Yearly Archives: 2013

Say Pays! Shareholder Voice and Firm Performance

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on

Monday, June 3, 2013

Agency costs, Executive Compensation, Firm performance, Management, Say on pay, Shareholder meetings, Shareholder voting
More from: Maria Guadalupe, Mireia Gine, Vicente Cunat

The following post comes to us from Vicente Cuñat of the Financial Markets Group at the London School of Economics and Political Science, Mireia Giné of the Financial Management Department at IESE Business School of the University of Navarra, and Maria Guadalupe of the Department of Economics and Political Science at INSEAD.

In our paper, Say Pays! Shareholder Voice and Firm Performance, which was recently made publicly available on SSRN, we estimate the effect of increasing shareholder “voice” in corporations through a new governance rule that provides shareholders with a regular vote on pay: Say on Pay. Say on Pay policy is an important governance change mandated by the Dodd-Frank Act that provides shareholders with a vote on executive pay. It is part of a general trend toward more CEO accountability and increased shareholder rights. Shareholders may use this new channel to voice their discontent regarding the link between pay and performance. This new policy is at the forefront of the debate on executive pay and its efficacy to deliver firm performance.

Corporate Director Selection and Recruitment: A Matrix

Posted by Matteo Tonello, The Conference Board, on

Sunday, June 2, 2013

Audit committee, Board composition, Boards of Directors, Compensation committees, Director qualifications, Nominating committees, Succession, The Conference Board
More from: Lawrence Trautman, Matteo Tonello, The Conference Board

Matteo Tonello is managing director of corporate leadership at The Conference Board. This post relates to an issue of The Conference Board’s Director Notes series authored by Lawrence J. Trautman; the full publication, including footnotes, is available here.

Achieving optimal board composition and succession planning requires an articulated and clearly communicated enterprise strategy. The ideal mix of director skills and experience depends on a number of company-speciﬁc factors. This report provides a matrix that nominating committees and boards can use to help deﬁne their needs and to provoke discussion about how to improve company-speciﬁc corporate governance.

How do you build the best board for your organization? What attributes and skills are required by law and what mix of experiences and talents will give you the best corporate governance? What commonly required director attributes are a must for each board and how do you customize and fine-tune your search to achieve a high-performing board? Optimal board composition—that is, achieving the best mix of director skills and experience—depends on many company-specific variables. Some of the most important of these include, but are not limited to: (1) stage of company development, (2) the extent to which international markets are mission critical to the company’s future (in which case nominees should have a detailed understanding of target culture, markets and business risk); (3) unique technology dependence; and (4) the need for access to financial and capital markets.

Cross-Border at the Crossroads: The SEC’s “Middle Ground”

Posted by John Ramsay, U.S. Securities and Exchange Commission, on

Saturday, June 1, 2013

Clearing houses, Cross-border transactions, Derivatives, Dodd-Frank Act, International governance, Regulators, SEC, Securities regulation, Swaps, Swaps entities
More from: John Ramsay

John Ramsay is acting director of the Division of Trading and Markets at the U.S. Securities and Exchange Commission. This post is based on Mr. Ramsay’s remarks at the New York City Bar Association, available here. The views expressed in the post are those of Mr. Ramsay and do not necessarily reflect those of the Securities and Exchange Commission, the Commissioners, or the Staff.

I’d like to describe the Commission’s recent set of proposals on the cross-border regulation of derivatives. First, though, I’ll describe the state of play among international regulators, both in developing their derivatives regimes and in grappling with the thorny cross-border aspects of derivatives trading.

Status of International Regulatory Efforts

Countries are at various stages of implementing their derivatives regimes in response to the G20 commitments.

The U.S. is further along in this effort. The SEC has now proposed substantially all of the rules required by Title VII, and we have adopted the foundational definitional rules and those governing swap clearing agencies standards, among others. The CFTC is further along in the adoption mode and is on track to complete the adoption of their rules later this year.

Other jurisdictions are further behind, which means that it is difficult to assess at this point how similar their requirements may be to those that the U.S. is implementing.

The Circuits Split on Securities Act Pleading Standards

Posted by David A. Katz, Wachtell, Lipton, Rosen & Katz, on

Friday, May 31, 2013

Pleading standards, Registration statements, Securities Act, Securities litigation
More from: David Katz, Eric Roth, Warren Stern, Wachtell Lipton

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 a Wachtell Lipton memorandum by Mr. Katz, Eric M. Roth, and Warren R. Stern.

