Yearly Archives: 2012

Comparing Corporate Governance Principles & Guidelines

Posted by Holly Gregory, Weil, Gotshal & Manges LLP, on
Wednesday, February 15, 2012
,
More from: , ,

Holly J. Gregory is a corporate partner specializing in corporate governance at Weil, Gotshal & Manges LLP. This post discusses a Weil Gotshal report by Ms. Gregory and Rebecca C. Grapsas, available here.

Although discussions continue to be robust about effective corporate governance practices, review of the aspirational governance principles and guidelines issued by influential board, management and investor affiliated associations and pension funds indicates significant areas of agreement. Areas of apparent agreement include, for example, the appropriate voting standard in director elections (majority voting in uncontested elections with a director resignation policy, plurality for contested elections), the need for some form of independent board leadership (whether in the form of an independent chair or lead or presiding director) and the importance of formal board evaluation processes.

The Comparison of Corporate Governance Principles & Guidelines from Weil, Gotshal & Manges LLP highlights the convergence in views about effective governance practices and structures, as well as remaining areas of disagreement, by providing a side-by-side look at suggestions for board structure and practice from influential players in the investor, board and management communities. The Comparison shows a range of structures and practices that are generally acceptable, while reflecting general agreement that “one size does not fit all.”

READ MORE »

Banks and the Global Credit Crisis

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, February 15, 2012
, , , ,
More from:

The following post comes to us from Andrea Beltratti, Professor of Finance at the Università Bocconi, and René Stulz, Professor of Finance at Ohio State University.

In our paper, The Credit Crisis Around the Globe: Why Did Some Banks Perform Better?, forthcoming in the Journal of Financial Economics, we investigate the determinants of the relative stock return performance of large banks across the world during the period from the beginning of July 2007 to the end of December 2008. Our study does not focus on why the crisis happened. Rather, it is an investigation of the validity of various hypotheses advanced in the literature and the press as to why banks performed so poorly during the crisis.

Analyses of the crisis that emphasize the fragility of banks financed with short-term funds raised in the money markets are strongly supported by our empirical work, as are analyses that emphasize the role of bank capital. We find that large banks with more Tier 1 capital, more deposits, and less funding fragility performed better. Banks from countries with current account surpluses fared significantly better during the crisis, while banks from countries with banking systems more exposed to the U.S. fared worse. These latter results show that macroeconomic imbalances and the traditional asset contagion channel are related to bank performance during the crisis.

READ MORE »

Executive Pay and the Financial Crisis: A Response to René Stulz

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Tuesday, February 14, 2012
, ,
More from:
Editor’s Note: Below is the response by Professor Lucian Bebchuk to the opening statement of Professor René Stulz in an online debate between the two of them at a World Bank forum. The debate focused on the question: Has executive compensation contributed to the financial crisis? The moderator’s introduction to the debate is available here; Lucian Bebchuk’s opening statement is available here; René Stulz’s opening statement is available here; Lucian’s Bebchuk’s response is available here; and René Stulz’s response is available here. Bebchuk’s response refers to two studies on the subject issued by the Harvard Law School Program on Corporate Governance, Regulating Bankers’ Pay and Paying for Long-Term Performance.

In his opening statement, René Stulz relies on the results of the Fahlenbrach-Stulz study (FS study) to reject the view that executive compensation has contributed to the financial crisis. Stulz argues that the evidence in his study is “inconsistent with the view that banks performed poorly because CEOs had poor incentives.” However, as explained below, the FS study does not provide a good basis for rejecting the poor incentives view.

The FS study attempts to test the “poor incentives” hypothesis by examining whether banks whose CEOs had larger equity holdings performed better during the crisis. Failing to find such an association – and indeed finding that such banks performed worse – the FS study rejects the poor incentives hypothesis. But the poor incentives view does not attribute poor risk-taking incentives to relatively low equity holdings, and the analysis in the FS study does not supply an adequate test of this view.

As I explained in my opening statement, the poor incentives view does not regard large equity holdings as the way to ensure good risk-taking incentives and does not view poor incentives as rooted in insufficient equity holdings. Rather, as I explained, poor incentives have resulted from (i) design of equity compensation (as well as bonus compensation) that rewarded executives even for short-term results that were subsequently reversed, and (ii) linking executive payoffs only to payoffs for shareholders and not also to payoffs for other contributors of capital to financial firms (such as bondholders).

