Monthly Archives: August 2013

The Role of the Media in Corporate Governance

The following post comes to us from Baixiao Liu of the Department of Finance at Florida State University, and John McConnell, Professor of Finance at Purdue University.

In an open capital market economy, guided by market signals, firms (and their managers) play an important role in the allocation of capital. Zingales (2000) proposes that the media may also play a role, perhaps positive, perhaps negative, in guiding firms (and their managers) in making capital allocation decisions. Dyck and Zingales (2002) develop this idea more fully. Given that the media collect, aggregate, disseminate, and amplify information, and to the extent that this information affects managers’ reputations, they propose that managers are sensitive to the way in which the media report and comment upon their decisions. Managers may even be sensitive to whether the media reports on their decisions at all. After all, a bad decision that goes unnoticed may be no worse than a good decision that goes equally unnoticed.

In our paper, The Role of the Media in Corporate Governance: Do the Media Influence Managers’ Capital Allocation Decisions?, forthcoming in the Journal of Financial Economics, we investigate whether, and to what extent, managers of publicly-traded U.S. corporations are sensitive to public news media in making one specific type of capital allocation decision. To wit: the decision of whether to complete or abandon a large proposed corporate acquisition that is accompanied by a negative stock market reaction at the announcement (“value-reducing acquisition attempt”). More specifically, we investigate whether the likelihood that a value-reducing acquisition attempt is abandoned is related to the level of media attention given to the attempt and to the tone of media coverage regarding the acquirer’s attempt at the time of the acquisition announcement.


Court: Private Equity Funds Potentially Liable for Portfolio Company Pensions

The following post comes to us from Brian D. Robbins, Partner and the Head of the Executive Compensation and Employee Benefits Practice Group at Simpson Thacher & Bartlett LLP, and is based on a Simpson Thacher memorandum.

In December 2012, we published an Alert after a Federal District Court concluded that: (1) a private equity fund was not a “trade or business” for purposes of determining whether the fund could be liable under the Employee Retirement Income Security Act of 1974 (“ERISA”) for the pension obligations of one of its portfolio companies and (2) consequently, the private equity fund could not be liable for its portfolio company’s pension obligations under Title IV of ERISA, even if the fund and the portfolio company were part of the same “controlled group.” Our December Alert, which contains background on the issue and a summary of the state of the law through December 2012, may be found here. This post is to advise that the First Circuit Court of Appeals has reversed the 2012 Federal District Court opinion.

In Sun Capital Partners III LP v. New England Teamsters & Trucking Indus. Pension Fund (No. 12-2312, July 24, 2013), the First Circuit Court of Appeals has concluded that: (a) a private equity fund can be a “trade or business” for purposes of determining “controlled group” joint and several liability under ERISA and (b) as a result, the private equity fund could be held liable for the pension obligations of its portfolio company under Title IV of ERISA, if certain other tests are satisfied. Under ERISA, a “trade or business” within a “controlled group” can be liable for the ERISA Title IV pension obligations (including withdrawal liability for union multiemployer plans) of any other member of the controlled group. This “controlled group” liability represents one of the few situations in which one entity’s liability can be imposed upon another simply because the entities are united by common ownership, but in order for such joint and several liability to be imposed, two tests must be satisfied: (1) the entity on which such liability is to be imposed must be a “trade or business” and (2) a “controlled group” relationship must exist among such entity and the pension plan sponsor or the contributing employer.


“Pay for Investment”: Looking to the Long Term

Joseph Bachelder is special counsel in the Tax, Employee Benefits & Private Clients practice group at McCarter & English, LLP. This post is based on an article by Mr. Bachelder, with assistance from Andy Tsang, which first appeared in the New York Law Journal. Work from the Program on Corporate Governance about executive compensation includes Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried, discussed on the Forum here.

Today’s post considers what might be done in the design of executive pay to encourage commitment by executives to the longer-term interests of their employers.

