Yearly Archives: 2013

Shackling Short Sellers: The 2008 Shorting Ban

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Thursday, May 23, 2013
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The following post comes to us from Ekkehart Boehmer, Professor of Finance at EDHEC Business School; Charles Jones, Professor of Finance and Economics at Columbia University; and Xiaoyan Zhang of the Krannert School of Management at Purdue University.

In September 2008, the U.S. Securities and Exchange Commission (SEC) temporarily banned most short sales in nearly 1,000 financial stocks. In our paper, Shackling Short Sellers: The 2008 Shorting Ban, forthcoming in the Review of Financial Studies, we examine the ban’s effect on market quality, shorting activity, the aggressiveness of short sellers, and stock prices. For the most part, financial economists consider short sellers to be the “good guys,” unearthing overvalued companies and contributing to efficient stock prices. Even as late as the summer of 2007, regulators in the United States seemed to share this view, as they made life easier for short sellers by repealing the New York Stock Exchange’s (NYSE’s) uptick rule and other short-sale price tests that had impeded shorting activity since the Great Depression (see Boehmer, Jones, and Zhang (2009) for an analysis of this event). However, short sellers are often the scapegoats when share prices fall sharply, and regulators in the United States did a sharp U-turn in 2008, imposing tight new restrictions on short sellers as the financial crisis worsened. In September 2008, the U.S. Securities and Exchange Commission (SEC) surprised the investment community by adopting an emergency order that temporarily banned most short sales in nearly 1,000 financial stocks. In this paper, we study changes in various liquidity measures, the rate of short sales, the aggressiveness of short sellers, and in stock prices before, during, and after the shorting ban. We compare banned stocks to a control group of nonbanned stocks to identify these effects.

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SRP Mid-Proxy-Season Results: 19 Boards Declassified, 13 Precatory Declassification Proposals Passed

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Wednesday, May 22, 2013
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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 Counsel at the SRP. 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.

This post describes the results produced so far during the 2013 proxy season as a result of the work that the Shareholder Rights Project (SRP) has done on behalf of SRP-represented clients. Thus far, this work has already resulted in the following 2013 outcomes:

  • 19 boards of S&P 500 and Fortune 500 companies declassified following the adoption of agreed-upon management proposals at 2013 annual meetings; and
  • 13 precatory proposals passed at the 2013 annual meetings of S&P 500 and Fortune 500 companies, with an average support of 78%.

Further details about these results (including lists of all the relevant S&P 500 and Fortune 500 companies) are provided below. We note that these results add to those obtained during 2012 in which the work of the SRP and SRP-represented investors resulted in:

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The Case for an Unbiased Takeover Law

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, May 22, 2013
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The following post comes to us from Luca Enriques, Nomura Visiting Professor of International Financial Systems at Harvard Law School and Professor of Business Law at LUISS University (Rome), Ronald J. Gilson, Charles J. Meyers Professor of Law and Business at Stanford Law School and Marc and Eva Stern Professor of Law and Business at Columbia University School of Law, and Alessio M. Pacces, Professor of Law & Finance, Erasmus School of Law, Rotterdam.

Takeovers remain the most controversial corporate governance mechanism. According to pro-takeover commentators, takeovers are generally beneficial for corporate governance. Takeovers can displace poorly performing managers and facilitate corporate restructuring. From this perspective, regulation should encourage takeovers. On the opposite side of the debate, those who oppose hostile takeovers argue that they can disrupt well-functioning companies and encourage short-termism. From this point of view, policies that hamper takeovers are favored.

In our paper The Case for an Unbiased Takeover Law (with an Application to the European Union), we reject a categorical pro- or anti-takeover position. While hostile and friendly takeovers may be efficient in the aggregate, individual takeovers and individual companies’ exposure thereto are efficient or inefficient depending on a variety of factors. These factors include the production functions of companies, the conditions in the relevant industry, the problems confronting the corporation and the best response to those problems. Because these all may differ from company to company and over time, so also may the appropriate stance to takeovers differ. Consequently, we posit that takeover regulation should sanction the efforts by individual companies to devise a takeover regime appropriate to their own, mutable circumstances. In other words, takeover regulation should be limited to a set of optional rules.

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Exit Consents in Restructurings – Still a Viable Option?

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, May 22, 2013
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The following post comes to us from David J. Billington, partner focusing on international financing transactions and restructuring transactions at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb memorandum; the full text, including footnotes and appendices, is available here.

Exit consents are often used as a restructuring tool by issuers of bonds. Issuers invite bondholders to exchange their existing bonds for new bonds (usually with a lower principal amount). In order to participate in the exchange, bondholders must agree to vote in favour of a resolution that amends the terms of the existing bonds so as to negatively affect (or, in Assénagon, [1] substantially destroy) their value. This is referred to as ‘covenant-stripping’. If the issuer does not achieve the majority needed to pass the resolution, the covenant-strip and the exchange do not happen. But if the resolution is passed, each participating holder’s bonds are exchanged for the new bonds, and the terms of the old bonds are amended to remove most of the protective covenants. This incentivises bondholders to participate in the exchange: accepting the new bonds (even though they will usually have a lower face amount than the existing bonds) may be preferable to being ‘left behind’ in the old bonds, which will cease to have any meaningful covenant protection.

