Monthly Archives: February 2013

Hedge Fund Activism Canadian Style

Brian Cheffins is a Professor of Corporate Law at the University of Cambridge.

Hedge funds first began engaging in the assertive form of shareholder activism for which they are renowned in the United States, and the United States is where hedge fund activism has become most firmly entrenched as part of the corporate governance landscape. Nevertheless, hedge fund activism is a global phenomenon, with companies in numerous countries being targeted. The United Kingdom, Japan and Canada are the three countries other than the U.S. where hedge fund activism has been most prevalent. The efforts of hedge fund activists in Britain and Japan have begun to capture the attention of academics (e.g. Iris Chiu, The Foundations and Anatomy of Shareholder Activism (2010) and John Buchanan, Dominic Chai and Simon Deakin, Hedge Fund Activism in Japan: The Limits of Shareholder Primacy (2012)). In the case of Canada, however, little has been said about hedge fund activism in the academic literature. Correspondingly in “Hedge Fund Activism Canadian Style,” recently published on SSRN, I describe the emergence of hedge fund activism in Canada, identify the legal and economic variables that account for its rise to prominence and offer predictions on whether the trend will be sustained.


Benefits Trust and Walgreens Collaborate on Political Spending Disclosure

The following post comes to us from Meredith Miller, Chief Corporate Governance Officer, and Cambria Allen, Corporate Governance Director, of the UAW Retiree Medical Benefits Trust, which provides health care benefits to over 800,000 UAW retirees and their dependents and has $52 billion under management. This post is based on a January 8, 2013 Press Release, available here.

The UAW Retiree Medical Benefits Trust (Trust) and leading drugstore chain Walgreen Co. (Walgreens) recently announced an agreement to a multi-year collaboration in which the company would develop a best practice policy approach to corporate political spending and lobbying activities. A product of constructive dialogue between the Trust and Walgreens, the agreement highlights the utility of the shareholder engagement process by underscoring that companies and shareholders can work together to their collective long-term interest.

Walgreens is to be applauded for coming to the table and developing an agreement to work together with the Trust.

The main components of the agreement are:


Acquisition Financing: The Year Behind and the Year Ahead

The following post comes to us from Eric M. Rosof, partner focusing on financing for corporate transactions at Wachtell, Lipton, Rosen & Katz, and is based on a Wachtell Lipton memorandum by Mr. Rosof, Joshua A. Feltman, Gregory E. Pessin, Michael S. Benn and Austin T. Witt.

Just like 2007… and not much like it at all.

So it was in the financing markets in 2012. Capital flowed to non-investment grade issuers in amounts reminiscent of the earlier time. However, those issuers mainly seized upon rising debt investor confidence in order to consummate refinancings, repricings and dividend recapitalizations, while the banks that arrange leveraged loan and high yield bond deals remained cautious in providing committed financing for acquisitions. Meanwhile, acquisitions, spinoffs and other transactions by investment grade issuers received strong support from arrangers and investors alike, with significant availability of committed financing for complex deals and favorable execution of debt issuances to close transactions. If the first few weeks are a guide, and barring any significant disruption in the interest rate environment, 2013 promises more of the same, but whether committed financing for high yield deals will continue its slow recovery remains to be seen.


IOSCO Requirements for Distribution of Complex Financial Products

The following post comes to us from Jeremy Jennings-Mares, partner in the Capital Markets practice at Morrison & Foerster LLP, and is based on a recent Morrison & Foerster client alert by Bradley Berman.

On January 21, 2013, the International Organization of Securities Commissions (IOSCO), of which the Financial Industry Regulatory Authority, Inc. is an affiliate member, published its final report on Suitability Requirements With Respect to the Distribution of Complex Financial Products. The report can be found at

The report sets forth nine principles relating to the distribution of complex products by “intermediaries” (defined below), and, for each of the principles, “means of implementation,” which include suggested regulatory changes and detailed guidance for intermediaries. The purpose of the principles is to “promote robust customer protection in connection with the distribution of complex financial products by intermediaries,” including providing guidance on how the applicable suitability requirements should be implemented. The principles are intended to address concerns raised by regulatory authorities and others about sales of structured products, particularly to retail investors. The focus is on not only the point of sale but also on the intermediary’s internal procedures related to suitability determinations.

