Monthly Archives: July 2012

Lessons Learned So Far During the 2012 Proxy Season

The following post comes to us from Regina Olshan, partner in the executive compensation and benefits practice at Skadden, Arps, Slate, Meagher & Flom LLP, and is based on a Skadden alert by Ms. Olshan, Stuart N. Alperin, Neil M. Leff, Erica Schohn, Joseph M. Yaffe, and Barbara R. Mirza.

As we reach the peak of the 2012 proxy filing season, we are continuing to monitor the following developments:

What are the overall vote results?

Of the first 1,656 companies to report the results of say-on-pay proposals, approximately:

  • 70 percent have passed with more than 90 percent support;
  • 21 percent have passed with between 70 percent and 90 percent
  • 7 percent have passed with between 50 percent and 70 percent
    support; and
  • 3 percent (45 companies) obtained less than 50 percent support.

While the overall proportions are generally not dissimilar to 2011 results, we have already seen more companies fail their say-on-pay votes this year than in the entire season last year. Four companies have seen failed votes in both 2011 and 2012.


Large Trader Reporting Rule

The following post comes to us from Russell D. Sacks, partner at Shearman & Sterling LLP, and is based on a Shearman client publication by Mr. Sacks, Charles S. Gittleman, Shriram Bhashyam, Michael J. Blankenship, and Bradford B. Rossi.

On April 23, 2012, the US Securities and Exchange Commission (“SEC”) issued an order temporarily exempting registered broker-dealers from the Large Trader Identification requirements under Rule 13h-1 (the “Rule”). [1] This temporary exemption was issued in anticipation of the Rule’s original effective date of April 30, 2012, providing covered broker-dealers with additional time to ensure compliance with the recordkeeping, reporting, and monitoring requirements under the Rule. In addition, the SEC granted a permanent exemption for certain capital market transactions for the purposes of the large trader identification requirements.

Introduction and Overview

Rule 13h-1 will require a “large trader,” defined as a person whose transactions in NMS securities equal or exceed 2 million shares or $20 million during any calendar day, or 20 million shares or $200 million during any calendar month, to identify itself to the SEC and make certain disclosures to the SEC on Form 13H. Upon receipt of Form 13H, the SEC will assign to each large trader an identification number that will identify the trader, which the large trader must then provide to registered broker-dealers with which it conducts business. Such registered broker-dealers will then be required to maintain records relating to transactions effected through large traders’ accounts and to report large trader transaction information to the SEC upon request. The large trader reporting requirements are designed to provide the SEC with data to support its investigative and enforcement activities, as well as to facilitate the SEC’s ability to assess the impact of large trader activity on the securities markets including reconstructuring trading activity following periods of unusual market volatility, and analyzing significant market events for regulatory purposes.


CEO Characteristics and Firm Responses to Pressures for Disclosure

The following post comes to us from Glen Dowell and Ben Lewis, both of the Department of Management at Cornell University, and Judith Walls of the Department of Management at Concordia University, Quebec.

In the paper, Difference in Degrees: CEO Characteristics and Firm Responses to Pressures for Disclosure, which was recently made publicly available on SSRN, we extend existing theory by examining how managerial attributes influence firm’s strategic responses to environmental issues. We argue that the characteristics of the CEO play an important role in the extent to which external environmental pressures are attended to and how they are interpreted and acted upon (Hoffman, 2001). As top managers, CEOs strongly influence whether stakeholder groups are considered salient (Delmas & Toffel, 2008; Eesley & Lenox, 2006) and how environmental issues should be addressed (Sharma, 2000).

Specifically, our research examines how firms respond to requests to disclose their environmental performance. Because the costs and benefits of disclosure are often uncertain, decisions about firm response may be subject to managerial interpretation. We therefore argue that CEO characteristics play an important role in determining whether the disclosure of environmental information is perceived as an opportunity or a threat (Sharma et al., 1999).


A Growing Divide Between Compliance Have’s and Have-Not’s

The following post comes to us from Jeffrey M. Kaplan, partner at Kaplan & Walker LLP.