Facts of the case

Anglo Irish Bank Corporation Limited (the “Bank”) suffered severe financial difficulties as a result of the financial crisis, and was nationalised in January 2009. As part of its restructuring, the Bank proposed an exchange offer whereby:

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Risk in the Boardroom

Posted by Matteo Tonello, The Conference Board, on
Tuesday, May 21, 2013
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Matteo Tonello is managing director at The Conference Board. This post relates to an issue of The Conference Board’s Director Notes series authored by Dr. Tonello and available here.

In a Director Note recently published, The Conference Board reviews current corporate practices on risk oversight by members of the board of directors of U.S. public companies. The study is based on findings from a survey of 359 SEC-registered business corporations conducted by The Conference Board in collaboration with NASDAQ OMX and NYSE Euronext. Data are categorized and analyzed according to 22 industry groups (using their Standard Industrial Classification, SIC, codes), seven annual revenue groups (based on data received from manufacturing and nonfinancial services companies) and five asset value groups (based on data reported by financial companies, which tend to use this type of benchmarking).

The publication details where the board assigns risk oversight responsibilities, whether it avails itself of dedicated reporting lines from senior management on risk issues, and the degree to which it adopts a standardized framework on enterprise risk management (ERM). Given the correlation between risk and strategy, data on the frequency and forms of strategic reviews is also presented.

The following are the main findings discussed in the study.

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The Non-Expert Agency: Using the SEC to Regulate Partisan Politics

Posted by Bradley A. Smith, Capital University Law School; & Allen Dickerson, Center for Competitive Politics, on
Tuesday, May 21, 2013
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The following post comes to us from Bradley A. Smith, Josiah H. Blackmore II/Shirley M. Nault Designated Professor of Law position at Capital University Law School, and Allen Dickerson, Legal Director of the Center for Competitive Politics. Work from the Program on Corporate Governance about corporate political spending includes Shining Light on Corporate Political Spending by Lucian Bebchuk and Robert Jackson, discussed on the Forum here. 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. Their earlier work on corporate political spending, Corporate Political Speech: Who Decides?, is discussed on the forum here, here and here.

The regulation of political speech, including the regulation of contributions and spending, is one of the most constitutionally delicate operations in which the government can engage. As the Supreme Court stated in Buckley v. Valeo, “[Political] contribution and expenditure limitations operate in an area of the most fundamental First Amendment activities. . . . [T]he First and Fourteenth Amendments guarantee ‘freedom to associate with others for the common advancement of political beliefs and ideas.’” The same is true of “compelled disclosure,” which the Court has noted “in itself[] can seriously infringe on privacy of association and belief guaranteed by the First Amendment.”

Given these important First Amendment concerns, and wary of creating the actuality or appearance of partisan advantage, Congress has entrusted interpretation and enforcement of the campaign finance laws to the Federal Election Commission (FEC). This agency is unique in a number of ways. Perhaps most fundamentally, it includes six commissioners evenly divided between the two major parties. Furthermore, having been the defendant in many of the most important First Amendment lawsuits of the past 40 years, it has considerable expertise in dealing with the intricate intersection of campaign finance regulation and constitutional liberties.

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SEC Comment Letter: Shining Light on Corporate Political Spending

Posted by Lucian Bebchuk, Harvard Law School, and Robert J. Jackson, Jr., Columbia Law School, on
Monday, May 20, 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 Corporate Political Speech: Who Decides? and Shining Light on Corporate Political Spending, coming out this month in the Georgetown Law Journal. This post is based on a comment letter that Bebchuk and Jackson filed with the SEC in further support of the rulemaking petition. The comment letter, available here, submitted Shining Light on Corporate Political Spending for SEC consideration and is largely based on it.

We recently submitted a comment letter in connection with a rulemaking petition, currently before the SEC, urging the development of rules to require public companies to disclose the use of corporate resources for political activities. The Petition was submitted by the Committee on Disclosure of Corporate Political Spending, a group of ten corporate and securities law experts that we co-chaired. In further support of the rules advocated by the Petition, our comment letter submitted for consideration by the SEC our Article Shining Light on Corporate Political Spending, which was published recently in the Georgetown Law Journal.

The submitted Article puts forth a comprehensive, empirically-grounded case for the rules advocated in the Petition. The Article also provides a detailed response to each of the ten objections that have been raised by the Petition’s opponents, either in the comment file or elsewhere. The Article shows that none of these objections, either individually or collectively, provides a basis for opposing rules requiring public companies to disclose political spending.

