Yearly Archives: 2014

CEO Job Security and Risk-Taking

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, February 26, 2014
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The following post comes to us from Peter Cziraki of the Department of Economics at the University of Toronto and Moqi Xu of the Department of Finance at the London School of Economics.

In our paper, CEO Job Security and Risk-Taking, which was recently made publicly available on SSRN, we use the length of employment contracts to estimate CEO turnover probability and its effects on risk-taking. Protection against dismissal should encourage CEOs to pursue riskier projects. Indeed, we show that firms with lower CEO turnover probability exhibit higher return volatility, especially idiosyncratic risk. An increase in turnover probability of one standard deviation is associated with a volatility decline of 17 basis points. This reduction in risk is driven largely by a decrease in investment and is not associated with changes in compensation incentives or leverage.

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Toward Board Declassification in 100 S&P 500 and Fortune 500 Companies: The SRP’s Report for the 2012 and 2013 Proxy Seasons

Posted by Lucian Bebchuk, Scott Hirst and June Rhee, Shareholder Rights Project, on
Tuesday, February 25, 2014
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Lucian Bebchuk is the Director of the Shareholder Rights Project (SRP), Scott Hirst is the SRP’s Associate Director, and June Rhee is a 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.

Editor’s Note:

The Shareholder Rights Project (SRP) just released its final report for the 2012 and 2013 proxy seasons, the SRP’s first two years year of operations. As the report details, major results obtained include the following:

  • 100 S&P 500 and Fortune 500 companies (listed here) entered into agreements to move toward declassification;
  • 81 S&P 500 and Fortune 500 companies (listed here) declassified their boards; these companies have aggregate market capitalization exceeding one trillion dollars, and represent about two-thirds of the companies with which engagement took place;
  • 58 successful declassification proposals (listed here), with average support of 81% of votes cast; and
  • Proposals by SRP-represented investors represented over 50% of all successful precatory proposals by public pension funds and over 20% of all successful precatory proposals by all proponents.

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Communication and Decision-Making in Corporate Boards

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Tuesday, February 25, 2014
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The following post comes to us from Nadya Malenko of the Finance Department at Boston College.

The board of directors is a collective body, whose members have diverse expertise in various aspects of the company’s business. Therefore, communication between directors is critical to successful board functioning. In recent years, regulators, shareholders, and directors themselves have been paying increased attention to decision-making policies that could increase the quality of board discussions. Executive sessions that exclude the management, separation of the CEO and chairman positions, board retreats, and separate committees on specific topics have been put in place to promote more effective communication. As governance experts Carter and Lorsch (2004) emphasize, “If we could offer only one piece of advice, it would be to strive for open communication among board members.”

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An Economic Theory of Fiduciary Law

Posted by Robert Sitkoff, Harvard Law School, on
Monday, February 24, 2014
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Robert H. Sitkoff is the John L. Gray Professor of Law at Harvard Law School.

I’ve recently posted to SSRN a book chapter called “An Economic Theory of Fiduciary Law,” which will be published in Philosophical Foundations of Fiduciary Law by Oxford University Press. The editors are Andrew Gold and Paul Miller.

The purpose of my chapter is to restate the economic theory of fiduciary law. In doing so, the chapter makes several fresh contributions. First, it elaborates on earlier work by clarifying the agency problem that is at the core of all fiduciary relationships. In consequence of this common economic structure, there is a common doctrinal structure that cuts across the application of fiduciary principles in different contexts. However, within this common structure, the particulars of fiduciary obligation vary in accordance with the particulars of the agency problem in the fiduciary relationship at issue. This point explains the purported elusiveness of fiduciary doctrine. It also explains why courts apply fiduciary law both categorically, such as to trustees and (legal) agents, as well as ad hoc to relationships involving a position of trust and confidence that gives rise to an agency problem.

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Basel III Framework: Net Stable Funding Ratio (Proposed Standards)

Posted by Barnabas Reynolds, Shearman & Sterling LLP, on
Monday, February 24, 2014
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Barnabas Reynolds is head of the global Financial Institutions Advisory & Financial Regulatory Group at Shearman & Sterling LLP. This post is based on a Shearman & Sterling client publication. The complete publication, including annex, is available here.

A key new element of the Basel III framework for regulatory capital aims to improve banks’ management of their funding and liquidity profiles. Two new measures are proposed: a “net stable funding ratio”, and a “liquidity coverage ratio”. The net stable funding ratio has received relatively little attention due to its seemingly distant implementation date of 1 January 2018. However, its impact will be immediate and significant for many banking institutions.

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White House Releases NIST Cybersecurity Framework

Posted by Holly J. Gregory, Sidley Austin LLP, on
Sunday, February 23, 2014
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Holly J. Gregory is a partner and co-global coordinator of the Corporate Governance and Executive Compensation group at Sidley Austin LLP. This post is based on a Sidley update by Alan Raul and Ed McNicholas.

