Monthly Archives: February 2016

Trust Busting: The Effect of Fraud on Investor Behavior

Umit Gurun is Associate Professor of Accounting at the University of Texas at Dallas. This post is based on an article authored by Professor Gurun; Noah Stoffman, Associate Professor of Finance at Indiana University, Bloomington, and Scott Yonker, Assistant Professor of Finance at Cornell University.

When the massive Ponzi scheme orchestrated by Bernie Madoff collapsed in December 2008, its effects were immediately felt by a large number of charities, universities, wealthy individuals who altogether disclosed investments of more than $20 billion with Bernard L. Madoff Investment Securities LLC.

In our paper, Trust Busting: The Effect of Fraud on Investor Behavior, which was recently made publicly available on SSRN, we argue that this fraud had effects far beyond the direct investments that were lost by thousands of victims. Public trust in the financial system was affected, especially among people who lived close to Madoff victims. This “shock” to trust could have arisen from a heightened awareness of the fraud either through social connections to victims, or increased coverage by local media in areas with many victims. Indeed, across states, the amount of searching on Google for the term Madoff is highly correlated with the concentration of victims in that state. Moreover, Gallup survey data indicate that people who lived closer to Madoff victims reported larger declines in confidence in the criminal justice system than did others.

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Sodali Institutional Investor Survey 2016

Kiran Vasantham is Director of Investment Engagement at Sodali. This post is based on a Sodali publication by Mr. Vasantham and Giulio Pediconi. The complete publication, including survey results and graphics, is available here.

Sodali conducted this inaugural global institutional investor survey to identify the key drivers and trends that companies should be aware of as we approach a significant engagement phase in relation to the 2016 Annual General Meeting season. In our survey we asked investors: what general governance themes are driving engagement; what factors make a compelling case for engagement; and what executive remuneration corporate disclosures companies should focus on.

The survey provides valuable insights outlining material drivers for investor engagement and will be a helpful tool for companies to determine the right approach during upcoming engagement opportunities. The outcomes from this survey should assist corporates in delivering the right message, collect valuable feedback, and consequently find common ground in challenging situations.

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Political Activism and Firm Innovation

Syed Walid Reza is Assistant Professor of Finance at SUNY at Binghamton. This post is based on an article authored by Professor Reza; Alexei Ovtchinnikov, Associate Professor of Finance at HEC Paris; and Yanhui Wu, Lecturer at Queensland University of Technology. Related research from the Program on Corporate Governance includes Shining Light on Corporate Political Spending and Corporate Political Speech: Who Decides?, both by Lucian Bebchuk and Robert Jackson (discussed on the Forum here and here).

Although the relation between political activism and firm value appears well established, our understanding of the exact mechanisms through which political activism creates value and affects real economic outcomes is far from complete. In the paper, Political Activism and Firm Innovation, publicly available on SSRN, we contribute to this literature by analyzing the effect of political activism on firm investment decisions, specifically investment in innovation.

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Changes to SEC Rules Governing Mutual Fund Transfer Agents

Bryan Chegwidden is partner and co-leader of the Investment Management Group and John M. Loder is partner and co-head of the Investment Management practice group at Ropes & Gray LLP. This post is based on a Ropes & Gray alert.

On December 22, 2015, the SEC published an Advance Notice of Proposed Rulemaking, Concept Release, and Request for Comment on Transfer Agent Regulations (the “Release”) seeking public comment regarding the SEC’s transfer agent rules. [1] The SEC notes that the “first transfer agent rules were adopted in 1977 and remain essentially unchanged [while] transfer agents now operate in a market structure that bears little resemblance to the structure in 1977.”

The Release includes an Advance Notice of Proposed Rulemaking (the “Advance Notice”) covering specific areas, including transfer agent registration and reporting requirements and transfer agent safeguarding of funds and securities, along with requests for comment. The Release also contains a Concept Release and Request for Comment (the “Concept Release”) that addresses areas of specific SEC interest, including transfer agents to mutual funds (“Mutual Fund Transfer Agents”), along with requests for comment. The Advance Notice and the portion of the Concept Release applicable to Mutual Fund Transfer Agents are summarized below.

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The “New Insiders”: Rethinking Independent Directors’ Tenure

Yaron Nili is a fellow at the Harvard Law School Program on Corporate Governance. This post is based on Mr. Nili’s recent article, The “New Insiders”: Rethinking Independent Directors’ Tenure, forthcoming in the Hastings Law Journal.

Director independence has become a key element of modern corporate governance in the United States. Regulators, scholars, companies and shareholders have all placed a strong emphasis on director independence as a means to ensure that investors’ interests in their companies are well-served. Surprisingly, however, their treatment of director independence has generally failed to consider the impact of director tenure on the independence of boards. Indeed, although legislation, listing rules and state law mandate director independence, none of these rules take into account director tenure.

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Maintaining Director Confidentiality

Steven B. Stokdyk and Joel H. Trotter are global Co-Chairs of the Public Company Representation Practice Group at Latham & Watkins LLP. This post is based on an article by Mr. Stokdyk, Mr. Trotter, and David Zaheer that was originally published by NACD Directorship magazine.

How confidential are your boardroom discussions? Trends that include the appointment of directors affiliated with investment funds, advances in communications technology, and increases in third-party information requests increase the potential for a leak. But companies can take steps to reduce the likelihood of boardroom leaks and limit the damages resulting from them.

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Three Things Nominating Committees Need to Know

Ruby Sharma is a principal and Ann Yerger is an executive director at the EY Center for Board Matters at Ernst & