Yearly Archives: 2012

Analyzing Aspects of Board Composition

Posted by David A. Katz, Wachtell, Lipton, Rosen & Katz, on
Monday, February 20, 2012
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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. The views expressed are the authors’ and do not necessarily represent the views of the partners of Wachtell, Lipton, Rosen & Katz or the firm as a whole.

As the 2012 proxy season approaches, it appears that certain issues in board composition—the separation of the chairman and chief executive officer (CEO) roles (along with the related issue of the independence of the chairman) and board diversity—are likely to be more prominent this year. As boards consider these and other related corporate governance issues, directors should keep in mind that a corporate board is a complex creature, with company history, personal dynamics, and board structure all contributing to, or potentially undermining, the overall effectiveness of the board. No single factor in board composition will have the same significance at one company as it has at another; boards should seek to adopt best practices that will make them more effective, but this does not mean that governance structures such as the separation of chairman and CEO roles should be mandated. Directors facing pressure from activists should be counseled that it is the board’s right and responsibility to determine its own operation, and that it is the board’s duty to do so in a way that, in the business judgment of the directors, best serves the company and its shareholders.

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Say on Pay Votes and CEO Compensation

Posted by Fabrizio Ferri, Columbia University, on
Monday, February 20, 2012
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Fabrizio Ferri is an Assistant Professor of Accounting at Columbia University. Work from the Program on Corporate Governance about executive compensation includes the book Pay without Performance and the article Paying for Long-Term Performance, both by Bebchuk and Fried.

As we begin to analyze the first proxy season under “say on pay” in the US, it may be useful to review the evidence from the UK experience with say on pay. In the study, Say on Pay Votes and CEO Compensation: Evidence from the UK, co-authored with David Maber of University of Southern California and forthcoming in the Review of Finance, we examine the impact of “say on pay” in the UK, the first country to adopt a mandatory, non-binding annual shareholder vote on executive pay.

We perform three sets of analyses. First, we examine the market reaction to the (largely unanticipated) announcement of say on pay regulation and find positive abnormal returns for firms with weak penalties for poor performance, e.g. firms with excess CEO pay combined with poor performance and firms with generous severance contracts, which can weaken penalties in the event of poor future performance.

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Corporate Governance Practices for IPOs

Posted by Matteo Tonello, The Conference Board, on
Sunday, February 19, 2012
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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 Sandler and Elizabeth Weinstein of Davis Polk & Wardwell LLP, which was adapted from a Davis Polk memorandum, available here.

This report examines the corporate governance practices of 50 U.S. companies at the time of their initial public offerings (IPOs) and finds that pressure to update governance practices at larger companies has had only a limited effect on companies at the IPO stage.

To glean the governance practices of newly public companies, we analyze the prospectuses filed with the U.S. Securities and Exchange Commission by the 50 domestic companies with the largest IPOs (in terms of deal size) from January 1, 2009 through August 31, 2011. The deal size of the IPOs examined ranged from $132.0 million to $18.14 billion. [1]

Despite the growing pressure for seasoned issuers to use certain corporate governance provisions, corporate governance practices at the top 50 IPO companies examined remain in many ways unchanged from those of previous years (as shown by a nearly identical review of the top IPOs in the United States from 2007 to 2008). [2] The IPOs from both time frames show similar percentages for the use of classified boards, plurality voting in uncontested board elections, and fully independent audit committees. Far fewer recent IPO companies separated the role of CEO and chairman of the board—34 percent, compared with 52 percent from the previous sample.

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Dutch Court Decision Impacts Global Securities Class Actions

Posted by Scott Hirst, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Saturday, February 18, 2012
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The following post comes to us from Todd G. Cosenza, partner in the Litigation Department of Willkie Farr & Gallagher LLP, and is based on a Willkie memorandum by Mr. Cosenza and Antonio Yanez, Jr.

Recently, the Amsterdam Court of Appeal issued an important decision in the Converium case with implications for class action suits in the United States and internationally. The decision authorizes the use of the Dutch collective-settlement statute to settle disputes on a classwide, opt-out basis. Given that the U.S. Supreme Court’s decision in Morrison v. National Australian Bank significantly limited the extent to which claims by foreign investors can be settled in United States securities cases, the Amsterdam Court of Appeal’s decision is significant because it provides a practical mechanism for structuring global securities class action settlements through the use of the Dutch statute in concert with U.S. proceedings, particularly in cases involving a large number of European investors.

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Financial Reporting Challenges for 2012

Posted by Scott Hirst, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, February 17, 2012
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The following post comes to us from Catherine T. Dixon, member of the Public Company Advisory Group at Weil, Gotshal & Manges LLP, and is based on the introduction of a Weil Gotshal client alert by Ms. Dixon and Ellen J. Odoner, available in full here.

Reflecting the continued uncertainty and volatility of the global economic environment, this year’s financial reporting challenges center around the identification, analysis and disclosure of risks and uncertainties. Those responsible for preparing, certifying, reviewing and/or signing their companies’ forthcoming annual reports on Form 10-K should be aware of recent disclosure guidance issued by the Securities and Exchange Commission (SEC)’s Division of Corporation Finance regarding two specific categories of risk – cyber security threats and exposure to potential European sovereign and private debt defaults. This disclosure guidance is the latest example of how, in this era of change, the SEC and its staff expect companies to apply a principles-based, holistic approach to analysis and disclosure of material risks and uncertainties of all kinds.

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Narrative Disclosure and Earnings Performance

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, February 17, 2012
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The following post comes to us from Kenneth Merkley of the Department of Accounting at Cornell University.

In the paper, Narrative Disclosure and Earnings Performance: Evidence from R&D Disclosures, which was recently made publicly available on SSRN, I examine whether earnings performance relates to the quantity of narrative R&D disclosure that firms provide concurrently in their financial reports. A large body of research examines how managers’ incentives to voluntarily disclose information depend on whether that specific disclosure would reveal good or bad news. This study differs from prior work on the relation between performance and disclosure in that I examine whether earnings performance, a mandatory disclosure, relates to firms’ decisions to provide narrative disclosures – one of the main channels used to convey contextual information about a firm’s operations to investors. While more quantitative disclosures such as earnings guidance have received considerably more attention, narrative information makes up a comparatively large amount of disclosure information and helps to bridge the gap between a firm’s economic reality and its financial statements.

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Bebchuk Testifies on Compensation at Large Financial Firms

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Thursday, February 16, 2012
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Editor’s note: Lucian Bebchuk is Professor of Law, Economics, and Finance and Director of the Corporate Governance Program at Harvard Law School. The Program has issued several studies on compensation authored or co-authored by Professor Bebchuk, including Regulating Bankers’ Pay, Paying for Long-Term Performance, The Wages of Failure: Executive Compensation at Bear Stearns and Lehman 2000-2008, and How to Fix Bankers’ Pay.

Professor Lucian Bebchuk testified yesterday before the Subcommittee on Financial Institutions and Consumer Protection of the United States Senate Committee on Banking, Housing and Urban Affairs. He participated in a hearing on “Pay for Performance: Incentive Compensation at Large Financial Institutions.” In addition to Bebchuk, the other witnesses testifying in the hearing were Kurt Hyde, Deputy Special Inspector General of the Troubled Asset Relief Program; Professor Robert J. Jackson, Jr., Associate Professor of Law at Columbia Law School; and Michael S. Melbinger, an executive compensation expert appearing on behalf of the Financial Services Roundtable.

In his testimony, Bebchuk explained how compensation practices at financial firms should be reformed to eliminate excessive risk-taking incentives. He described two distinct shortcomings of pay arrangements: first, excessive focus on short-term results; and, second, excessive focus on results for shareholders. He then discussed how pay arrangements should be designed to address each of these problems. In particular, Bebchuk explained how pay structures  should be designed to induce executives to focus on long-term rather than short-term results, as well as to induce such executives to take into account the consequences of their decisions for all those contributing to the bank’s capital (rather than only for shareholders). Bebchuk suggested that the rules proposed by regulators last spring be strengthened to ensure that financial firms provide executives with such incentives. Because of the importance of providing such incentives for financial stability, he concluded, ensuring that financial firms  provide such incentives should be regarded as a regulatory priority.

