Monthly Archives: April 2013

Hedge Fund Governance

The following post comes to us from Houman Shadab, Associate Professor of Law at New York Law School.

Concerns about the internal governance of hedge funds have dramatically increased in recent years. During the financial crisis of 2008, investors became frustrated when numerous hedge fund managers suddenly prevented them from withdrawing their capital yet nonetheless continued to charge them fees. Since the financial crisis, concerns about hedge fund governance have focused on transparency, operational practices, and the growing view that fund directors do not effectively monitor fund managers.

In my paper, Hedge Fund Governance, which was recently made publicly available on SSRN, I provide the first comprehensive scholarly analysis of hedge fund governance. In doing so, my paper makes several contributions. First, it contributes to the literature on corporate governance by conceptualizing the unique way in which hedge funds are governed and situating their style of governance within established paradigms. I argue that hedge fund governance is a type of responsive managerialism.


The European Single Supervisory Mechanism

The following post comes to us from Eilis Ferran, Professor of Company and Securities Law, and Valia SG Babis, both at University of Cambridge.

Euro Area banks need credible financial backstops. The European Stability Mechanism (ESM) could contribute to the performance of this function but the direct recapitalization of Euro Area banks from this source has been made conditional upon common, high quality prudential supervision. Centralised supervision of the banking sector in the Euro Area is intended to be accomplished through the Single Supervisory Mechanism (SSM), the first step towards a future banking union.

Within the SSM, the ultimate authority and responsibility for specific supervisory tasks related to the safety and stability of all Euro Area banks will sit with the European Central Bank (ECB). This approach has been driven by pragmatism and realpolitik, rather than abstract principle: the Treaty on the Functioning of the European Union (TFEU) already caters for the possibility of the ECB conducting supervisory tasks with respect to banks, while in the post-crisis reforms central bank direct involvement in prudential supervision has come back strongly into favour. But just because it was the best option realistically available does not mean that equipping the ECB with the legal authority to act as a prudential supervisor has been a straightforward task. Any evaluation of this new system must take careful account of the boundaries of the legal space within which institutional progress was possible, and give credit for the legal ingenuity deployed. Nevertheless, compromises in certain areas and unresolved tensions in others provide reasons for unease as to the likely effectiveness of the new system.


Executive Compensation 2012 Year in Review and Implications

The following post comes to us from George B. Paulin, chairman and chief executive officer of Frederick W. Cook & Co., Inc., and head of the firm’s Los Angeles office. This post is based on an FW Cook alert letter.

Say on Pay Continues to Shape the Executive Pay Landscape

An overwhelming 97% of Russell 3000 companies that conducted a Say on Pay (SOP) vote in 2012 received majority shareholder support. [1] While support levels rival those for management proposals to ratify auditors, companies do not take SOP vote outcomes for granted. Rather, the prospects for low shareholder support for SOP proposals have caused most companies to devote a tremendous amount of time, resources, and consideration to the administration and disclosure of executive compensation programs. This paper serves to highlight the key issues compensation committees faced in 2012 and the implications for action in 2013 and beyond.


Say on Pay So Far – 2013

Jeremy Goldstein is a partner at Wachtell, Lipton, Rosen & Katz active in the firm’s Executive Compensation and Benefits practice. This post is based on a Wachtell Lipton firm memorandum by Mr. Goldstein.

With the proxy season just getting underway, we thought it might be useful to summarize some initial observations to aid those in the midst of the season’s challenges.

Results. According to Institutional Shareholder Services’ (ISS) 2013 Say on Pay Snapshot released April 8, 2013, ISS has recommended against 10 percent of issuers so far this proxy season. While ISS’s study represents a relatively small sample size (473 companies), a “no” recommendation from ISS against 10 percent of companies represents a decrease in “no” recommendations of over 20 percent from last year (12.2 percent).

Reasons for Failure. The single largest reason that companies have received “no” recommendations from ISS continues to be a so-called pay-for-performance disconnect. In addition, ISS has recommended against an increased number of companies on the basis of a so-called lack of compensation committee communications and effectiveness. A lack of effectiveness often arises where ISS has determined that the company has not provided disclosure about actions it has taken in light of a low say on pay vote for the previous year.


Financial Literacy, Investor Protection, and Public Service at the SEC

Elisse B. Walter is a Commissioner at the U.S. Securities and Exchange Commission and was the Chairman of the SEC from December 2012 to April 2013. This post is based on Commissioner Walter’s recent remarks before students at The George Washington University in Washington, D.C., available here. The views expressed in this post are those of Commissioner Walter and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

What I’d like to talk about this evening is something that isn’t always recognized in day-to-day discussion of business and government and their interaction. That is, the importance of the public sector and those who work in the public sector, like my many dedicated colleagues, to the health of our markets and to a flourishing economy.

Of course, the regulations we write at the SEC, the examinations we conduct, and the enforcement actions we bring demand time and resources that businesses would rather spend on other things. But, the truth is that the SEC wants the investing public and the businesses in which they invest their hard-earned money to succeed.

That is why the SEC was created in 1934 as part of the effort to lift the American economy out of the rubble of the Great Depression. Since then, we have worked for nearly 80 years to make our capital markets the strongest and most vibrant in the world. And we understand that economic growth on a national level is the product of millions of individual financial achievements, so a great deal of our work is focused on facilitating your success:


Inside Debt and Mergers and Acquisitions

The following post comes to us from Hieu Phan, Assistant Professor of Finance at the University of Massachusetts Lowell.