The main part of our comment letter discusses and reviews the analysis in the attached article as follows:

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2013 Women on Boards Survey

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, May 20, 2013
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The following post comes to us from Kimberly Gladman, Director of Research and Risk Analytics at GovernanceMetrics International, and is based on the executive summary of GMI Ratings’ 2013 Women on Boards survey by Ms. Gladman and Michelle Lamb, available for download here; last year’s Women on Boards Survey is available here.

GMI Ratings’ 2013 Women on Boards survey includes data on 5,977 companies in 45 countries around the world. The results show that progress on most measures of female representation continues to be slow. Women now hold 11% of board seats at the world’s largest and best-known companies, up 0.5 percentage points from a year ago and a total of only 1.7 percentage points since 2009. Among these companies, 63% have at least one female director, and 13% have at least three women—a level that some research suggests may constitute a critical mass and allow women’s leadership styles to come to the fore. As we noted last year, women make up a higher percentage of directors in developed markets (11.8%, up from 11.2% last year) than they do in emerging markets (7.4%, both this year and last).

Underlying the incremental pace of global change are very heterogeneous trends in female board representation in different countries and regions. Leading the globe on gender-diverse boards is Europe, where legal requirements for women’s representation exist or are being considered at both the EU level and in various countries. Norway, Sweden and Finland continue to lead the developed world in their percentage of female directors, with 36.1%, 27.0%, and 26.8%, respectively. Significant increases in women’s representation are also happening in Italy and France, following the passage of recent laws on board diversity. France now ranks 4th in the world, with 18.3% female directors. (In Spain, however, where a law exists but enforcement mechanisms are weak, much less change has occurred.) In addition to raising their percentages of female directors over the last year, Italy, France, Germany, and the Netherlands have all seen sharp increases (of between 8-18 percentage points) in the proportion of companies with at least three women. Over half of French boards, and a third of those in Germany, now have at least three female directors.

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The Relation between Equity Incentives and Misreporting

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, May 20, 2013
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The following post comes to us from Christopher Armstrong and Daniel Taylor, both of the Department of Accounting at the University of Pennsylvania; David Larcker, Professor of Accounting at Stanford University; and Gaizka Ormazabal of the Department of Accounting and Control at the University of Navarra, IESE Business School.

A large body of prior literature examines the relation between managerial equity incentives and financial misreporting but reports mixed results. This literature argues that a manager whose wealth is more sensitive to changes in stock price has a greater incentive to misreport. However, if managers are risk-averse and misreporting increases both equity values and equity risk, managers face a risk/return tradeoff when making a misreporting decision. In this case, the sensitivity of the manager’s wealth to changes in stock price, or portfolio delta, will have two countervailing incentive effects: a positive “reward effect” and a negative “risk effect.” In contrast, the sensitivity of the manager’s equity portfolio to changes in risk, or portfolio vega, will have an unambiguously positive incentive effect. Accordingly, when managers are risk-averse, it is important to jointly consider both portfolio delta and portfolio vega when assessing the relation between equity incentives and misreporting.

In our paper, The Relation Between Equity Incentives and Misreporting: The Role of Risk-Taking Incentives, forthcoming in the Journal of Financial Economics, we show that jointly considering both portfolio delta and portfolio vega substantially alters inferences reported in the literature. Specifically, we find inferences in studies reporting either a positive relation or no relation between portfolio delta and misreporting are not robust to controlling for vega.

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Are Companies Connecting the Sustainability and Financial Disclosure Dots?

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Sunday, May 19, 2013
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The following post comes to us from Peter DeSimone, deputy director and co-founder of Si2, and Jon Lukomnik, executive director of the IRRC Institute.

All U.S. S&P 500 companies except one report some form of sustainability disclosure. This widespread reporting indeed is good news. But, isolated sustainability disclosures have proven to be of limited value to corporate management trying to improve the bottom line, and for investors seeking to gauge risk and opportunity.

New research from the Investor Responsibility Research Center Institute (IRRCi) and the Sustainable Investments Institute (Si2) – the first to benchmark the status of integrated reporting in the U.S. – finds that nearly all S&P 500 companies are failing to connect the disclosure dots. A mere seven companies are integrating financial and sustainability reporting. These trendsetters include American Electric Power, Clorox, Dow Chemical, Eaton, Ingersoll Rand, Pfizer and Southwest Airlines.

The study also finds companies typically are beginning to place a dollar figure on sustainability – about 74 percent of corporations. But, these disclosures frequently mention other initiatives without quantification of the benefits and costs. Also interesting is that some 44 percent of companies link executive compensation to sustainability criteria.

What’s driving increased disclosure is a combination of factors – rules, regulations, fines, and even the increased volume on the climate change debate. What’s problematic, however, is that the rules are disjointed. As a result, companies and investors don’t have a clear vision so they can factor sustainability into corporate planning and financials.

But this disorderly backdrop doesn’t mean companies lack the capability to quantify the impact of sustainability.

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