Yearly Archives: 2014

New Evidence on Compensation Consultants and CEO Pay

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Thursday, October 16, 2014
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The following post comes to us from Jenny Chu, Jonathan Faasse, and Raghavendra Rau, all of the Finance & Accounting Group at the University of Cambridge.

In 2013, CEOs in S&P 500 firms were paid, on average, over 200 times the average worker’s salary in their firms. To avoid or minimize public outrage, managers have a substantial incentive to obscure and try to legitimize their excessive compensation. One way of doing so is to have “independent” compensation consultants recommend higher pay to the board. However, prior literature has not been able to find significant evidence that hiring consultants leads to higher pay, partly because the information is only available after 2006 and most studies on this topic examine one or two years after 2006.

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SEC Whistleblower Program Achieves Critical Mass

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, October 15, 2014
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The following post comes to us from Matt T. Morley, partner in the Government Enforcement practice area at K&L Gates LLP, and is based on a K&L Gates alert authored by Mr. Morley.

Two recent Dodd-Frank whistleblower awards suggest that the program is becoming the kind of “game changer” for law enforcement that many had predicted. The program, which took effect in August 2011, mandates the payment of bounties to persons who voluntarily provide information leading to a successful securities enforcement action in which more than $1 million is recovered. Informants are entitled to receive between 10 and 30 percent of the amounts recovered, with the precise amount to be determined by the SEC.

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How Do Bank Regulators Determine Capital Adequacy Requirements?

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, October 15, 2014
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The following post comes to us from Eric Posner, Kirkland & Ellis Distinguished Service Professor of Law and Aaron Director Research Scholar at the University of Chicago.

The incentive to take socially costly financial risks is inherent in banking: because of the interconnected nature of banking, one bank’s failure can increase the risk of failure of another bank even if they do not have a contractual relationship. If numerous banks collapse, the sudden withdrawal of credit from the economy hurts third parties who depend on loans to finance consumption and investment. The perverse incentive to take financial risk is further aggravated by underpriced government-supplied insurance and the government’s readiness to play the role of lender of last resort.

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SEC Enforcement Actions Regarding Section 16 Reporting Obligations

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Tuesday, October 14, 2014
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The following post comes to us from John P. Kelsh, partner in the Corporate and Securities group at Sidley Austin LLP, and is based on a Sidley Austin publication by Mr. Kelsh, Paul V. Gerlach, and Holly J. Gregory.

Last month, the SEC announced that it brought enforcement actions primarily relating to Section 16(a) under the Securities Exchange Act against 34 defendants. The defendants were 13 individuals who were or had been officers or directors of public companies, five individual investors, ten investment funds/advisers and six public companies.

This post briefly discusses several noteworthy points regarding this development and also discusses practical steps that companies could consider taking in response.

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Towards a “Rule of Law” Approach to Restructuring Sovereign Debt

Posted by Steven L. Schwarcz, Duke University, on
Tuesday, October 14, 2014
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Steven L. Schwarcz is the Stanley A. Star Professor of Law & Business at Duke University School of Law.

In a landmark vote, the United Nations General Assembly overwhelmingly decided on September 9 to begin work on a multilateral legal framework—effectively a treaty or convention—for sovereign debt restructuring, in order to improve the global financial system. The resolution was introduced by Bolivia on behalf of the “Group of 77” developing nations and China. In part, it was sparked by recent litigation in which the U.S. Supreme Court held that, to comply with a pari passu clause (imposing an equal-and-ratable repayment obligation), Argentina could not pay holders of exchanged bonds without also paying holdouts who retained the original bonds. That decision was all the more dramatic because the holdouts included hedge funds—sometimes characterized as “vulture funds”—that purchased the original bonds at a deep discount, yet sued for full payment.

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Opening Remarks at Investor Advisory Committee

Posted by Mary Jo White, Chair, U.S. Securities and Exchange Commission, on
Monday, October 13, 2014
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Mary Jo White is Chair of the U.S. Securities and Exchange Commission. The following post is based on Chair White’s remarks at a recent Investor Advisory Committee meeting, available here. The views expressed in this post are those of Chair White and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Good morning, and welcome to today’s [October 9, 2014] meeting of the Investor Advisory Committee.