Bebchuk’s written testimony is available here.

The Outlook for Bank M&A in 2012

Posted by Edward D. Herlihy, Wachtell, Lipton, Rosen & Katz, on
Thursday, February 16, 2012

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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 by Mr. Herlihy, Richard K. Kim, Lawrence S. Makow, Nicholas G. Demmo, David E. Shapiro, Matthew M. Guest, Patricia A. Robinson, and David M. Adlerstein.

This time last year appeared to hold the promise of increased deal activity, as a series of significant strategic deals were announced in the waning days of 2010 and fundamentals appeared to be aligned. That promise began to manifest itself in the opening months of the year, with several significant deals. As the year wore on, though, deal activity was dampened by several troubling environmental realities: an alarming sovereign debt and bank crisis in Europe, persistent U.S. monetary policy promising sustained low interest rates and a flat yield curve, a weak U.S. housing market and a tricky legal and regulatory landscape.

There were, though, some very bright spots. Leading the way were transformative deals by Comerica, Capital One and PNC. We also witnessed increasingly ambitious efforts by several stronger community banks to intelligently strengthen their franchises through successive smaller acquisitions in strategically important markets. Bank M&A in 2012 will likely remain episodic, as current ongoing business and regulatory conditions and weak equity market valuations will surely take more time to work through. Still, we should see a continued trend of stronger banks making selective, targeted acquisitions focused more on securing their long-term competitive positioning and maintaining balance sheet strength (and less on a short-term boost to quarterly earnings) as well as increasing pressure on smaller banks from several fronts to accept current valuations.

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Challenges in Board Leadership

Posted by Jeffrey Stein, King & Spalding LLP, on
Thursday, February 16, 2012
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Jeffrey Stein is a partner in the Corporate Practice Group at King & Spalding LLP. This post comes to us from Mr. Stein, Bill Baxley, and Rob Leclerc, and is based on a report from the Lead Director Network, available here.

All directors share the responsibility of helping a board resolve challenging board issues. Lead directors, however, frequently guide the board through critical situations. Although there are many different issues that a board may encounter that are well suited for a lead director’s involvement, a lead director often plays a key role in resolving the following four challenges: (1) handling individual director performance issues, (2) responding to an underperforming CEO, (3) bringing new directors on board, and (4) preparing for lead director succession.

The Lead Director Network (the “LDN”), a group of lead directors, presiding directors and non-executive chairmen from many of America’s leading companies, met on November 1, 2011 to discuss their role as lead directors in these and other challenges. Following this meeting, King & Spalding and Tapestry Networks have published a ViewPoints report here to present highlights of the discussion that occurred at the meeting and to stimulate further consideration of these subjects.

The following provides highlights from the LDN meeting, as described in the ViewPoints report.

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Securities Litigation: Recent Supreme Court Decisions and Future Trends

Posted by Peter Atkins, Skadden, Arps, Slate, Meagher & Flom LLP, on
Wednesday, February 15, 2012
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Peter Atkins is a partner of corporate and securities law matters at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a section from Skadden’s 2012 Insights, contributed by Frances Kao, Jay B. Kasner, Christopher P. Malloy, Matthew J. Matule, Peter B. Morrison, Scott D. Musoff, and Susan L. Saltzstein.

Recent and Upcoming Supreme Court Decisions

In 2011, the Supreme Court decided three significant securities cases: Matrixx Initiatives, Inc. v. Siracusano 131 S. Ct. 1309 (2011), regarding statistical significance in the context of securities fraud; Erica P. John Fund, Inc. v. Halliburton Co. 131 S. Ct. 2179 (2011), addressing the relationship between loss causation and class certification; and Janus Capital Group, Inc. v. First Derivative Traders 131 S. Ct. 2296, 2305 (2011), construing the phrase “to make” under the SEC’s Rule 10b-5. Coming up in the term that began in October 2011, the Court will decide Credit Suisse Securities v. Simmonds, to clarify the two-year statute of limitations under Section 16(b) of the Securities Exchange Act.

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