Many of the themes raised in the report have also been discussed by U.S. regulatory authorities in the past year, including suitability and sales practices. The report suggests that regulators should have the power to impose outright bans on sales of some complex financial products in certain situations. Of course, each jurisdiction has a different legal and regulatory regime and, as a result, the report contains certain general statements that would not be uniformly applicable.


CEO Wage Dynamics

The following post comes to us from Lucian Taylor of the Department of Finance at the University of Pennsylvania.

There is considerable debate over the level of executive pay. On one side, Bebchuk and Fried (2004) and others argue that weak governance allows executives to effectively set their own pay while disregarding market forces and shareholder value. On the other side, Gabaix and Landier (2008) and others argue that executive pay is determined in a competitive labor market, so executives have limited influence on their own pay.

In the paper, CEO Wage Dynamics: Estimates from a Learning Model, forthcoming in the Journal of Financial Economics, I use CEO wage dynamics as a laboratory for exploring this debate. Specifically, I examine how learning about a CEO’s ability affects the level of his or her pay. For example, suppose that after a year of high profits we update our beliefs about a CEO’s ability, and as a result the CEO’s perceived contribution to next year’s profits increases by $10 million. If the CEO obtains a $5 million raise for the following year, then the CEO captures half of the $10 million surplus and shareholders pocket the rest.


Directors and Information Technology Oversight

Mary Ann Cloyd is leader of the Center for Board Governance at PricewaterhouseCoopers LLP. This post is based on a publication from PwC. The full text, including footnotes, is available here.

The “IT confidence gap”

Overseeing a company’s information technology activities is a significant challenge for directors. The pace of change in this area is rapid, the subject matter is complicated, and the highly technical language used to describe emerging technologies and evolving risks makes this a challenging area. And many companies are relying more and more on technology to get ahead, often prompting substantial changes in how they operate. All of these factors can make the board’s IT oversight responsibility appear harder than it is.

Our research, which included surveying 860 public company directors, indicates many board members are uncomfortable with overseeing their company’s IT. Although many directors want to better comprehend the risks and opportunities related to IT, they sometimes don’t have an adequate understanding of the subject to be truly effective in their oversight roles. In addition, boards often lack a well-defined process that satisfies their needs in this area. On the whole, this confluence of factors creates an “IT confidence gap” for many board members. Consider the following:


SEC Enforcement in the Second Term of the Obama Administration

This post comes to us from Erich T. Schwartz and Colleen P. Mahoney, partners at Skadden, Arps, Slate, Meagher & Flom, and is based on a Skadden memorandum by Mr. Schwartz.

At the beginning of the first Obama administration, the United States Securities and Exchange Commission (SEC or the Commission) was an agency on the ropes, with some knowledgeable observers even speculating that it might not survive the revision to the financial regulatory apparatus that was anticipated in the wake of the financial crisis. Although the agency has been the subject of fierce criticism and controversy regarding a variety of issues during the last four years, it has indeed survived and, by many measures, been reinvigorated. It announced that last year it brought 734 enforcement actions, nearly equaling the record number of 735 in 2011, and that it obtained more than $3 billion in financial remedies.

As the second term of the Obama administration begins, the SEC is experiencing a profound leadership transition, with the departures of agency Chair Mary Schapiro; Director of Enforcement Robert Khuzami; its general counsel; the director of Corporation Finance; and the director of Trading and Markets. Such widespread turnover at the Commission and among its senior staff will have a significant impact on the priorities and direction of the agency. Although eventually a new chair may be named to the Commission, for now Elisse Walter, who was elevated from commissioner to chair on Ms. Schapiro’s departure, is moving forward to grapple with the pressing issues on the Commission’s agenda. She also is re-populating the senior staff ranks, having recently named a new general counsel.

At this moment of transition, we assess several of the initiatives that marked Director Khuzami’s tenure at the SEC and that are likely to continue to influence enforcement activity. We also reflect on several pressing issues that may be prominent on the SEC’s enforcement agenda during the second Obama term.


