Monthly Archives: January 2013

2012 Annual Corporate Governance Review

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Tuesday, January 22, 2013
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The following post comes to us from David Drake, President of Georgeson Inc, and is based on the executive summary of Georgeson’s 2012 Annual Corporate Governance Review; the full publication is available for download here.

The Rise of Engagement in the 2012 Proxy Season

For many years Georgeson’s Annual Corporate Governance Review has promoted the concept of engagement between public companies and their institutional investors. While Georgeson has noticed increased engagement, the nature of the engagement has generally been incremental and devoted to specific governance and compensation issues from year to year. After years of this slow, incremental growth, the 2012 proxy season became the Year of Engagement and witnessed a marked increase in company/shareholder interaction — engagement that was not limited to a few days out of the five- or six-week period between the mailing of the corporate proxy statement and the last days of a proxy solicitation campaign prior to the annual meeting. The types of issues discussed leading up to and during the 2012 proxy season ranged from executive compensation and board structure to negotiations with proponents over the potential withdrawal of shareholder-sponsored ballot resolutions to just open-ended discussions to understand each other better. The voting statistics contained between these covers cannot fully measure that activity — although they do make it clear that the level of communication was more frequent and intense than in the past.

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Putting Stockholders First, Not the First-Filed Complaint

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Tuesday, January 22, 2013
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The following post comes to us from Leo E. Strine, Jr., Senior Fellow for the Harvard Program on Corporate Governance and Austin Wakeman Scott Lecturer at Harvard Law School, Lawrence A. Hamermesh, Ruby R. Vale Professor of Corporate and Business Law at Widener University School of Law, and Matthew Jennejohn, an associate at Shearman & Sterling, LLP.

The prevalence of settlements in class and derivative litigation challenging mergers and acquisitions in which the only payment is to plaintiffs’ attorneys suggests potential systemic dysfunction arising from the increased frequency of parallel litigation in multiple state courts. After examining possible explanations for that dysfunction, and the historical development of doctrines limiting parallel state court litigation — the doctrine of forum non conveniens and the “first-filed” doctrine — this paper suggests that those doctrines should be revised to better address shareholder class and derivative litigation. Revisions to the doctrine of forum non conveniens should continue the historical trend, deemphasizing fortuitous and increasingly irrelevant geographic considerations, and should place greater emphasis on voluntary choice of law and the development of precedential guidance by the courts of the state responsible for supplying the chosen law. The “first-filed” rule should be replaced in shareholder representative litigation by meaningful consideration of affected parties’ interests and judicial efficiency.

Putting Stockholders First responds to the observation that in 2011, only 5% of settlements of shareholder litigation challenging mergers and acquisitions involved an additional payout to stockholders, 84% of such settlements were based on additional disclosure only, but all of such settlements involved payment of fees for plaintiffs’ attorneys. These figures reflect a significant change from 1999 to 2000, when 52% of suits filed on behalf of shareholders produced a financial benefit for the class, and only 10% of settlements were “disclosure-only.”

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January 2013 Davis Polk Dodd-Frank Progress Report

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, January 21, 2013
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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 January 2013 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 January 2, 2013, a total of 237 Dodd-Frank rulemaking requirement deadlines have passed. Of these 237 passed deadlines, 142 (59.9%) have been missed and 95 (40.1%) have been met with finalized rules.
  • In addition, 136 (34.2%) of the 398 total required rulemakings have been finalized, while 129 (32.4%) rulemaking requirements have not yet been proposed.
  • Rulemaking activity this month included an SEC final rule on requirements to search for lost securityholders and notification requirements with respect to unresponsive payees. The Federal Reserve released a proposed rule on enhanced prudential standards and early remediation requirements for foreign banking organizations and foreign nonbank financial companies.

Matching Directors with Firms

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, January 21, 2013
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The following post comes to us from David Denis, Professor of Finance at the Katz School of Business, University of Pittsburgh; Diane Denis, Professor of Finance at the Katz School of Business, University of Pittsburgh; and Mark Walker, Associate Professor of Finance at the Poole College of Management, North Carolina State University.

