Yearly Archives: 2016

Board Governance: Higher Expectations, but Better Practices?

Posted by Dan Ryan, PricewaterhouseCoopers LLP, on

Wednesday, January 13, 2016

Dan Ryan is Leader of the Financial Services Advisory Practice at PricewaterhouseCoopers LLP. This post is based on a PwC publication by Mr. Ryan, Jeff Lavine, Adam Gilbert, and Armen Meyer. The complete publication, including appendix, is available here.

The board’s role in risk governance continues to attract the attention of regulators who demand that the appropriate risk tone be set at the top of financial institutions. While the largest US banks have made significant progress toward meeting these expectations, many institutions still have a lot of work to do.

Our observations of the policies and practices of the largest US banks indicate that boards have undergone structural and functional transformation in recent years. We are finding that this transformation has been fueled not only by banks’ need to satisfy regulators, but also by their own realization of the benefits of stronger risk governance. We believe the post-crisis regulatory requirements and heightened expectations for risk governance, when fully implemented, will lead to improvements in the board’s understanding of risk taking activities and position the board to more effectively challenge management’s actions when necessary.

Private Equity Portfolio Company Fees

Posted by Ludovic Phalippou, Saïd Business School, University of Oxford, on

Wednesday, January 13, 2016

Agency costs, Compensation disclosure, Conflicts of interest, Disclosure, Fund managers, Investment advisers, Investor protection, Leveraged acquisitions, Private equity, SEC, Securities regulation, Taxation, Tunneling
More from: Christian Rauch, Ludovic Phalippou, Marc Umber

Ludovic Phalippou is an Associate Professor of Finance at Saïd Business School, University of Oxford. This post is based on an article authored by Professor Phalippou; Christian Rauch, Barclays Career Development Fellow in Entrepreneurial Finance at Saïd Business School, University of Oxford; and Marc Umber, Assistant Professor of Corporate Finance at Frankfurt School of Finance & Management.

When private equity firms sponsor a takeover, they may charge fees to the target company while some of the firm’s partners sit on the company’s board of directors. In the wake of the global financial crisis, such potential for conflicts of interest became a public policy focus. On July 21st 2015, thirteen state and city treasurers wrote to the SEC to ask for private equity firms to reveal all of the fees that they charge investors. The SEC announced on October 7^th 2015, that it “will continue taking action against advisers that do not adequately disclose their fees and expenses” following a settlement by Blackstone for $39 million over accelerated monitoring fees.

Bebchuk Leads SSRN’s 2015 Citation Rankings

Posted by Kobi Kastiel, Co-Editor, HLS Forum on Corporate Governance and Financial Regulation, on

Tuesday, January 12, 2016

Lucian Bebchuk, Program on Corporate Governance, Rankings, SSRN
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Statistics released publicly by the Social Science Research Network (SSRN) indicate that, as was the case at the end of each of the eight preceding years, Professor Lucian Bebchuk led SSRN citation rankings for law professors at the end of 2015. As of the end of December 2015, Bebchuk ranked first among all law school professors in all fields in terms of the total number of citations to his work (as well as second in the total number of downloads of his work on SSRN).

Professor Bebchuk’s papers (available on his SSRN page here) have attracted a total of 4,373 citations. His top ten papers in terms of citations are as follows:

What Matters in Corporate Governance? (with Alma Cohen and Allen Ferrell) (442 citations)
Pay Without Performance: The Unfulfilled Promise of Executive Compensation (with Jesse Fried) (310 citations)
Executive Compensation as an Agency Problem (with Jesse Fried) (283 citations)
Managerial Power and Rent Extraction in the Design of Executive Compensation (with Jesse Fried and David Walker) (226 citations)
A Theory of Path Dependence in Corporate Ownership and Governance (with Mark Roe) (188 citations)
Stock Pyramids, Cross-Ownership, and Dual Class Equity: The Creation and Agency Costs of Separating Control from Cash Flow Rights (with Reinier Kraakman and George Triantis) (178 citations)
A Rent-Protection Theory of Corporate Ownership and Control (158 citations)
The Costs of Entrenched Boards (with Alma Cohen) (152 citations)
The Case for Increasing Shareholder Power (132 citations)
The Powerful Antitakeover Force of Staggered Boards: Theory, Evidence, and Policy (with John Coates, IV and Guhan Subramanian) (98 citations)

SSRN is the leading electronic service for social science research, and its electronic library contains (as of December 2015) 539,398 full-text documents by 297,574 authors. SSRN’s rankings in terms of citations are available here and SSRN’s rankings in terms of downloads are available here.

Economic Downsides and Antitrust Liability Risks from Horizontal Shareholding

Posted by Einer Elhauge, Harvard Law School, on

Tuesday, January 12, 2016

Antitrust, Banks, Blockholders, Controlling shareholders, Exchange-traded funds, Executive Compensation, Financial institutions, Firm performance, Incentives, Institutional Investors, Management, Ownership, Peer groups, Securities regulation, Shareholder value
More from: Einer Elhauge

Einer Elhauge is the Petrie Professor of Law at Harvard Law School. This post is based on Professor Elhauge’s recent article, forthcoming in the Harvard Law Review.

In recent decades, institutional investors have grown and become more active in influencing corporate management. While this development has often been viewed as salutary from a corporate governance perspective, the implications for product market competition have become deeply troubling. As I show in a new article called Horizontal Shareholding (forthcoming in the Harvard Law Review), this growth in institutional investors means that a small group of institutions has acquired large shareholdings in horizontal competitors throughout our economy, causing them to compete less vigorously with each other.

