Yearly Archives: 2013

Who Cares? Corporate Governance in Today’s Equity Markets

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Tuesday, May 14, 2013
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The following post comes to us from Mats Isaksson, the Head of Corporate Affairs, and Serdar Celik, Economist, both at the Organization for Economic Co-operation and Development (OECD).

There are two main sources of confusion in the public corporate governance debate. One is the confusion about the role of public policy in corporate governance. The other is a lack of empirical knowledge among commentators about the corporate landscape and the way that today’s stock markets influence the conditions for exercising long term and value creating corporate governance. This paper tries to mitigate some of this confusion and to increase awareness in both respects.

In terms of public policy it is important to understand that the general corporate governance discussion usually takes place on two different levels. And both are legitimate. One is concerned with the everyday workings of individual companies: how they organize their internal procedures, staff their company organs and build their corporate culture. Much of this is unique to the company in question. The choices to be made are often a matter of business judgment and are seldom in a domain where policy makers and regulators have any specific expertise.

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Rulemaking Petition on Disclosure of Political Spending Attracts Support from More Than 500,000 Comment Letters Filed with the SEC

Posted by Lucian Bebchuk, Harvard Law School, and Robert J. Jackson, Jr., Columbia Law School, on
Monday, May 13, 2013
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Lucian Bebchuk is Professor of Law, Economics, and Finance at Harvard Law School. Robert J. Jackson, Jr. is Associate Professor of Law and Milton Handler Fellow at Columbia Law School. Bebchuk and Jackson served as co-chairs of the Committee on Disclosure of Corporate Political Spending, which filed a rulemaking petition requesting that the SEC require all public companies to disclose their political spending, discussed on the Forum here. Bebchuk and Jackson are also co-authors of Shining Light on Corporate Political Spending, published last month in the Georgetown Law Journal.

In July 2011, we co-chaired a committee of ten corporate and securities law experts that petitioned the Securities and Exchange Commission to develop rules requiring public companies to disclose their political spending. In a post eleven months ago, we noted that the petition had attracted more than 250,000 comment letters. In this post, we report that, as reflected in the SEC’s webpage for comments filed on our petition, the SEC has now received more than half a million comment letters regarding the petition. To our knowledge, the petition has attracted more comments than any other SEC rulemaking petition—or, indeed, than any other issue on which the Commission has accepted public comment—in the history of the SEC.

As in the past, it remains the case that the overwhelming majority of comment letters filed with the SEC are supportive of the petition. In November 2012, the then-Director of the SEC’s Division of Corporation Finance said that the Division was “looking at the [petition] and we have 300,000 comments on it. So in light of this interest, we’re taking a look at whether to make a recommendation to the Commission.” The comment letters submitted over the last several months reinforce the strength of interest noted by the Director.

We should note that, of the filed comments, 497,024 came from individuals who expressed their views through one of fourteen common types of letters filed with the Commission. While these comments use standard form letters, each was separately submitted by individuals who presumably were interested enough in this subject to write to the SEC. Furthermore, the petition has separately attracted 3,363 distinct comment letters, and the overwhelming majority of these letters is also supportive of the petition.

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Emerging Say-on-Pay Trends and Litigation Developments

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, May 13, 2013
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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 Barbara R. Mirza.

Early Lessons from the 2013 Proxy Season

As Skadden monitors the initial weeks of the 2013 proxy season, we are seeing the following preliminary trends:

Vote Results

Of the first 279 companies of the Russell 3000 to report the results of say-on-pay proposals, approximately:

  • 72 percent have passed with over 90 percent support;
  • 22 percent have passed with between 70.1 percent and 90 percent support;
  • 4 percent have passed with between 50 percent and 70 percent support; and
  • 2 percent (six companies) obtained less than 50 percent support.

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How Do Investors Interpret Announcements of Earnings Delays?

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, May 13, 2013
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The following post comes to us from Tiago Duarte-Silva of Charles River Associates, Huijing Fu of the Shanghai Advanced Institute of Finance, Christopher Noe of MIT Sloan School of Management, and K. Ramesh, Professor of Accounting at Rice University.

Companies that fail to file a 10-K or 10-Q on time are required by SEC Rule 12b-25 to file a Form NT (NT for non-timely), which provides a narrative explanation for the late filing. No analogous rule exists for earnings announcements, which often precede 10-K or 10-Q filings. For companies that are unable to report earnings by their expected date, therefore, managers face a decision – to keep silent or announce the delay. The SEC has also manifested interest in earnings delays: it recently announced a quantitative model that is expected to supply potential leads to its Division of Enforcement and lists earnings delays as a signal of earnings management.

In our paper, How Do Investors Interpret Announcements of Earnings Delays?, which was recently accepted for publication in the Journal of Applied Corporate Finance, we show that announcements of a delay in the reporting of earnings produce an average one-day abnormal stock return of approximately -6%. So, although announcements of a delay in the reporting of earnings are infrequent, they tend to be associated with a considerable reduction in firm value. In addition, delays precipitated by accounting issues or lacking an explanation result in more negative market reactions than delays related to business events, implementation of new accounting standards, or non-business reasons such as bad weather.

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European Compensation Developments: Financial Institutions and Beyond

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Sunday, May 12, 2013
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The following post comes to us from Simon Witty and Kyoko Takahashi Lin, both partners in the corporate department at Davis Polk & Wardwell LLP, and is based on a Davis Polk client memorandum.