In my paper Inside Debt and Mergers and Acquisitions, forthcoming in the Journal of Financial and Quantitative Analysis, I examine the link between CEO inside debt holdings and corporate risk-taking in M&A activities and its implications for bondholder, shareholder, and firm value. M&As are among the largest and most readily observable forms of corporate investment, which tend to intensify the inherent conflict of interests among shareholders, bondholders, and managers. Manager’s pension benefits and deferred compensation are debt-like compensation since they represent fixed obligations by the company to make future payments to corporate insiders/managers (hence, these are usually referred to as “inside debt”). Inside debt is expected to align manager interests with those of external debtholders and alleviate managers’ risk-taking incentive since inside debt is typically unsecured and unfunded, and if the firms go bankrupt, managers have equal claims as those of other unsecured creditors. Therefore, M&As provide a unique ground for testing the potential effects of debt-like compensation on corporate investment and financing strategies and the implications of the stakeholders’ interests.


Citizens DisUnited

Robert Monks is the founder of Lens Governance Advisors, a law firm that advises on corporate governance in the settlement of shareholder litigation.

My newest book, Citizens DisUnited: Passive Investors, Drone CEOs and the Corporate Capture of the American Dream, has been in the works for the last year, and is really the culmination of thirty years of work in corporate governance, activism and government. It was prompted by frustrations and failures, in many ways. But it was through those frustrations that I gained clarity on the problems facing our nation. Not just problems in the boardroom but the larger issues of power that tie corporations to the power structure in Washington and how it affects our society. The specific thoughts that led to this book began almost two years ago with a speech I gave at ICGN in Paris and are further illuminated in some new research done for the book by GMIRatings’ Ric Marshall.

In the course of planning the book, I had begun to think of some corporations as “drones” – in the sense that they are untethered from reality and responsibility. We define them as corporations, “in which no single shareholder retains a principal position, defined by the SEC as 10 percent or more.” The owners aren’t at the helm — but manager-kings are. And there are no limits to prevent these CEOs from enriching themselves at the shareholder expense or from shifting the burden of externalities onto society.

Ric, in the meantime, had begun to find empirical data that showed that,


Cross Border Mergers & Acquisitions: Anti-Corruption Issues

The following post comes to us from Bill Michael, partner, and co-chair of Mayer Brown LLP’s White Collar Defense & Compliance practice group, and Bill Kucera, partner in Mayer Brown’s Mergers & Acquisitions practice group.

Cross-border mergers and acquisitions can provide tremendous business opportunities for companies looking to expand globally. Reduced labor and operational costs, new technology and vast new markets for existing products are just some of the benefits companies look to take advantage of when considering entering new geographical areas. However, in analyzing cross-border deals M&A professionals must be conversant with the risk factors associated with the vigorous and cooperative anti-corruption efforts being taken by regulators around the world. While these anti-corruption efforts are increasingly legislated through many jurisdictions, the most significant attention remains focused on the efforts undertaken by the United States in this area.


Measuring the Effectiveness of Public Policy Towards Venture Capital

The following post comes to us from Douglas Cumming, a Professor in Finance and Entrepreneurship at York University – Schulich School of Business.

A recent book by Josh Lerner and a recent article in the Journal of Public Economics has asserted that government venture capital programs in Europe have displaced or crowded out private venture capital. The result of work such as this has been to place pressure on government bodies around the world to remove or replace their existing governmental programs. In the aftermath of the financial crisis, venture capital markets around the world themselves have been in crisis. So, it is particularly timely to address the issue of whether or not government venture capital programs in regions such as Europe really have in fact crowded out private venture capital programs.

As pointed out in this Economist article and in my recent commentary and my review article, the idea that government programs crowding out private venture capital in Josh Lerner’s book and in the Journal of Public Economics is based on empirical measures that are completely flawed. The empirical tests supporting crowding out are based on methodologies that rank the Austrian and Hungarian venture capital markets as being the best in the Europe, and the U.K. venture capital market as being the worst in Europe (I am not kidding).


Responding to Objections to Shining Light on Corporate Political Spending (2): Claims of Special Interest Influence

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 Corporate Political Speech: Who Decides? and Shining Light on Corporate Political Spending, coming out this month in the Georgetown Law Journal. This post is the second in a series of posts, based on the Shining Light article, in which Bebchuk and Jackson respond to objections to an SEC rule requiring disclosure of corporate political spending; the full series of posts is available here.

The SEC is expected to consider a rulemaking petition requesting that the SEC develop rules requiring that public companies disclose their spending on politics. The petition has received significant support—including more than 490,000 comment letters urging the SEC to act as advocated by the petition—but has also attracted opponents, including prominent members of Congress. The SEC recently indicated that it plans to address the petition’s request this year. Given the SEC’s expected consideration of the petition, we have written an article, Shining Light on Corporate Political Spending, that puts forth a comprehensive case for the rulemaking advocated in the petition—and responds to each of the ten objections that opponents of the petition have raised.

In our post last week, we explained why opponents’ claims that corporate spending on politics is immaterial to investors provide no basis for opposing rules requiring public companies to disclose their political spending. In this post, we focus on a second objection that opponents of these rules have raised: the claim that disclosure rules on political spending will empower shareholders who have special interests, such as pension funds, at the expense of other investors.


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