Last week, the United States Court of Appeals for the Sixth Circuit held that a claim alleging a false statement of opinion or belief in a registration statement may proceed under Section 11 of the Securities Act notwithstanding the absence of allegations showing that the defendants did not actually hold the opinion or believe the statement. Indiana State District Council of Laborers & Hod Carriers Pension & Welfare Fund v. Omnicare, Inc., (6th Cir. May 23, 2013). The Sixth Circuit’s decision conflicts with decisions of the Second and Ninth Circuits holding that liability under Section 11 for a statement of belief or opinion would exist only if the statement was both objectively and subjectively false or misleading. See Fait v. Regions Financial Corp., 655 F.3d 105 (2d Cir. 2011); Rubke v. Capital Bancorp Ltd., 551 F.3d 1156 (9th Cir. 2009). Under that standard, a Section 11 complaint that fails to plausibly allege that a defendant did not actually believe the false statement or hold the opinion would be dismissed.

Board Evaluation – A Window into the Boardroom

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on

Friday, May 31, 2013

Board composition, Board evaluation, Board meetings, Boards of Directors, Crisci & Partners
More from: Maria Ungureanu

The following post comes to us from Maria Cristina Ungureanu, a consultant at Crisci & Partners.

Board behavior and effectiveness are becoming increasingly visible to investors and other stakeholders. In the past few years, the European Commission has reinforced its focus on the corporate governance matters, issuing several rules and guidelines in this regard. Most of these raise, among other aspects, the issue of increased board responsibility in the corporate governance framework through better functioning and more appropriate structures.

In accordance with most best practice requirements laid out in corporate governance codes, the majority of European listed companies are now conducting board performance evaluations. Board evaluation is increasingly acknowledged as a vital process for improving board performance and dynamics, whatever the size, status or type of organization. If thoroughly conducted, a board evaluation (also called “board assessment”, “board review”) has the potential to significantly enhance board effectiveness, maximize strengths and tackle weaknesses.

Forthcoming Changes to UK’s City Code on Takeovers and Mergers

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on

Thursday, May 30, 2013

International governance, Takeovers, UK, UK Takeover Code
More from: Gareth Jones, Jeffery Roberts, Selina Sagayam, Gibson Dunn

The following post comes to us from Jeffery Roberts, senior partner in the London office of Gibson, Dunn and Crutcher, and is based on a Gibson Dunn alert by Mr. Roberts, Gareth Jones, and Selina S. Sagayam.

This post provides a brief summary of recent updates to the UK’s City Code on Takeovers and Mergers (the “Code”), the primary rule book governing the regulation of takeovers in the UK, and in particular those relating to the categories of companies that are subject to the Code, as well as certain issues affecting the trustees of offeree companies’ defined-benefit pension schemes.

Introduction

On April 22, 2013, the Code Committee of the UK Takeover Panel (the “Code Committee”) published its Response Statement to its consultation paper on certain pension scheme issues. This was followed by a Response Statement to its consultation paper on the type of companies that fall within the jurisdiction of the Code, which was published on May 15, 2013. [1] The amendments to the Code to be introduced in relation to those proposals relating to offeree company pension schemes will come into force on May 20, 2013 and an amended version of the Code will be published on that date. The amendments to the Code in relation to those companies and offers that are subject to the Code will take effect on September 30, 2013 (so as to allow any companies that may be affected to make any changes to their constitutional documents and/or operational procedures they feel are appropriate in light of those changes), although the updated Code will apply to any transactions that straddle that date.

Identifying the Valuation Effects and Agency Costs of Corporate Diversification

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on

Thursday, May 30, 2013

Agency costs, Agency model, Banks, Deregulation, Diversification
More from: Luc Laeven, Martin Goetz, Ross Levine

The following post comes to us from Martin Goetz of the Federal Reserve Bank of Boston; Luc Laeven of the International Monetary Fund and Professor of Finance at Tilburg University; and Ross Levine, Professor of Economics at UC Berkeley.

In our paper, Identifying the Valuation Effects and Agency Costs of Corporate Diversification: Evidence from the Geographic Diversification of U.S. Banks, forthcoming in the Review of Financial Studies, we develop and implement two new approaches for identifying the causal impact of the geographic diversification of bank holding company (BHC) assets on their market valuations. Although we provide some evidence about the factors underlying observed changes in market valuations, our major contribution is in improving identification, not in constructing better measures of scale economies, agency problems, or other factors associated with market valuations. Furthermore, although we primarily use both identification strategies to evaluate the net effect of geographic diversification on BHC valuations, they can be employed to assess an array of questions about bank behavior.

At the core of both identification strategies, we exploit the cross-state, cross-time variation in the removal of interstate bank branching prohibitions to identify an exogenous increase in geographic diversity. From the 1970s through the 1990s, individual states of the United States removed restrictions on the entry of out-of-state banks. Not only did states start deregulating in different years, but states also signed bilateral and multilateral reciprocal interstate banking agreements in a somewhat chaotic manner over time. There is enormous cross-state variation in the twenty-year process of interstate bank deregulation, which culminated in the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1995.

