes to NYSE and Nasdaq listing requirements (“affected firms”) and firms that were less affected by such mandates (“control firms”). We use propensity score trimming (Crump et al. 2009; Imbens and Wooldridge 2009) to form a sample of affected and control firms that display covariate balance, facilitating comparisons across the pre- (1996 through 2004) and post-regulatory (2005 through 2009) periods. An important objective of recent governance mandates was to improve board monitoring. Hence, we identify affected and control firms using the governance mandates most closely related to board monitoring (please see our paper for more details). Our research design helps to mitigate endogeneity concerns by combining a quasi-natural experiment with the identification of firms differentially affected by the regulatory governance mandates.

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Corporate Philanthropy as Signaling and Co-optation

Posted by Scott Hirst, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Sunday, May 27, 2012
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The following post comes to us from Roy Shapira, fellow of the Program on Corporate Governance.

In a paper recently published in Fordham Law Review, Corporate Philanthropy as Signaling and Co-optation, I examine a previously unnoticed mechanism through which corporate philanthropy (CP) can enhance company value: signaling.

Current value-enhancing accounts rest on the premise that CP “buys goodwill” for the company: companies, by acting nicely, can increase consumers’ or employees’ willingness to pay. But the necessary conditions underlying this theory are simply too unrealistic. For one, consumers have to be aware of companies’ CP policies and be willing to pay to delegate their philanthropy (that is, pay for someone else’s charitable preferences). We should focus less on charitable preferences and warm-glow concepts, and more on the potential of pro-social sacrifices to convey messages about a firm’s fundamentals. Explicit sacrifices of profits can serve as costly signals. They reliably convey messages about attributes that are important to shareholders, consumers, and employees – who are evaluating whether to invest in, buy products from, or work for those companies (that is, important even to those stakeholders who are strictly profit-minded).

To illustrate, the paper elaborates on the option of CP as a costly signal to investors. An increase in the level of donations could convey messages about financial strength to potential investors, who could infer that future free cash flows are perceived by insiders to be relatively high, that the company is now less financially constrained, or that the riskiness of future cash flows has decreased. Pro-sociality could also bridge asymmetric information between insiders and non-financial stakeholders, such as employees and consumers, by conveying messages about the styles and characteristics of top management and the extent to which they are subject to short-termism.

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Dim the Spotlight: De-emphasizing Pay for Performance

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Saturday, May 26, 2012
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Editor’s Note: Simon Wong is a partner at Governance for Owners, an adjunct professor of law at the Northwestern University School of Law, and a visiting fellow at the London School of Economics and Political Science. This post is based on an article by Mr. Wong that appeared The Conference Board Review. Work from the Program on Corporate Governance on executive compensation includes the paper Paying for Long-Term Performance, and the book Pay without Performance, both by Bebchuk and Fried.

It is common knowledge that people are not driven solely by the prospect of financial rewards. Yet, in business, motivational tools for top executives—particularly the CEO—almost singularly comprise financial incentives. In 1980, only 10 percent of the UK’s largest FTSE100 companies utilized incentive arrangements (in the form of cash and stock-based variable pay). Today, they are universally employed as a matter of best practice and variable pay accounts for approximately two-thirds of total compensation.

Widespread adoption of financial incentives has contributed to substantial pay increases, in absolute and relative terms. In the United Kingdom, the average compensation of FTSE100 CEOs climbed from £1 million in 1998 to £4 million a decade later, with the ratio of CEO pay to average employee pay nearly tripling. (The figures are, of course, higher for American executives.) The rise in top executive pay has far outstripped growth in share price and other indicators of company performance, with certain incentive arrangements proving counterproductive by encouraging excessive risk-taking and accounting manipulation.

Amid growing sensitivity to widening income inequality in many countries, it is no wonder that executive pay has remained a visible target.

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Private Equity Buyer/Public Target M&A Deal Study

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, May 25, 2012
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The following post comes to us from John Pollack and David Rosewater, partners focusing mergers & acquisitions at Schulte Roth & Zabel LLP. This post discusses the Schulte Roth & Zabel Private Equity Buyer/Public Target M&A Deal Study 2011 Year-End Review, which is available here. Posts about previous versions of the study are available here and here.

