Monthly Archives: February 2015

The CEO-Employee Pay Ratio

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, February 23, 2015
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The following post comes to us from Steve Crawford of the Department of Accounting & Taxation at the University of Houston, and Karen Nelson and Brian Rountree, both of the Accounting Area at Rice University.

Will knowing how much the CEO makes relative to rank and file employees provide information to investors? We may soon find out as a result of a provision in the Dodd Frank Act that requires companies to report the ratio of the CEO’s compensation to that of the median employee. A number of different sources have developed industry-based estimates of the ratio using information about CEO pay from corporate disclosures and employee pay from the government’s Bureau of Labor Statistics. For instance, an article in Bloomberg BusinessWeek on May 2, 2013 found the ratio of CEO pay to the typical worker rose from about 20-to-1 in the 1950s to 120-to-1 in 2000, with the ratio reaching nearly 500-to-1 for the top 100 companies.

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Making the Municipal Securities Market More Transparent, Liquid, and Fair

Posted by Luis A. Aguilar, Commissioner, U.S. Securities and Exchange Commission, on
Sunday, February 22, 2015
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Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Aguilar’s recent public statement; the full text, including footnotes, is available here. The views expressed in the post are those of Commissioner Aguilar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

It is difficult to overstate the importance of the municipal securities market. There is perhaps no other market that so profoundly influences the quality of our daily lives. Municipal securities provide financing to build and maintain schools, hospitals, and utilities, as well as the roads and other basic infrastructure that enable our economy to flourish. Municipal bonds’ tax-free status also makes them an important investment vehicle for individual investors, particularly retirees. Ensuring the existence of a vibrant and efficient municipal bond market is essential, particularly at a time when state and local government budgets remain stretched.

Unfortunately, despite its size and importance, the municipal securities market has been subjected to a far lesser degree of regulation and transparency than other segments of the U.S. capital markets. In fact, investors in municipal securities are afforded “second-class treatment” under current law in many ways. This has allowed market participants to cling to outdated notions about how the municipal securities market should operate. The result is a market that, in the view of many, is excessively opaque, illiquid, and decentralized.

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Financial Market Utilities: Is the System Safer?

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Saturday, February 21, 2015
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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.

It has been two and a half years since the Financial Stability Oversight Council (FSOC) designated select financial market utilities (FMUs) as “systemically important.” These entities’ respective primary supervisory agencies have since increased scrutiny of these organizations’ operations and issued rules to enhance their resilience.

As a result, systemically important FMUs (SIFMUs) have been challenged by a significant increase in regulatory on-site presence, data requests, and overall supervisory expectations. Further, they are now subject to heightened and often entirely new regulatory requirements. Given the breadth and evolving nature of these requirements, regulators have prioritized compliance with requirements deemed most critical to the safety and soundness of financial markets. These include certain areas within corporate governance and risk management such as liquidity risk management, participant default management, and recovery and wind-down planning.

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Ensuring the Proxy Process Works for Shareholders

Posted by Luis A. Aguilar, Commissioner, U.S. Securities and Exchange Commission, on
Friday, February 20, 2015
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Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Aguilar’s recent public statement; the full text, including footnotes, is available here. The views expressed in the post are those of Commissioner Aguilar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Today’s [February 19, 2015] Roundtable on Proxy Voting is certainly timely since over the course of the next several months, thousands of America’s public companies will hold annual shareholders meetings to elect directors and to vote on many important corporate governance issues. The start of the annual “proxy season” is an appropriate time to consider the annual process by which companies communicate with their shareholders and get their input on a variety of issues. Whether it’s voting on directors, executive compensation matters, or other significant matters, the annual meeting is the principal opportunity for shareholders—the true owners of public companies—to have their voices heard by the corporate managers of their investments. At these annual meetings, shareholders can express their support, or disappointment, with the direction of their companies through the exercise of their right to vote.

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Governance Issues in Spin-Off Transactions

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Thursday, February 19, 2015
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The following post comes to us from Stephen I. Glover, Partner and Co-Chair of the Mergers & Acquisitions practice at Gibson, Dunn & Crutcher LLP, and is based on a Gibson Dunn M&A Report by Mr. Glover, Elizabeth Ising, Lori Zyskowski, and Alisa Babitz. The complete publication, including footnotes, is available here.

Spin-off transactions require a focused, intensive planning effort. The deal team must make decisions about how best to allocate businesses, assets and liabilities between the parent and the subsidiary that will be spun-off. It must address complex tax issues, securities law questions and accounting matters, as well as issues related to capital structure, financing and personnel matters. In addition, it must resolve a long list of governance issues, including questions about the composition of the spin-off company board, the importance of mechanisms for dealing with conflicts of interest and the desirability of robust takeover defenses.

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Bondholders and Securities Class Actions

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Thursday, February 19, 2015
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The following post comes to us from James Park, Professor of Law at the UCLA School of Law. Recent work from the Program on Corporate Governance about securities litigation includes: Rethinking Basic by Lucian Bebchuk and Allen Ferrell (discussed on the Forum here) and Negative-Expected-Value Suits by Lucian Bebchuk and Alon Klement.