In Semi-Tough: A Short History of Compliance and Ethics Program Law, presented at a May 2012 RAND Symposium on Corporate Culture and Ethical Leadership Under the Federal Sentencing Guidelines: What Should Boards, Management and Policymakers Do Now, I explore the legacy of the Federal Sentencing Guidelines for Organizations (“FSGO”) with respect to compliance and ethics (“C&E”) programs.

Since the advent of the FSGO in November 1991, the legal drivers for corporations to implement strong C&E programs have seemed to be ever on the increase, at least in the U.S. Indeed, the past few years alone have seen:

  • Rigorous enforcement, to an unprecedented extent, of the Foreign Corruption Practices Act (“FCPA”) – a law which, because of its internal controls provisions, strongly encourages companies to have effective C&E programs.
  • The imposition, also to an extent never before seen, of very large federal criminal fines, including but by no means limited to those meted out in FCPA cases.
  • The initiation of a significant number of “Caremark” claims alleging failures by directors to oversee sufficiently their respective companies’ C&E programs.
  • Revisions in 2010 to the FSGO to encourage independent C&E officer functions.
  • Numerous other subject-matter-specific legal developments including (but by no means limited to) those regarding government contracting and energy utilities.


Binding Say on Pay in the UK

Amy Goodman is a partner and co-chair of the Securities Regulation and Corporate Governance practice group at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn memo by Ms. Goodman, James Barabas, James A. Cox, Jeffery Roberts, and Elizabeth A. Ising.

Earlier this year we reported on the UK Government’s proposals to give shareholders of companies greater influence over executive pay through the use of binding votes.

Since the draft proposals were announced the UK has seen the so-called “Shareholder Spring” with majority votes against remuneration reports under the current ‘advisory’ (non-binding) regime at Aviva, Cairn Energy, Pendragon, and WPP; and sizeable votes against the reports at Xstrata (40% against), Barclays, Cookson and UBM (approx. 25% or more against) amongst others.

Building on the momentum created by shareholders on June 20, 2012, the UK Government announced its detailed proposals for a far-reaching reform of the approval mechanism for executive pay, including the use of binding votes. The proposals will likely apply (we await detail) to so-called ‘quoted companies’ (see further below).


The End of the Era of the Corporate Interlock Network

The following post comes to us from Johan Chu of the Department of Management and Organizations at the University of Michigan Ross School of Business.

In the paper, Who Killed the Inner Circle? The End of the Era of the Corporate Interlock Network, which was recently made publicly available on SSRN, I show that the American board interlock network has changed in fundamental ways.

Throughout the 20th century, the American board interlock network—in which companies are linked by shared board directors—exhibited a stable cohesiveness, characterized by short path lengths between companies and the existence of an “inner circle” of well-connected directors. This enduring cohesiveness of the interlock network was both the result of elite social cohesion and a key mechanism for maintaining this elite cohesion (e.g., Mills, 1956; Useem, 1984). The characteristics of the interlock network were so stable that Davis, Yoo, and Baker (2003) asserted that short path lengths and an inner circle were inevitable properties of “networks qua networks”.


Advancing Board-Shareholder Engagement

The following post comes to us from Mark Watson, partner at Tapestry Networks, and is based on the introduction of a Tapestry paper by Anthony Goodman and Tom Woodard. The full paper is available here.

On April 26, 2012, representatives of four large, North American institutional investors met with five experienced non-executive directors of major, global corporations to explore the important topic of how corporate boards and their members should appropriately engage with shareholders. This topic has attracted great interest in recent years, triggering a fair amount of animated discussion, particularly so in the wake of the 2000–2001 corporate scandals (e.g., Enron and WorldCom) and the 2008 financial crisis.

Indeed, before and after the financial crisis, Tapestry’s corporate governance networks have discussed their responsibility to investors and met with major investing institutions in the United States, Canada, and Europe and experts, advocates, and other participants in the field of board-shareholder engagement in an attempt to determine a way forward that works for all constituencies. Shareholders, lawmakers, board leaders, and corporate governance activists have all expressed views, and they are not always in agreement. Many of the issues are laid out in a Tapestry-prepared white paper, “A Key Moment to Improve Board-shareholder Engagement,” that was shared in advance with meeting participants.