From Vigilance to Vision

Posted by Jennifer Mailander, Corporation Service Company, on

Wednesday, May 29, 2013

Board communication, Board meetings, Boards of Directors, CSC, Management, Oversight
More from: Jennifer Mailander, Skadden

Jennifer Mailander is director of CSCPublishing at Corporation Service Company. This post is an excerpt from the 2013 Edition of The Directors’ Handbook, by Thomas J. Dougherty, partner and head of the Litigation Group of Skadden, Arps, Slate, Meagher & Flom LLP.

Directors receive a continuous stream of information and try to be vigilant in order to discern from the mix of background and foreground company data those dissonant notes, those underappreciated inputs, those gaps in analysis. They listen to identify the things that don’t add up.

But it’s getting harder to detect those subtle yet critical notes buried in the morass of reading material now available to directors. Only a few years ago, the volume of pre-meeting materials was limited to the width of a three-ring binder and the size of a standard FedEx box, which typically arrived at the director’s office or home a few days before the meeting. As I’ve pointed out in this Handbook, the director most up-to-speed on these “pre-reading” materials was often the director who made the longest plane trip to attend the meeting. Those directors, poring through their binders stuffed with pre-reading materials, were a common sight in the first-class sections of commercial airliners. The binder was a bulky carry-on, but at least its size limited the volume of pre-reading. Not so anymore.

Today, services like BoardLink permit companies to transmit vast amounts of information to dedicated devices supplied by boards to their directors. There is a consequent proliferation of PowerPoints, appendices, memos, advisories, agendas, draft minutes, and so on. There is also a potential collapse in timing, because content can be added or revised and resent without FedEx deadlines. The result: significantly more pre-reading, less time.

Directors need the board to put reasonable limits and priorities on this phenomenon. It is true that so long as directors make well-informed decisions without conflict of interest, they should not be held liable for business judgments that do not lead to successful outcomes, and under Delaware law can be exonerated from personal liability by company charter so long as they meet that standard of conduct. However, having more data does not necessarily mean that directors are better informed.

Federal Reserve Board Governor Tarullo Outlines Potential Regulatory Initiatives

Posted by H. Rodgin Cohen, Sullivan & Cromwell LLP, on

Wednesday, May 29, 2013

Basel Committee, Capital requirements, Dodd-Frank Act, Federal Reserve, Financial reform, Financial regulation, Liquidity, Systemic risk
More from: Daniel Tarullo, H. Rodgin Cohen, Samuel Woodall, Sullivan & Cromwell

H. Rodgin Cohen is a partner and senior chairman of Sullivan & Cromwell LLP focusing on acquisition, corporate governance, regulatory and securities law matters. This post is based on a Sullivan & Cromwell publication by Mr. Cohen and Samuel R. Woodall III.

On May 3, 2013, Federal Reserve Board Governor Daniel Tarullo delivered a speech outlining potential regulatory initiatives before the Peterson Institute for International Economics in Washington, D.C. In this speech, entitled “Evaluating Progress in Regulatory Reforms to Promote Financial Stability,” Governor Tarullo acknowledged that substantial progress has been made in achieving financial regulatory reform, but he maintains that much more is still needed. [1]

Even beyond the substantive impact of the reforms proposed by Governor Tarullo, his speech is particularly noteworthy for two reasons. First, Governor Tarullo oversees the Federal Reserve Board’s banking supervision and regulation function and was recently appointed as Chairman of the Financial Stability Board’s Standing Committee on Supervisory and Regulatory Cooperation. Second, in the past, Governor Tarullo has used similar speeches to forecast the Federal Reserve’s upcoming regulatory initiatives.

Governor Tarullo’s speech focuses on three general areas of increased regulatory scrutiny: (1) large financial institutions generally; (2) large financial institutions that rely on short-term wholesale funding; and (3) short-term wholesale funding markets, in particular those for securities financing transactions (SFTs). Governor Tarullo proposes a number of regulatory requirements to address what he perceives as the unfinished business of regulatory reform, including both macro- and micro-prudential requirements at an institution-specific level and market practice level.

Harvard Convenes the M&A Roundtable

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on

Tuesday, May 28, 2013

Program on Corporate Governance
More from:

The Harvard Law School Program on Corporate Governance convened its Mergers & Acquisitions Roundtable last Wednesday, May 22. The M&A Roundtable brought leading experts in the M&A field from the judiciary, legal practice, the academy, investment banking, proxy advising and soliciting, and the investor community. The topics of discussion and participants in the event are set out below.

The morning session of the M&A Roundtable focused on issues concerning acquisitions, both friendly and hostile. Among the issues discussed were management buyouts and private equity buyouts; deal-protection terms and go-shop provisions; the proliferation of M&A litigation; forum shopping and forum selection and arbitration clauses; reform of Section 13(d); and poison pills and other takeover defenses.

The afternoon session of the M&A Roundtable focused on hedge fund activism and shareholder activism more generally. Among the issues discussed were compensation for dissident directors, proxy advisors, universal ballots, and the short-term and long-term effects of shareholder activism.

The participants in the M&A Roundtable included:

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