Prior studies of corporate and securities law litigation have focused almost entirely on cases filed by shareholder plaintiffs. Bondholders are thought to play little role in holding corporations accountable for poor governance that leads to fraud. My article, Bondholders and Securities Class Actions, challenges that conventional view in light of new evidence that bond investors are increasingly recovering losses through securities class actions.

Drawing upon a data set of 1660 securities class actions filed from 1996 through 2005, I find that bondholder involvement in securities class actions is increasing. Bondholder recoveries were rare for the first five years covered by the data set, averaging about 3% of settlements from 1996 through 2000. The rate of bondholder recoveries increased to an average of 8% of settlements from 2001 through 2005. Bondholder recoveries have not only become more frequent, they are disproportionately represented in the largest settlements of securities class actions. For the period covered by the data set, bondholders recovered in 4 of the 5 largest settlements and 19 of the 30 largest settlements.

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What’s New in 2015: Cybersecurity, Financial Reporting and Disclosure Challenges

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, February 18, 2015
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The following publication comes to us from Weil, Gotshal & Manges LLP and is based on a Weil alert; the complete publication, including footnotes, is available here.

As calendar-year reporting companies close the books on fiscal 2014, begin to tackle their annual reports on Form 10-K and think ahead to reporting for the first quarter of 2015, a number of issues warrant particularly close board and management attention. In highlighting these key issues, we include guidance gleaned from the late Fall 2014 programs during which members of the staff of the Securities and Exchange Commission (SEC) and other regulators delivered important messages for companies and their outside auditors to consider. Throughout this post, we offer practical suggestions on “what to do now.”

While there are no major changes in the financial reporting and disclosure rules and standards applicable to the 2014 Form 10-K, companies can expect heightened scrutiny from regulators, and heightened professional skepticism from outside auditors, regarding compliance with existing rules and standards. Companies can also expect shareholders to have heightened expectations of transparency fostered by notable 2014 events such as major corporate cyber-attacks. Looking forward into 2015, companies will need to prepare for a number of significant changes, including a new auditing standard for related party transactions, a new revenue recognition standard and, for the many companies that have deferred its adoption, a new framework for evaluating internal control over financial reporting (ICFR). The role of the audit committee in helping the company meet these challenges is undiminished—and perhaps, in regulators’ eyes, more important than ever.

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Why Do Dual-Class Firms Have Staggered Boards?

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, February 18, 2015
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The following post comes to us from Mira Ganor, professor at the University of Texas School of Law. Recent work from the Program on Corporate Governance about staggered boards includes: How Do Staggered Boards Affect Shareholder Value? Evidence from a Natural Experiment (discussed on the Forum here).

The paper, Why Do Dual-Class Firms Have Staggered Boards?, which was recently made publicly available on SSRN, identifies a relatively high incidence of the combination of two of the strongest anti-takeover mechanisms: a dual-class capital structure with a staggered board. On its face this combination seems superfluous and redundant. If we already have a dual-class capital structure, why do we need a staggered board?

Even more puzzling are the results of the empirical studies of the combined use of staggered boards and dual class capital structures that find a negative correlation between staggered boards and firm value (as measured by Tobin’s Q) similar to the correlation found in firms with single class capital structures. This statistically significant and economically meaningful correlation persists even when controlling for special cases such as founder firms and family firms. Similarly, there are no significant changes in the results when controlling for effective dual class structures, i.e., dual class structures that grant de jure control and not merely the likelihood of de facto control.

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Key Considerations for Board and Audit Committee Members

Posted by Mary Ann Cloyd, PricewaterhouseCoopers LLP, on
Tuesday, February 17, 2015
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Mary Ann Cloyd is leader of the Center for Board Governance at PricewaterhouseCoopers LLP. This post is based on a PwC’s 2014-2015 Key considerations for board and audit committee members report.

The changing business landscape, technological advances, and significant risks such as cybersecurity continue to present opportunities and challenges for companies today. Directors will want to take a fresh and critical look at their boardroom agenda to ensure it is meeting today’s needs.

PwC’s 2014-2015 edition of Key considerations for board and audit committee members, an annual publication from PwC’s Center for Board Governance, can help enhance the quality of board and management discussions in the coming year.

Here are some highlights:

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Limited Commitment and the Financial Value of Corporate Law

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Tuesday, February 17, 2015
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The following post comes to us from Martijn Cremers, Professor of Finance at the University of Notre Dame, and Simone Sepe of the College of Law at the University of Arizona. 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.

For at least 40 years, a large body of literature has debated the effects of state competition for corporate charters and the value of state corporate laws. The common assumption of these studies is that interstate competition affects the way state corporate laws respond to managerial moral hazard, i.e., the agency problem arising between shareholders and managers out of the separation of ownership from control (Jensen and Meckling, 1976). Nevertheless, scholars have been sharply divided about the importance of interstate competition, and particularly whether interstate competition fosters a “race to the top” that maximizes firm value (Winter, 1977; Easterbrook and Fischel, 1991; Romano, 1985, 1993) or a “race to the bottom” that pushes states to cater to managers at the expense of shareholders (Cary, 1974; Bebchuk, 1992; Bebchuk and Ferrell, 1999, 2001).

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