READ MORE »

CFTC Rule on Protection of Swap Collateral

Posted by Annette L. Nazareth, Davis Polk & Wardwell LLP, on
Tuesday, February 14, 2012
, , , ,
More from: ,

Annette Nazareth is a partner in the Financial Institutions Group at Davis Polk & Wardwell LLP, and a former Commissioner at the U.S. Securities and Exchange Commission. This post is based on a Davis Polk client memorandum.

In adopting final rules on the treatment of cleared swap customer collateral, the CFTC has taken a major step in defining the architecture of market-wide swap clearing, a key pillar of the Dodd-Frank Act’s derivatives reform. After receiving intense arguments for divergent types of collateral protection, the CFTC adopted the “legal segregation, operational commingling” (“LSOC”) model.

The LSOC model is designed to eliminate the “fellow customer risk” to which futures customers are exposed. Under the LSOC model, if a customer of a futures commission merchant (“FCM”) defaults on a cleared swap margin obligation and the FCM is not able to satisfy the defaulting customer’s obligations, the derivatives clearing organization (“DCO”) has no recourse to funds of the FCM’s non-defaulting customers. Therefore, LSOC is intended to provide additional protection, albeit at an additional cost, to cleared swap customers beyond the current futures DCO model. In contrast, under the futures DCO model, any FCM customers’ swap collateral is available to the DCO upon a default of both the FCM and one of its futures customers. The CFTC has not extended the LSOC model to futures at this time, but will consider doing so.

READ MORE »

Delaware Corporations Seek to Counter Forum Shopping

Posted by Claudia H. Allen, Neal, Gerber & Eisenberg LLP, on
Tuesday, February 14, 2012
, , , ,
More from: ,

Claudia H. Allen is chair of the Corporate Governance Practice Group at Neal, Gerber & Eisenberg LLP. This post discusses a study by Ms. Allen, available here. This post is part of the Delaware law series, which is co-sponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

In response to concerns that the plaintiffs’ bar is rushing [1] to sue Delaware corporations “anywhere but Delaware,” to avoid the predictability and speed of Delaware courts and potentially to obtain larger settlements, 195 Delaware corporations (including Chevron, DIRECTV, Life Technologies and 24 other members of the S&P 500) have adopted or proposed adopting charter or bylaw provisions requiring that derivative actions, fiduciary duty claims and other intra-corporate disputes be litigated exclusively in the Delaware Court of Chancery. Among other things, these provisions seek to address the phenomenon of Delaware corporations facing parallel, competing litigation in Delaware and another state or in federal court, [2] often in connection with M & A activity. The January 2012 edition of my Study of Delaware Forum Selection in Charters and Bylaws analyzes these provisions and the trends they reveal.

READ MORE »

February 2012 Dodd-Frank Progress Report

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, February 13, 2012
, ,
More from: , ,

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 February 2012 Davis Polk Dodd-Frank Progress Report, is the eleventh 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 February 1, 2012, a total of 225 Dodd-Frank rulemaking requirement deadlines have passed. Of these 225 passed deadlines, 164 (72.9%) have been missed and 61 (27.1%) have been met with finalized rules.
  • Major rulemaking activity this month included CFTC final rules on business conduct standards and registration of swap dealers and major swap participants.
  • The GAO published seven studies in January 2012.

The Flight Home Effect

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, February 13, 2012
, , ,
More from: ,

The following post comes to us from Mariassunta Giannetti, Professor of Finance at the Stockholm School of Economics, and Luc Laeven of the International Monetary Fund and Professor of Finance at Tilburg University.

In our paper, The Flight Home Effect: Evidence from the Syndicated Loan Market During Financial Crises, forthcoming in the Journal of Financial Economics,  we study whether lenders, when hit by shocks that negatively affect bank wealth in their home market, have a tendency to rebalance their portfolio away from international markets to their domestic market. We explore this flight home effect in the context of the syndicated loan market, a large and highly internationalized financial market.

After controlling for demand shocks in foreign markets, we explore whether foreign lenders not only transmit shocks to foreign markets, as established in existing literature, but also whether they amplify these effects by substituting foreign loans for domestic loans. To establish whether this is the case, we analyze how the relative importance of a bank’s domestic and foreign loans varies following negative shocks.