A very interesting examination into design features in an incentive program that puts emphasis on long-term considerations of executive pay is contained in the proxy statement for Goldman Sachs. (Elements of this program discussed below have been developed by Goldman Sachs over a period of years—the CD&A section of the 2013 proxy statement provides a description of the program.) Following are two interesting aspects of that program.


Risk Oversight; Effective Board and Committee Leadership

Jeffrey Stein is a partner in the Corporate Practice Group at King & Spalding LLP. This post is based on two reports from the Lead Director Network by Mr. Stein, Bill Baxley, and Rob Leclerc, available here and here.

Board oversight of risk and effective board and committee leadership are high priorities for virtually every board of directors. While success in these matters has always been essential to maintaining a high-performing board, how boards approach the risk oversight function and seek to maximize board and committee leadership continues to evolve. Strategic risks can threaten a company’s very existence and stakeholders continue to challenge traditional approaches to board leadership.

The Lead Director Network (the “LDN”) and the North American Audit Committee Leadership Network (the “ACLN”) met on June 4th and June 5th to discuss risk oversight and effective board and committee leadership. Following these meetings, King & Spalding and Tapestry Networks have published two ViewPoints reports to present highlights of the discussion that occurred at these meetings and to stimulate further consideration of these subjects. Separate reports address Board Oversight of Risk and Effective Board and Committee Leadership.

The following post provides highlights from the LDN and ACLN meeting, as described in the ViewPoints reports.


ISS Releases Survey for 2014 Policy Updates

Amy Goodman is a partner and co-chair of the Securities Regulation and Corporate Governance practice group at Gibson, Dunn & Crutcher LLP. The following post is based on a Gibson Dunn alert by Ms. Goodman, Elizabeth A. Ising, and Ronald O. Mueller.

Institutional Shareholder Services (“ISS”), the most influential proxy advisory firm, today launched its annual global policy survey. Each year, ISS solicits comments in connection with its review of its proxy voting policies. At the end of this process, in November 2013, ISS will announce its updated proxy voting policies applicable to 2014 shareholders’ meetings.

Results from the policy survey that ISS posted on its website today will be used by ISS to inform its voting policy review. The survey includes questions on a variety of governance and executive compensation topics, including:


Banks and Commodities Trading

The following post comes to us from Arthur S. Long, partner in the Financial Institutions and Securities Regulation practice groups at Gibson, Dunn & Crutcher LLP, and is based on a Gibson Dunn publication by Mr. Long, Alexander G. Acree, Kimble C. Cannon, C.F. Muckenfuss III, and Colin C. Richard. The complete publication, including footnotes, is available here.

On July 19, 2013, Barbara Hagenbaugh, a spokeswoman for the Board of Governors of the Federal Reserve System (Federal Reserve) made the surprising announcement that the Federal Reserve “is reviewing the 2003 determination that certain commodity activities are complementary to financial activities and thus permissible for bank holding companies.” The statement, upon which the Federal Reserve did not elaborate, seems to call into question the physical commodities trading activities (Physical Commodities Trading) that certain financial holding companies (FHCs), both domestic and foreign, have engaged in for the better part of the last decade.

This post describes the justifications for the original Federal Reserve conclusion that, under Section 4(k) of the Bank Holding Company Act of 1956 (BHC Act), Physical Commodities Trading is complementary to a financial activity and does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. It then analyzes these justifications in light of the current state of the financial system and enhanced regulatory environment, which support the conclusion that the Federal Reserve’s original view of Section 4(k) continues to be a reasonable interpretation of the statute.


Current Thoughts About Activism

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, Steven A. Rosenblum, and Sabastian V. Niles. Work from the Program on Corporate Governance about hedge fund activism includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon P. Brav, and Wei Jiang.