Large-Scale Governance Reforms in S&P 500 Companies

Editor’s Note: Lucian Bebchuk is the Director of the Shareholder Rights Project (SRP), Scott Hirst is the SRP’s Associate Director, and June Rhee is the SRP’s Counsel. The SRP, a clinical program operating at Harvard Law School, works on behalf of public pension funds and charitable organizations seeking to improve corporate governance at publicly traded companies, as well as on research and policy projects related to corporate governance. Any views expressed and positions taken by the SRP and its representatives should be attributed solely to the SRP and not to Harvard Law School or Harvard University. The work of the SRP has been discussed in other posts on the Forum available here.

In its 2012 Annual Report released today, and in joint press releases issued today with institutional investors it represents, the Shareholder Rights Project (SRP) provided detailed information about the outcomes of its work with SRP-represented investors during 2012, the SRP’s first full year of operations.

As discussed below, major results obtained during 2012 include the following (for complete details on all outcomes see the Annual Report):

  • 48 S&P 500 companies (listed here) entering into agreements to move toward declassification;
  • 38 successful precatory proposals (listed here), with average support of 82% of votes cast;
  • Over 60% of successful precatory proposals by public pension funds and over 30% of all successful precatory proposals; and
  • 42 board declassifications (listed here), reducing the number of classified boards among S&P 500 companies by one-third.

Expected Impact by End of 2013: As a result of these outcomes and the ongoing work of the SRP and SRP-represented investors, it is estimated that a majority of the 126 S&P 500 companies that had classified boards at the beginning of 2012 will have moved toward annual elections by the end of 2013.


ISS Governance QuickScore: Back to the Future

Andrew R. Brownstein is a partner in the Corporate Department at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton firm memorandum by Mr. Brownstein, Adam O. Emmerich, David A. Katz, Trevor S. Norwitz and S. Iliana Ongun.

ISS, the dominant proxy advisory firm, recently unveiled its new ISS Governance QuickScore product, which will replace its Governance Risk Indicators (“GRId”) next month. ISS asserts that QuickScore is an improvement on the GRId product because it is “quantitatively driven” (with a “secondary policy-based overlay”). Using an algorithm purportedly derived from correlations between governance factors and financial metrics, QuickScore will rank companies in deciles within each of ISS’ existing four pillars—Audit, Board Structure, Compensation and Shareholder Rights – and provide an overall governance rating to “provide a quick understanding of a company’s relative governance risk to an index or region.” While one can understand, as a business matter, ISS’ desire to continually reinvent and “improve” its products, the constant shifting of goalposts creates uncertainty and inefficiency. More important, QuickScore will likely provide a no more complete or accurate assessment of corporate governance practices than its predecessors, and it may be worse.

When ISS adopted its GRId product three years ago, we cautiously noted that it offered greater transparency and granularity than the blunt one-dimensional CGQ ratings that it replaced. Unfortunately, in our view, going back to a system of opaque quantified ratings is a move in the wrong direction. After a substantial investment of management time and effort, companies have familiarity with the GRId “level of concern” approach, which at least helps them understand and address any legitimate issues or explain any divergences from ISS’ “best practices.” While ISS retains GRId’s formulaic approach, to the extent that it does not share the weightings it assigns to the various governance factors, it reduces transparency as companies would not be able to compute their own QuickScores.


Investor Horizons and Corporate Policies

The following post comes to us from François Derrien, Professor of Finance at HEC Paris, Ambrus Kecskés of the Department of Finance at Virginia Tech, and David Thesmar, Professor of Finance at HEC Paris.

In our paper, Investor Horizons and Corporate Policies, forthcoming in the Journal of Financial and Quantitative Analysis, we study the effect of investor horizons on corporate behavior. Institutional ownership of U.S. firms has increased dramatically during the last fifty years, and institutional investors today own the great majority of U.S. firms. However, institutional investors are far from homogenous. One of the dimensions along which they differ is the horizon of their investments. Their investment horizons can differ because the maturities of their liabilities differ. For example, pension funds have long-term liabilities and thus long investment horizons, whereas mutual funds are subject to large short-term redemptions and thus their investment horizons are also short-term. Investors also differ in their investment strategies: some, like Stevie Cohen, turn their portfolios over with lightning speed while others, like Warren Buffett, hold their portfolios forever. Surprisingly, however, there is little research on the effect of investor horizons on corporate policies. This paper aims to fill this void.


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