Yearly Archives: 2014

Who’s Responsible for the Walmart Mexico Scandal?

Posted by Benjamin W. Heineman, Jr., Harvard Law School Program on Corporate Governance and Harvard Kennedy School of Government, on
Thursday, May 15, 2014
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Ben W. Heineman, Jr. is a former GE senior vice president for law and public affairs and a senior fellow at Harvard University’s schools of law and government. This post is based on an article that appeared in the Harvard Business Review online, which is available here.

The Walmart bribery scandal is one of the most closely-watched cases of alleged malfeasance by a global company. It broke into the open in April, 2012, when the New York Times published a lengthy investigative piece alleging Walmart bribery in a Mexican subsidiary and a cover-up in its Bentonville, Arkansas, global headquarters. The piece, which won a Pulitzer Prize for reporter David Barstow, raised a host of personal accountability and corporate governance issues for the company.

Late last month, on the second anniversary of the story nearly to the day, Walmart released its first Global Compliance Report (GCR). The report describes the company’s governance response and changed compliance framework—from holding 20 audit committee meetings in 2014, to substantial organizational restructuring, to enhanced education and training. On paper, Walmart appears to have adopted many best practices and to have set out a sound plan for moving forward. However, questions of accountability remain unanswered, when it comes to determining what actually happened in the past, what systems failed, and who was responsible for possible violations of the Foreign Corrupt Practices Act, which bars bribery of foreign officials. A lengthy internal inquiry continues, as well as investigations by the Justice Department and the SEC, with the scope broadened to include possible Walmart improprieties in Brazil, China and India.

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Shareholder Governance through Disclosure

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Thursday, May 15, 2014
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The following post comes to us from Jordan Schoenfeld of the Department of Accounting at the University of Michigan.

Index fund sponsors today oversee about 18% of all mutual fund and ETF assets (or $2.3 trillion), but their ability to govern is hampered by a pressing need to keep expense ratios low (ICI, 2013). Thus traditional governance channels, such as evaluating and guiding project selection by managers (intervention), are foreclosed to them. Neither can these fund sponsors strategically trade in response to private information, because they must hold the index. Nonetheless, index fund sponsors would still like to govern their portfolio companies, because high index returns mean more inflows into their funds and fees. In my paper, Shareholder Governance through Disclosure, which was recently made publicly available on SSRN, I conjecture that index fund sponsors govern by asking management of firms to disclose more about their activities. These disclosures can facilitate the monitoring activities of all stakeholders and increase firm value, thus benefiting the index fund sponsor. For example, more disclosure enhances other blockholders’ monitoring activities and makes stock prices more informative about management’s actions. In addition, eliciting such disclosures about current projects undertaken by management does not require the index fund sponsor to invest in and acquire specific skills about how to run the business. This feature of disclosure makes it particularly attractive to index fund sponsors, who compete by keeping their expenses low.

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CII Urges SEC to Require Disclosure of Third-Party Director Compensation

Posted by Sabastian V. Niles, Wachtell, Lipton, Rosen & Katz, on
Wednesday, May 14, 2014
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Sabastian V. Niles is counsel in the Corporate Department at Wachtell, Lipton, Rosen & Katz, where he focuses on rapid response shareholder activism, takeover defense and corporate governance. This post is based on a Wachtell Lipton firm memorandum by Mr. Niles, Trevor Norwitz, Andrew R. Brownstein, and David C. Karp.

As we have previously written, special compensation arrangements between public company directors and third parties, such as activist hedge funds or other nominating shareholders, pose serious threats to the integrity of boardroom decision-making and have been sharply criticized by commentators and many institutional shareholders. The Council of Institutional Investors (CII), which has previously declared that third-party director incentive schemes “blatantly contradict” CII policies on director compensation, has now taken the additional step of encouraging the SEC to act to ensure investors are fully informed about such arrangements between nominating shareholders and their director candidates.

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Delaware Court Endorses “Fee-Shifting” Bylaw

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, May 14, 2014
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The following post comes to us from Wilson Sonsini Goodrich & Rosati, and is based on a WSGR Alert memorandum by Chancellor William Chandler, David Berger, Katherine Henderson, Steven Guggenheim, Amy Simmerman, and Tamika Montgomery-Reeves. 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.

On May 8, 2014, the Delaware Supreme Court provided an en banc answer to a certified question of law from the U.S. District Court for the District of Delaware captioned ATP Tour, Inc. v. Deutscher Tennis Bund, concluding that fee-shifting provisions in the bylaws of a Delaware corporation are facially valid under Delaware law and enforceable even against parties who joined the corporation before the bylaw was adopted. [1] Although this opinion arose in the context of a non-stock corporation, as discussed below, the opinion is relevant to traditional stock corporations as well. Further, the court acknowledged that the bylaw would not necessarily be rendered unenforceable as an equitable matter if adopted with the “intent to deter litigation.”

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The Statistical Significance of Excess Dollar Returns

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, May 14, 2014
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The following post comes to us from Tiago Duarte-Silva and Maria Tripolski-Kimel, both of Charles River Associates.