Although the structure of the board of directors has been the topic of considerable debate and academic research over the past two decades, much of this prior literature focuses on aggregate measures of board composition such as board size or the fraction of independent outside directors. More recent studies recognize that directors with differing backgrounds and expertise are likely to bring different sources of value to the board. However, empirical studies of the importance of these attributes are limited by the ‘stickiness’ of board structures. Specifically, transactions costs associated with board structure adjustments can result in board structures that evolve only very slowly. As a result, observing board structures and their determinants at any given point in time can provide a misleading picture of how boards are formed; most notably, how and why particular individual directors are matched with the specific set of assets that they help govern.

In our paper, Matching Directors with Firms: Evidence from Board Structure Following Corporate Spinoffs, which was recently made publicly available on SSRN, we aim to overcome some of these limitations by analyzing board structure following corporate spinoffs. As part of the spinoff, a board of directors must be created from scratch for the spun off unit. This ‘de novo’ feature provides a unique opportunity to observe boards that are unlikely to be affected by the factors that contribute to the ‘stickiness’ of ongoing boards. In addition, the separation of one publicly traded firm into two publicly-traded firms leads to large discrete differences in asset and operating structure and significant variation in CEO identity and origin. This allows us to examine both the formation of new boards by the spun off units and the changes in parent board structure occasioned by a significant operational restructuring. Perhaps more importantly, our experimental design allows us to link specific assets with specific directors, thereby providing unique evidence on how directors are matched with the assets they govern. Similarly, by tracking the movement of individual CEOs and individual directors, our data can enhance our understanding of the extent to which individual directors are matched with specific CEOs.

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Italy Introduces a Financial Transaction Tax as of 2013

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Sunday, January 20, 2013
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The following post comes to us from Vania Petrella, partner resident in the Rome office of Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb memorandum.

On December 21, 2012, the Italian Parliament approved the budget law for 2013 (the “Budget Law”) contemplating, among other things, the introduction of a new tax applicable to certain financial transactions (the “Financial Transaction Tax” or “FTT”).

While the Budget Law includes an articulate regime of the FTT, ”some of its features will be set with a Ministerial Decree to be issued by the Ministry of Economy and Finance (the “Ministerial Decree”) within 30 days from the entry in force of the Budget Law (which is subject to its publication in the Official Gazette, expected to occur in the coming days).

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Business Ethics in Emerging Markets and Investors’ Expectations Standards

Posted by George Dallas, F&C Management Ltd., on
Saturday, January 19, 2013
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George Dallas is Director of Corporate Governance at F&C Investments. This post is based on an article by Mr. Dallas that first appeared in the International Corporate Governance Network’s 2012 Yearbook.

Ethics is in origin the art of recommending to others the sacrifices required for cooperation with oneself.” Bertrand Russell

Since the publication of its Statement and Guidance on Anti-Corruption Practices in 2009, the ICGN has actively advocated the fight against bribery and corruption as a fundamental component of the corporate governance agenda. The Statement and Guidance takes a global perspective, making clear that anticorruption is a priority in all markets.

But is it appropriate to set the same standards for anticorruption in all jurisdictions, particularly in emerging markets, where many underlying conditions are different and where bribery and corruption are particularly acute in both the public and private sectors? This was the question posed as the main discussion point at ICGN’s “Town Hall” meeting on business ethics in its June 2012 conference in Rio de Janeiro. Meeting participants, from a range of developed and emerging markets, expressed a resounding consensus that investors should not compromise their standards on anticorruption in emerging markets, even if corruption may be a more deep-rooted problem. However, while absolute standards on anticorruption should remain undiluted — beginning with a “zero tolerance” position — there may be different anticorruption strategies to apply in emerging markets, reflecting economic, cultural and legal differences.

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2012 Year-End Update on Corporate Deferred Prosecution and Non-Prosecution Agreements

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, January 18, 2013
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The following post comes to us from Joseph Warin, partner and chair of the litigation department at the Washington D.C. office of Gibson, Dunn & Crutcher, and is based on a Gibson Dunn client alert by Mr. Warin and Jeremy Joseph. The full publication, including footnotes and appendix, is available here.