On February 12, the White House released the widely anticipated Framework for Improving Critical Infrastructure Cybersecurity (“the Framework”). Developed pursuant to Executive Order 13636 (issued in February 2013), the Framework strongly encourages companies across the financial, communications, chemical, transportation, healthcare, energy, water, defense, food, agriculture, and other critical infrastructure sectors to implement and comply with its voluntary standards. The provisions set forth in the Framework may establish a new baseline for industry standard practices, and may impact or guide FTC enforcement actions and plaintiff data breach lawsuits.

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Securities Class Action Filings—2013 Year in Review

Posted by John Gould, Cornerstone Research, on
Saturday, February 22, 2014
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John Gould is senior vice president at Cornerstone Research. This post discusses a Cornerstone Research report by Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse, titled “Securities Class Action Filings—2013 Year in Review,” available here.

Plaintiffs filed 166 new federal securities class actions in 2013, a 9 percent increase over 2012, according to Securities Class Action Filings—2013 Year in Review, an annual report prepared by Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse. The 2013 filings, although boosted by a second-half surge, are still 13 percent below the historical average from 1997 to 2012.

One possible explanation for filings remaining below the historical average in recent years is the decline in the number of unique companies listed on the NYSE and NASDAQ. A new analysis in the report shows that the number of companies on these exchanges has decreased 46 percent since 1998, providing fewer companies for plaintiffs to target as the subject of federal securities class actions.

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Delaware Chancery Emphasizes Materiality as Key in Disclosure-Based M&A Settlements

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, February 21, 2014
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The following post comes to us from Bradley W. Voss, partner in the Commercial Litigation Practice Group of Pepper Hamilton LLP, and is based on a Pepper Hamilton publication. This post is part of the Delaware law series, which is co-sponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

Some corporate practitioners could have the impression that significant fee awards are granted as a matter of course in M&A class action litigation, even where the results obtained by class counsel were supplemental (and arguably routine) disclosures regarding the proposed transaction. Recent comments by the judges of the Delaware Court of Chancery, however, may suggest an increasing concern over what might be perceived as “default” fee awards in this context, as well as the value of purely supplemental, as opposed to remedial, disclosures.

In 2011, Vice Chancellor J. Travis Laster analyzed M&A fee awards in a published case titled In re Sauer-Danfoss Inc. Shareholders Litigation, 65 A.3d 1116 (Del. Ch. 2011). This undertaking, it reasonably could be hoped, would serve to promote consistency and establish reasonable expectations, especially in an area where precedent frequently lies in transcripts and unpublished orders. Of particular note, Vice Chancellor Laster wrote:

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Do Mandatory ‘Auctions’ Increase Gains of Target Shareholders in M&A?

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, February 21, 2014
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The following post comes to us from Fernan Restrepo of Stanford Law School. 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.

Several years ago, the Delaware Supreme Court held, in Revlon v. MacAndrews & Forbes Holdings, that when a “sale” or “break-up” of a company becomes “inevitable,” the duty of the board of directors is not to maintain the independence of the company or otherwise give priority to long-term considerations, but rather to obtain the highest price possible for the shareholders in the transaction (that is, to maximize short-term value). To satisfy that duty, when confronted with these situations, the board is generally supposed to conduct an auction (or, as clarified in subsequent decisions, a “market check”) that ensures that the final buyer is, in fact, the best bidder available. In the words of the court, in this “inevitable” “break-up” or “sale” scenario (which, however, the court did not precisely define), the directors’ duties shift from “defenders of the corporate bastion to auctioneers charged with getting the best price for the stockholders.”

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Berkeley Transactional Practice Survey

Posted by Steven Davidoff, Ohio State University College of Law, on
Thursday, February 20, 2014

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Steven M. Davidoff is Professor of Law and Finance at Ohio State University College of Law. As of July 2014, Professor Davidoff will be Professor of Law at the University of California, Berkeley School of Law.

It is hard to gainsay the observation that business law practice has evolved significantly over the last three decades. Fields as distinct as corporate, securities and mergers and acquisitions law have substantially merged with a host of traditional “business school” topics, such as accounting, finance, strategy, project management and risk analysis. Although some law schools have endeavored to keep up with these changes in business law practice, their reaction has been somewhat sluggish. Indeed, many major law firms with sophisticated business law practices have expended significant resources on training their junior associates (or retraining their experienced attorneys) through “mini-MBA” courses, business boot camps, and similar programs offered either through third parties, partnerships or in-house expertise. Nevertheless, it is our view that law schools can and should continue to work to provide this type of training to students in partnership with efforts already under way at law firms. Such efforts are certainly key components to creating sophisticated lawyers for the next century.

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