Delaware Rules on “Without Cause” Director Removal

Posted by William Savitt, Wachtell, Lipton, Rosen & Katz, on

Monday, January 11, 2016

Boards of Directors, Charter & bylaws, Classified boards, Delaware cases, Delaware law, DGCL, DGCL s.141, Ousting directors, Proxy fights, Securities litigation, Shareholder activism, Shareholder suits, Shareholder voting, Staggered boards
More from: William Savitt, Wachtell Lipton

William Savitt is a partner in the Litigation Department of Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton firm memorandum, and is part of the Delaware law series; links to other posts in the series are available here.

The Delaware Court of Chancery recently held that a corporation without a classified board or cumulative voting may not restrict stockholders’ ability to remove directors without cause. In re Vaalco Energy S’holder Litig., C.A. No. 11775-VCL (Dec. 21, 2015). The ruling gives rise to questions for the many companies with similar charter or bylaw provisions.

Reputation Concerns of Independent Directors

Posted by Wei Jiang, Columbia University, on

Monday, January 11, 2016

Behavioral finance, Board dynamics, Board independence, Boards of Directors, China, Incentives, International governance, Management, Market reaction, Outside directors, Public firms, Reputation
More from: Hualin Wan, Shan Zhao, Wei Jiang

Wei Jiang is Professor of Finance at Columbia University. This post is based on an article authored by Professor Jiang; Hualin Wan, Associate Professor of Accounting at Shanghai Lixin University of Commerce; and Shan Zhao, Assistant Professor of Finance at Grenoble Ecole de Management.

Across the major world markets, institutional investors, stock exchanges and regulators have pushed publically listed firms to increase the number of independent directors on their boards. By 2013, 80% of directors of the S&P 1500 firms are independent, according to RiskMetric. Such a trend reflects a common belief that independent directors are effective monitors of management since they are not formally connected to firm insiders nor do they have material business relationship with the firm. However, it is unclear what incentivizes independent directors to monitor and potentially confront management, given that they are not significant shareholders, do not receive performance-sensitive compensation, and often owe their appointment to the managers they monitor.

2015 FINRA Enforcement Actions

Posted by Jonathan N. Eisenberg, K&L Gates LLP, on

Sunday, January 10, 2016

Jonathan N. Eisenberg is partner in the Government Enforcement practice at K&L Gates LLP. This post is based on a K&L Gates publication by Mr. Eisenberg.

Over the past several years, the Financial Industry Regulatory Authority (“FINRA”), the self-regulatory organization responsible for regulating every brokerage firm and broker doing business with the U.S. public, brought between 1,300 and 1,600 disciplinary actions each year. In 2014, the most recent year for which full-year statistics are available, it ordered $134 million in fines and $32.2 million in restitution. During the same period, it barred or suspended nearly 1,200 individuals, and expelled or suspended 23 firms. It also referred over 700 fraud cases to other federal or state agencies for potential prosecution. FINRA orders also often trigger automatic “statutory disqualifications” under Section 3(a)(39) of the Securities Exchange Act and Article III, Section 4 of FINRA’s By-Laws. Absent relief, these disqualifications prohibit persons from associating with a broker-dealer or prohibit firms from acting as broker-dealers.

OCC’s Recovery Planning Proposal

Posted by Dan Ryan, PricewaterhouseCoopers LLP, on

Saturday, January 9, 2016

Bankruptcy, Banks, Failed banks, FDIC, Federal Reserve, Financial institutions, Financial regulation, Foreign banks, OCC, Recovery & resolution plans, Risk management, SIFIs, Stress tests
More from: Adam Gilbert, Armen Meyer, Dan Ryan, Mike Alix, PricewaterhouseCoopers

Dan Ryan is Leader of the Financial Services Advisory Practice at PricewaterhouseCoopers LLP. This post is based on a PwC publication by Mr. Ryan, Mike Alix, Adam Gilbert, and Armen Meyer.

On December 17^th, the Office of Comptroller of the Currency (OCC) proposed recovery planning standards for banks with assets of $50 billion or more. [1] The proposal was released exactly one year after the FDIC released guidance for covered insured depository institutions (CIDI) that significantly raised the resolution planning bar for many of these same banks. [2]

Most institutions will find that they will be able to leverage their existing risk management, business continuity planning, capital and liquidity planning, stress testing, and resolution plans in order to build their recovery plan. Many of the proposed standards’ requirements can be met by modifying existing bodies of work.

Director Removal Without Cause

Posted by Daniel E. Wolf, Kirkland & Ellis LLP, on

Friday, January 8, 2016

Board declassification, Charter & bylaws, Classified boards, Delaware cases, Delaware law, DGCL, DGCL s.141, Majority voting, Mergers & acquisitions, Ousting directors, Shareholder activism, Shareholder elections, Shareholder voting
More from: Daniel Wolf, Matthew Solum, Kirkland & Ellis

Daniel Wolf is a partner focusing on mergers and acquisitions at Kirkland & Ellis LLP. The following post is based on a Kirkland memorandum by Mr. Wolf and Matthew Solum. This post is part of the Delaware law series; links to other posts in the series are available here.

In a recent bench ruling on a summary judgment motion in a case involving Vaalco Energy, Vice Chancellor Laster held that a provision of a company’s charter or bylaws could not override the default rule under Delaware law that directors serving on a non-classified board (i.e., annually elected) may be removed with or without cause by vote of holders of a majority of the outstanding shares entitled to vote in director elections. While prior Chancery rulings, including Nycal and Rohe, reached largely similar conclusions in related circumstances, VC Laster’s decision in Vaalco clearly articulates his view that this type of charter or bylaw provision that purports to limit director removal for non-classified boards to cases of cause is simply invalid as a matter of Delaware law.