Almost half a decade after the onset of the financial crisis, populist sentiment and the resulting political environment continue to fuel stricter regulation of executive and director compensation, with the latest wave in Europe including substantive restrictions on compensation in the financial services industry and “say-on-pay” initiatives (i.e., initiatives providing for shareholder approval of compensation). This post describes these recent European compensation developments, namely:

  • The so-called “banker bonus cap” – substantive limits on the amount of variable compensation that can be paid to certain employees at financial institutions; and
  • Say-on-pay developments in the E.U. and Switzerland.

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SEC Announces First Non-Prosecution Agreement in an FCPA Matter

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Saturday, May 11, 2013
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The following post comes to us from Colleen P. Mahoney, partner and head of the Securities Enforcement and Compliance practice at Skadden, Arps, Slate, Meagher & Flom, and is based on a Skadden Arps client alert by Ms. Mahoney, Charles F. Walker, and Erich T. Schwartz.

On April 22, the U.S. Securities and Exchange Commission (SEC) announced its first non-prosecution agreement (NPA) with a company in a matter involving alleged violations of the U.S. Foreign Corrupt Practices Act (FCPA). [1] The SEC entered into the agreement with Ralph Lauren Corporation (Lauren), resolving allegations that Lauren violated the FCPA when its Argentine subsidiary allegedly paid bribes to government and customs officials to improperly secure the importation of Lauren’s products into Argentina. The NPA in this case resulted from Lauren’s prompt self-reporting and extensive cooperation. Prior to the Lauren NPA, the SEC seemed to provide limited credit to public companies for cooperation in FCPA investigations.
Time will tell whether the Lauren NPA is a harbinger of a new approach.

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Bylaw Protection against Dissident Director Conflict/Enrichment Schemes

Posted by Martin Lipton, Wachtell, Lipton, Rosen & Katz, on
Friday, May 10, 2013
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Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton memorandum by Mr. Lipton, Theodore N. Mirvis, Andrew R. Brownstein, and Steven A. Rosenblum.

This year, the practice of activist hedge funds engaged in proxy contests offering special compensation schemes to their dissident director nominees has increased and become even more egregious. While the terms of these schemes vary, the general thrust is that, if elected, the dissident directors would receive large payments, in some cases in the millions of dollars, if the activist’s desired goals are met within the specified near-term deadlines.

These special compensation arrangements pose a number of threats, including:

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Regulation in a Global Financial System

Posted by Mary Jo White, Chair, U.S. Securities and Exchange Commission, on
Friday, May 10, 2013
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Mary Jo White is Chair of the U.S. Securities and Exchange Commission. This post is based on Chair White’s remarks at the Investment Company Institute (ICI) General Membership Meeting, which are available here. The views expressed in this post are those of Chair White and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

It should rapidly become clear that my remarks belong only to me because I will be talking about the role of the SEC in an increasingly global financial and regulatory system from the viewpoint of a Chair on Day 18 of her tenure. Already, I find myself emphasizing to some outside the agency that the international aspect of the SEC’s role is not a distraction from our important core domestic duties. Rather, that role must be understood in order to fully appreciate the agency’s whole mission – to protect investors, maintain fair, orderly and efficient markets, and facilitate capital formation.

And it’s how we’re furthering that mission through our international efforts that I will speak about today.

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Passive Investors, Not Passive Owners

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, May 10, 2013
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The following post comes to us from Glenn Booraem, Principal and Fund Controller at Vanguard Fund Financial Services, and is based on a Vanguard publication by Mr. Booraem.

About a year ago we restated Vanguard’s mission to read: “To take a stand for all investors, treat them fairly, and give them the best chance for investment success.” While the words were new, the ideals were not; they’ve been the consistent principles by which we’ve managed our enterprise since our founding.

As we stand on the cusp of “proxy season”—when investors in most U.S. companies will vote at shareholder meetings on matters including the election of directors and the approval of compensation plans—it strikes me that nothing better exemplifies our mission in action than our efforts to ensure that the companies in which our funds invest are subject to the highest standards of corporate governance.

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Do Investors Understand ‘Operational Engineering’ before Management Buyouts?

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, May 10, 2013
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The following post comes to us from Xi Li of the Department of Accounting at Hong Kong University of Science and Technology, Jun Qian of the Department of Finance at Boston College, and Julie Lei Zhu of the School of Management at Boston University.

In our paper, Do Investors Understand ‘Operational Engineering’ before Management Buyouts?, which was recently made publicly available on SSRN, we use a sample of management buyouts (MBOs) from 1985-2005 and a matched subsample of post-MBO firms to examine three questions. First, we examine whether firms undertake different types of activities to lower earnings before MBOs. Second, to see whether outside investors and the market understand such ‘operational engineering’ activities, we study the impact of these activities on target firms’ stock returns and MBO deal characteristics including deal premium and likelihood of deal completion. Third, we examine the relation between pre-MBO earnings-reducing activities and the post-MBO operating performance.

With the Great Recession of 2007-2009 exposing deficiencies of the world’s most advanced financial markets, leveraged buyouts (LBOs) have ‘reemerged’ as a solution to the many challenges facing corporate sectors. Unlike publicly listed firms, LBO firms are characterized by concentrated ownership, active monitoring and high leverage. A growing strand of literature shows that LBO firms can create value through ‘financial, operational and governance engineering’ (Kaplan and Stromberg, 2009). In fact, Jensen (1989) argues that LBOs should replace publicly held corporations as the dominant corporate organizational form.

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