Our results are consistent with the existence of a flight home effect. The proportion of loans granted to domestic borrowers increases by approximately 20 percent if the home country of the bank experiences a banking crisis, or more generally, if banks’ stock prices in the home country show a large decline. Lenders with less stable funding sources, being more vulnerable to negative liquidity shocks (Demirgüç-Kunt and Huizinga, 2010; Ivashina and Scharfstein, 2010), exhibit a stronger flight home effect. Overall, the results indicate that the home bias in the international allocation of syndicated loans increases in the presence of adverse economic shocks affecting the net wealth of international lenders.

READ MORE »

Should Your Board Have a Separate Risk Committee?

Posted by Matteo Tonello, The Conference Board, on
Sunday, February 12, 2012
, , , , , ,
More from: , , ,

Matteo Tonello is Director of Corporate Governance for The Conference Board, Inc. This post is based on a Conference Board Director Note by Carol Beaumier and Jim DeLoach, which was adapted from Board Perspectives: Risk Oversight, Protiviti, Issue 24, October 2011.

It is generally accepted that the full board has overall responsibility for risk oversight, mirroring the board’s responsibility for overseeing strategy. In deciding how to organize itself to oversee risk and risk management, the question arises as to whether the board should establish a separate risk committee. This article explores that question and provides examples to clarify the role and responsibility of a separate risk committee in situations where the board decides to establish one.

Through the risk oversight process, the board of directors obtains an understanding of the critical risks inherent in the corporate strategy, accesses useful information from internal and external sources about the critical assumptions underlying that strategy, remains alert to organizational dysfunctional behavior that can lead to excessive risk taking, and provides input to executive management regarding critical risk issues on a timely basis. How the board views risk oversight as a process should dictate how it chooses to organize itself for purposes of executing that process. The risk oversight process enables the board and management to develop a mutual understanding regarding the risks the company faces over time as it executes its business model for creating enterprise value. In organizing itself for risk oversight, what are some of the factors for boards to consider and when should boards establish a separate risk committee?

READ MORE »

House Passes Its Version of STOCK Act

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Saturday, February 11, 2012
, , ,
More from: ,

The following post comes to us from Kenneth A. Gross, leader of the Political Law practice at Skadden, Arps, Slate, Meagher & Flom LLP, and is based on two Skadden, Arps memorandums.

The U.S. House of Representatives passed by a vote of 417-2 its version of the STOCK Act, which, as you may know from our previous post, was introduced in response to the U.S. Senate’s passing its own version of the STOCK Act. Now that the House version has passed, we expect that the House and Senate versions will go to conference. A copy of the House version of the STOCK Act can be found here.

Please note that among the more notable differences between the bills are that the Senate version amends both the Lobbying Disclosure Act of 1995 (by adding a new category of activities, “Political Intelligence Contacts”) and the illegal gratuities statute, but the House version does not. The differences between the two bills will have to be resolved and then approved by both the House and Senate in order for a final bill to be sent to the White House.

Cross Border Shareholder Class Actions Before and After Morrison

Posted by Elaine Buckberg, NERA Economic Consulting, on
Saturday, February 11, 2012
, , , ,
More from: , ,

Elaine Buckberg is Senior Vice President at NERA Economic Consulting. This post is based on a NERA publication by Ms. Buckberg and Max Gulker; the full publication is available here.

In our paper, Cross Border Shareholder Class Actions Before and After Morrison, we conduct an empirical inquiry into the effect of the Supreme Court’s 2010 decision in Morrison v. National Australia Bank on the competitiveness of US markets as a venue for listings by foreign issuers and trading in cross-listed stocks. Passed in the wake of Morrison, the Dodd-Frank Act requires that the SEC inform Congress about the merits of creating a new extraterritorial private right of action. We provide input into the debate by using data on 329 shareholder class actions filed against foreign companies and discussing the effects of such a right on the competitiveness of U.S. capital markets.

We conclude that foreign companies’ expected litigation costs should fall after Morrison, because investors who purchased their shares on overseas exchanges will be excluded from classes. By reducing expected litigation costs, Morrison eases a deterrent to US listing by foreign issuers and thereby makes the US a more competitive venue for cross-listings, as well as for the volume in the cross-listed stocks. We submitted our paper to the SEC as part of its public comment process, and have posted it on SSRN.

READ MORE »

Page 55 of 63
1 … 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63