I want to touch briefly today on the Commission’s rulemaking agenda since you last met, mention a few other developments and give a brief update on the status of our consideration of your recommendations.

Rulemaking Agenda

The Commission has completed three sets of important rulemakings since your last meeting in July. They each put in place critical new investor protections to address some of the most significant risks in the securities markets highlighted by the financial crisis.

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Corporate Governance Enforcement in the Middle East and North Africa

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Sunday, October 12, 2014
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The following post comes to us from Alissa Kole Amico, corporate governance project manager for the Middle East and North Africa at the Organization for Economic Co-Operation and Development (OECD), and is based on an OECD Corporate Governance Working Paper by Ms. Amico; the complete publication is available here.

As an echo of the last financial crisis, the two themes that have arguably dominated the corporate governance debate globally are investor activism and corporate governance enforcement. Recent years have seen by all accounts the highest rates of institutional investor activism on a range of issues such as executive remuneration, non-financial disclosure and board composition, and at the same time, increased oversight and enforcement. Stewardship-oriented initiatives and rigorous enforcement activity by securities but also banking sector regulators have seen a level of heightened interest in Europe and North America, and to a lesser extent in emerging markets.

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Cross-Border Recognition of Resolution Actions

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Saturday, October 11, 2014
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The following post comes to us from Sullivan & Cromwell LLP, and is based on a Sullivan & Cromwell publication authored by Mitchell S. Eitel, Andrew R. Gladin, Rebecca J. Simmons, and Jennifer L. Sutton. The complete publication, including footnotes, is available here.

On September 29, 2014, the Financial Stability Board (the “FSB”) published a consultative document concerning cross-border recognition of resolution actions and the removal of impediments to the resolution of globally active, systemically important financial institutions (the “Consultative Document”). The Consultative Document encourages jurisdictions to include in their statutory frameworks seven elements that would enable prompt effect to be given to foreign resolution actions. In addition, due to a recognized gap between the various national legal resolution regimes that are currently in place and those recommended by the FSB, the Consultative Document sets forth two “contractual solutions”—that is, resolution-related arrangements to be implemented as a matter of contract among the private parties involved—to address two underlying substantive issues that the FSB considers critical for orderly cross-border resolution, namely:

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Short-Termism

Posted by Theodore N. Mirvis, Wachtell, Lipton, Rosen & Katz, on
Friday, October 10, 2014
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Theodore N. Mirvis is a partner in the Litigation Department at Wachtell, Lipton, Rosen & Katz.

Last Monday I ventured into the belly of the beast by presenting the attached decks (available here and here) in Professor Bebchuk’s class at Harvard Law School. The class and discussion focused on short-termism, using the Airgas case as a jumping off point (see first deck available here) to the broader governance issues canvassed by the second deck (available here). Once again there were no answers given to the “inconvenient questions” listed on the two pager available here.

The Duty to Maximize Value of an Insolvent Enterprise

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Thursday, October 9, 2014
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The following post comes to us from Brad Eric Scheler, senior partner and chairman of the Bankruptcy and Restructuring Practice at Fried, Frank, Harris, Shriver & Jacobson LLP, and is based on a Fried Frank M&A Briefing authored by Mr. Scheler, Steven Epstein, Robert C. Schwenkel, and Gail Weinstein. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

In Quadrant Structured Products Company, Ltd. v. Vertin (October 1, 2014), Vice Chancellor Laster clarified the Delaware Chancery Court’s approach to breach of fiduciary duty derivative actions brought by creditors against the directors of an insolvent corporation. Importantly, the Vice Chancellor applied business judgment rule deference to the non-independent directors’ decision to try to increase the value of the insolvent corporation by adopting a highly risky investment strategy—even though the creditors bore the full risk of the strategy’s failing, while the corporation’s sole stockholder would benefit if the strategy succeeded. By contrast, the court viewed the directors’ decisions not to exercise their right to defer interest on the notes held by the controller and to pay above-market fees to an affiliate of the controller as having been “transfers of value” from the insolvent corporation to the controller, which were subject to entire fairness review.

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