“Over the last decade, DPAs [Deferred Prosecution Agreements] have become a mainstay of white collar criminal law enforcement,” Lanny Breuer, the head of the U.S. Department of Justice’s Criminal Division, declared on September 13, 2012. Corporate Deferred Prosecution Agreements (“DPAs”) and Non-Prosecution Agreements (“NPAs”) (collectively, “agreements”) have, in Mr. Breuer’s words, ameliorated the “stark choice” that prosecutors faced: either to employ “the blunt instrument of criminal indictment” that he likened to using “a sledgehammer to crack a nut” or to “walk away” and decline prosecution outright. Mr. Breuer declared that DPAs and NPAs “have had a truly transformative effect on . . . corporate culture across the globe” resulting in “unequivocally[] far greater accountability for corporate wrongdoing–and a sea change in corporate compliance efforts.” Mr. Breuer’s comments are timely, coming in a year during which such agreements yielded a record level of monetary penalties and related payments totaling nearly $9.0 billion and are increasingly used to resolve front-page criminal matters.

This client alert, the ninth in our series of biannual updates on DPAs and NPAs, (1) summarizes the DPAs and NPAs from 2012, (2) considers detailed remarks from leading enforcement officials with the U.S. Department of Justice (“DOJ”) and the U.S. Securities and Exchange Commission (the “SEC”) regarding settlement agreements, (3) examines compliance measures presented in recent non-FCPA agreements as examples of DOJ-endorsed good practices in various industries, and (4) looks across the Atlantic to evaluate the United Kingdom’s prospective use of DPAs.

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Dodd-Frank Implementation: Navigating the Road Ahead

Posted by Dwight C. Smith, Morrison & Foerster LLP, on
Friday, January 18, 2013
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Dwight C. Smith is a partner at Morrison & Foerster LLP focusing on bank regulatory matters. This post is based on the introduction of a Morrison & Foerster booklet edited by Mr. Smith, Charles Horn, and Anna Pinedo; the full publication is available here.

In 2013, banking organizations, securities firms, insurance companies, and other participants in the financial services industry should stop to consider how the implementation of the Dodd-Frank Act has unfolded and to plan for new compliance duties that will or are likely to take effect. Regulators likewise would be advised to take a step back themselves and consider how implementation has proceeded. The incoming 113th Congress will certainly debate possible changes to Dodd-Frank, although the prospects for substantive follow-up legislation, corrective or otherwise, are uncertain at best.

This booklet broadly reviews the critical developments under Dodd-Frank that occurred during the second half of 2012 and considers how and what events may occur, as well as what trends may emerge in 2013. This is not an exhaustive review of all of the Dodd-Frank issues, but we have tried to identify those issues with important consequences for the financial services industry.

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The Effect of Disclosure on the Pay-Performance Relation

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, January 18, 2013
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The following post comes to us from Gus DeFranco and Ole-Kristian Hope, both of the Rotman School of Management at the University of Toronto, and Stephannie Larocque of the Department of Accounting at the Mendoza College of Business, University of Notre Dame.

An important task for boards is to oversee executive compensation. The effectiveness of boards in carrying out this monitoring responsibility, however, is widely debated. In the paper, The Effect of Disclosure on the Pay-Performance Relation, forthcoming in the Journal of Accounting and Public Policy, we argue that disclosure improves board effectiveness. First and as a general point, disclosure can improve transparency, which facilitates the monitoring of management and hence causes managers to act more in the interests of shareholders. Such monitoring is potentially valuable since managers will not always act in the best interest of shareholders.

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How to Address ISS & Glass Lewis Policy Changes

Posted by Holly Gregory, Weil, Gotshal & Manges LLP, on
Thursday, January 17, 2013
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Holly J. Gregory is a corporate partner specializing in corporate governance at Weil, Gotshal & Manges LLP. This post is based on a Weil alert by Ms. Gregory and Rebecca Grapsas; the full document, including footnotes and appendix, is available here.

Institutional Shareholder Services Inc. (ISS) and Glass Lewis & Co. have each made several important revisions to their proxy voting policies for the 2013 proxy season. ISS released new and updated FAQs relating to application of ISS proxy voting policies to compensation (including peer groups and realizable pay), board responsiveness to shareholder proposals, hedging and pledging of company stock, and other matters. This post provides guidance to US companies on how to address these policy changes.

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