July 2012 Dodd-Frank Progress Report

The following post comes to us from Margaret E. Tahyar and Gabriel D. Rosenberg of the Financial Institutions Group at Davis Polk & Wardwell LLP. This post discusses a Davis Polk report, which is available here. A post about the previous progress report is available here. Other posts about the Dodd-Frank Act are available here.

This posting, the July 2012 Davis Polk Dodd-Frank Progress Report, is one in a series of Davis Polk presentations that illustrate graphically the progress of the rulemaking work that has been done and is yet to occur under the Dodd-Frank Act. The Progress Report has been prepared using data from the Davis Polk Regulatory Tracker™, an online subscription service offered by Davis Polk to help market participants understand the Dodd-Frank Act and follow regulatory developments on a real-time basis. In this report:

  • As of July 2, 2012, a total of 221 Dodd-Frank rulemaking requirement deadlines have passed. Of these 221 passed deadlines, 140 (63%) have been missed and 81 (37%) have been met with finalized rules.
  • In addition, 119 (29.9%) of the 398 total required rulemakings have been finalized, while 142 (35.7%) rulemaking requirements have not yet been proposed.
  • Major rulemaking activity this month included the FDIC, Federal Reserve and OCC joint final rule on market risk capital standards and the FDIC proposed rule on the definition of “predominantly engaged in financial activities” for purposes of Orderly Liquidation Authority. Additionally, though not explicitly required by Dodd-Frank, the CFTC released proposed interpretive guidance and a proposed order related to the cross-border application of Title VII.

Independence Rules for Compensation Committees and Advisers

Richard J. Sandler is a partner at Davis Polk & Wardwell LLP and co-head of the firm’s global corporate governance group. This post is based on a Davis Polk client memorandum.

Yesterday, the SEC adopted final rules to implement the Dodd-Frank Act’s requirements regarding the independence of compensation committees and their advisers. For the most part, the SEC made few changes from the proposed rules, which in turn hewed very closely to the requirements of the statute.

The national securities exchanges will have 90 days from the publication of the final rules in the Federal Register to propose listing standards implementing the rules and one year from that date of publication to finalize their standards. New disclosure requirements regarding compensation consultants are not subject to this exchange rulemaking process and will be effective beginning with any proxy or information statement for an annual shareholders meeting (or a special meeting in lieu of an annual meeting) at which directors will be elected occurring on or after January 1, 2013.


Market Reaction to Corporate Press Releases

The following post comes to us from Andreas Neuhierl of the Department of Finance at Northwestern University, Anna Scherbina of the Department of Finance at UC Davis, and Bernd Schlusche, economist with the Board of Governors of the Federal Reserve System.

In our paper, Market Reaction to Corporate Press Releases, we provide a comprehensive investigation of how financial markets process various types of corporate news. The study argues that the importance of firm-level announcements should be assessed not only by investigating immediate stock price reactions but also by assessing their effect on firms’ informational environment.

This study became possible because of two important financial regulations that made corporate press releases a prevalent method of communicating new firm-level news to investors, Regulation Fair Disclosure, adopted in 2000 and the Sarbanes-Oxley Act implemented in 2002. These regulations mandate that publicly traded firm must disclose all private information that may have an impact on their market values and report changes in their “financial conditions and operations” in a timely fashion and simultaneously to all market participants. Firms routinely employ press releases as a way of achieving these objectives.

The dataset of corporate press releases was collected from a variety of newswire services, such as PR Newswire, BusinessWire, GlobeNewswire, and the like. The resulting dataset contains nearly all corporate press releases issued during the time period under investigation. Press releases are then classified into 60 news categories, formed with an objective of achieving a relative homogeneity in the news content within each category. While many types of financial announcements have been investigated in prior literature, a large number of other news categories have not due to the difficulty of collecting data.


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