The literature on event studies has long established the properties of excess returns and tests of their statistical significance. However, it is useful in certain settings to examine excess dollar returns. For example, mergers and acquisitions often require the examination of dollar returns to assess the impact on the wealth of securities’ holders. Other examples include the analysis of managerial skill on actively managed funds, of the magnitude of price manipulation, or of the impact of disclosure events on prices in securities litigation.

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Does Hiring M&A Advisers Matter For Private Sellers?

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Tuesday, May 13, 2014
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The following post comes to us from Anup Agrawal, Powell Chair of Finance at the University of Alabama; Tommy Cooper of the Department of Finance at the University of Mississippi; and Qin Lian and Qiming Wang, both of the Department of Economics and Finance at Louisiana Tech University.

M&A transactions result from negotiations between buyers and sellers. In a negotiation, the outcome often depends on the relative bargaining strength of the two parties. A party’s bargaining strength depends on some factors that are beyond its control and others within its control. In an M&A transaction, hiring an M&A adviser is a step that either side can take to increase its bargaining power. While the decision and the benefit of hiring an M&A adviser by a public acquirer have been examined extensively, to our knowledge, the decision and benefit of hiring an M&A adviser by a private target have not been empirically examined. In our paper, Does Hiring M&A Advisers Matter For Private Sellers?, which was recently made publicly available on SSRN, we investigate the determinants of private targets’ choice of whether to hire M&A advisers (or top-tier M&A advisers) and the effect of this choice on deal valuations.

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Stress Testing: A Look Into the Fed’s Black Box

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Tuesday, May 13, 2014
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The following post comes to us from Dan Ryan, Leader of the Financial Services Advisory Practice at PricewaterhouseCoopers LLP, and is based on a PwC publication; the complete publication, including graphs, tables, and appendix, is available here.

On March 26th, the Federal Reserve (Fed) announced the results of its annual Comprehensive Capital Analysis and Review (CCAR). [1] This year the Fed assessed the capital plans of 30 bank holding companies (BHCs)—12 more than last year—and objected to five plans (four due to deficiencies in the quality of capital planning process, and one for falling below quantitative minimum capital ratios). Two other US BHCs had to “take a mulligan” and quickly resubmit their plans with reduced capital actions to remain above the quantitative floors.

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Bebchuk and Coates Articles Selected Among the Top Ten Corporate and Securities Articles of 2013

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, May 12, 2014
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This year’s list of the Ten Best Corporate and Securities Articles, selected by an annual poll of corporate and securities law academics, includes two selections from Harvard Law faculty associated with the Program on Corporate Governance: Professor Lucian Bebchuk and Professor John Coates.

The top ten articles were selected from a field of 550 pieces. Professor Robert Thompson of Georgetown Law School conducted the annual poll, and the selected articles will be reprinted in an upcoming issue of the Corporate Practice Commentator.

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Open Sesame? Not for now, Alibaba

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, May 12, 2014
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The following post comes to us from John Chrisman, partner at Dorsey & Whitney LLP specializing in mergers & acquisitions and capital markets, and is based on a Dorsey publication by Mr. Chrisman, Eden McMahon, and David Richardson; the full text, including footnotes, is available here.

For months Alibaba Group Holding Limited (“Alibaba”) had tried to convince the Stock Exchange of Hong Kong Limited (“SEHK”) that they should open their doors to the internet giant. Alibaba had proposed a system through which a handpicked group of “partners” would nominate a majority of its board. At the time, commentators rushed to report that Alibaba was seeking to implement a dual share class structure, threatening investor protections. Alibaba had offered an alternative take and tried to convince the public that there was no story at all: their proposed partnership structure merely offered an “alternative view of good corporate governance”. Charles Li, the Chief Executive of the SEHK was meanwhile hearing voices from all sides in his dreams.

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What Will Result From the SEC’s Current Disclosure Reform Initiative?

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Sunday, May 11, 2014
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The following post comes to us from Betty Moy Huber, co-head of the Environmental Group in the Corporate Department of Davis Polk & Wardwell LLP, and is based on an article by Ms. Huber that first appeared in the American Bar Association’s Environmental Disclosure Committee newsletter.

The SEC is in the midst of what could be a sweeping reform of its disclosure regime. During the course of this year, the SEC’s Division of Corporation Finance, or Corp Fin, will be seeking broad input from companies and investors on how the SEC can improve its disclosure rules. This initiative follows on Corp Fin’s lengthy December 2013 report on this topic. Arguably, the SEC’s disclosure reform initiative could not have come at a better time for sustainability and environmental groups who have been working for years to achieve better corporate sustainability disclosure. These groups are savvy, dedicated, and have trillions of institutional investor (and other) dollars backing them. With social media, they have become well organized and effective advocates for their cause. In addition, investment banks are taking note and becoming interested in better and more uniform sustainability disclosure in their capacity as underwriters as well as investors themselves. Further, shareholder proponents have submitted a record number of environmental and sustainability shareholder proposals in recent proxy seasons. But will these sustainability groups succeed in finding common ground with the SEC and, if necessary, convince the SEC that sustainability issues are material or otherwise a priority?

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