A long-term oriented, well-functioning and responsible private sector is the country’s core engine for economic growth, national competitiveness, real innovation and sustained employment. Prudent reinvestment of corporate profits into research and development, capital projects and value-creating initiatives furthers these goals. Yet U.S. companies, including well-run, high-performing companies, increasingly face:

  • pressure to deliver short-term results at the expense of long-term value, whether through excessive risk-taking, avoiding investments that require long-term horizons or taking on substantial leverage to fund special payouts to shareholders;
  • challenges in trying to balance competing interests due to excessively empowered special interest and activist shareholders; and
  • significant strain from the misallocation of corporate resources and energy into mandated activist or governance initiatives that provide no meaningful benefit to investors or other critical stakeholders.


Smart Regulation: A Worthy and Achievable Goal

The following post comes to us from Andrew Liveris, President, Chairman and CEO of The Dow Chemical Company, and Chair of the Business Roundtable Select Committee on Smart Regulation.

Business Roundtable CEOs, who lead major U.S. companies representing every sector of the economy, understand that well-conceived, science-based regulations are essential to protect human health and safety. Regulations can help ensure that businesses retain the capacity to innovate and simultaneously promote the health and welfare of our employees, customers and communities. But overlapping, conflicting and poorly executed regulations can—and do—impose substantial costs on the U.S. economy, sometimes with only theoretical benefits.

That is why we have embraced a concept we call smart regulation that seeks to realize the goals of regulation without harming economic growth and job creation. About 18 months ago, we released a plan, Achieving Smarter Regulation, which laid out a roadmap for reform, including changes to current law and actions the Administration could take on its own, to streamline the federal regulatory process, reduce the economic burden of regulation and protect the public interest.


Alternatives to LIBOR

Joseph A. Grundfest is the W. A. Franke Professor of Law and Business at Stanford University Law School. The following post is based on an article co-authored by Professor Grundfest and Rebecca Tabb.

Revelations that bank traders attempted to manipulate LIBOR, the London Interbank Offer Rate, on a widespread and routine basis over the course of many years have rocked the global financial community and fueled international calls for reform. In response, the U.K. Government completely overhauled the governance of LIBOR, adopting in full the recommendations of the Wheatley Review, an independent review of LIBOR led by Martin Wheatley, CEO of the new Financial Conduct Authority (FCA) in the UK. Among other reforms, effective April 1, 2013, both “providing information in relation to” LIBOR and administering LIBOR are regulated activities in the United Kingdom. In addition, a new, independent administrator will provide oversight of LIBOR. NYSE Euronext, selected as the first administrator under the new regime, will begin oversight of LIBOR at the beginning of next year.

These reform efforts are an important first step towards restoring the credibility of LIBOR as an interest rate benchmark. The reforms instituted to date, however, do not address more fundamental concerns with LIBOR. In particular, even non-manipulated submissions sometimes bear little relation to actual market transactions because few market transactions occur in certain interbank unsecured lending markets, particularly in times of market stress. As Mervyn King has observed, LIBOR “[i]s in many ways the rate at which banks do not lend to each other…it is not a rate at which anyone is actually borrowing.”


FINRA Proposes to Disseminate Transaction Reports in Corporate Debt Securities

Russell D. Sacks is a partner in the Financial Institutions Advisory & Financial Regulatory Group at Shearman & Sterling LLP. The following post is based on a Shearman & Sterling publication by Mr. Sacks, Charles S. Gittleman, David L. Portilla, and Leo Wong.

FINRA has proposed a trade-reporting rule change that would result in the public dissemination of secondary market transactions in corporate debt securities sold under Securities Act Rule 144A. If adopted, this change could affect secondary market transactions in a number of assets classes, including high-yield debt securities.


On July 8, 2013, the US Financial Industry Regulatory Authority, Inc. (“FINRA”) submitted an amendment to its Rule 6750 to the Securities and Exchange Commission (“SEC”). If adopted, the amendment would allow FINRA to disseminate information on transactions effected pursuant to Rule 144A under the Securities Act of 1933 (“Rule 144A”) through the Trade Reporting and Compliance Engine (“TRACE”), the principal trade-reporting system for fixed-income securities. The proposed amendment would allow FINRA to disseminate information regarding secondary transactions effected pursuant to Rule 144A. It would not require the reporting of primary transactions.


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