Survey Methodology

We conducted our survey as follows:

  • We reviewed the treatment of certain key deal terms in all private equity buyer/public company target cash merger transactions involving consideration of at least $500 million in enterprise value [1] entered into during 2010 and 2011, which totaled 37 transactions.
  • We then compared the treatment of such deal terms in the 20 transactions entered into between Jan. 1, 2010 and Dec. 31, 2010, which we refer to as the “2010 Transactions,” with the treatment of the same key deal terms in the 17 transactions entered into between Jan. 1, 2011 and Dec. 31, 2011, which we refer to as the “2011 Transactions.”

Key Observations

As widely reported, 2011 was a tumultuous year characterized by economic uncertainty. The European sovereign debt crisis and the downgrade to the U.S. credit rating caused significant volatility in the U.S. debt and equity markets. The large private equity buyer/public company segment of the U.S. M&A market was not immune to these factors. Deal activity was down overall relative to 2010 and the deals that were completed in 2011 took longer to complete.

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Legal Entities as Transferable Bundles of Contracts

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, May 25, 2012
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The following post comes to us from Kenneth Ayotte, Professor of Law at Northwestern University, and Henry Hansmann, Professor of Law at Yale University.

The large modern business corporation is frequently organized as a complex cluster of hundreds of corporate subsidiaries under the common control of a single corporate parent. General Electric, for example, has over 1500 subsidiaries, most of them wholly-owned. What is the purpose of all these subsidiaries? Do they exist only as a means of avoiding taxation and regulation? Or are there real efficiency gains that subsidiaries can help unlock?

In our paper, Legal Entities as Transferable Bundles of Contracts, which was recently made publicly available on SSRN, we provide new theory and supportive evidence that help explain a relatively unexplored benefit of subsidiaries. We focus, in particular, on the advantages of subsidiary entities in enhancing the transferability of a business unit. The theory not only sheds light on corporate subsidiaries, but illuminates a basic function of all types of legal entities, from partnerships to nonprofit corporations.

Many of the modern firm’s key assets come in the form of bilateral contracts, in which both parties to the contract are exposed to performance risk from the other party. Take, for example, the movie rental company, Redbox, which is a wholly-owned subsidiary of Coinstar. Many of Redbox’s key assets are contractual, including agreements with movie studios to acquire DVDs, and revenue sharing agreements with companies like Wal-Mart that house Redbox kiosks. Real estate, such as corporate headquarters and processing facilities, are frequently acquired through long-term leases.

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Delaware Court Expedites Proceedings to Enjoin Enforcement of Advance Notice Bylaw

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Thursday, May 24, 2012
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Editor’s Note: Eduardo Gallardo is a partner focusing on mergers and acquisitions at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn client alert by Jeffrey Chapman, Brian Gingold, and Rachel Harrison. 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.

On April 20, 2012, Vice Chancellor Noble of the Delaware Court of Chancery issued an opinion in Icahn Partners LP v. Amylin Pharmaceuticals, Inc. [1] granting a motion to expedite a claim by Carl Icahn that Amylin’s directors breached their fiduciary duties by not waiving Amylin’s advance notice bylaw. Following the passage of the bylaw deadline, Icahn sought to nominate candidates for election to Amylin’s board of directors in the wake of his learning of Amylin’s recent rejection of an unsolicited takeover proposal by Bristol-Myers Squibb Co. Vice Chancellor Noble found that Icahn successfully made a “sufficiently colorable claim” [2] of irreparable injury as a result of the Board’s decisions to reject the Bristol-Myers proposal and his request to waive the advance notice deadline and re-open the nomination process.

The Facts

Amylin’s bylaws contain a fairly customary advance notice provision requiring stockholders to submit director nominations at least 120 days prior to the first anniversary of the preceding year’s annual meeting, unless the meeting date is delayed or advanced by more than 30 days from the anniversary. Given that Amylin’s 2011 annual meeting was held on May 24, 2011 and its 2012 annual meeting was scheduled for May 15, 2012, the cutoff for valid stockholder nominations was January 25, 2012 (the 120th day prior to the first anniversary of the May 24, 2011 meeting). No stockholder nominations were received prior to such date.

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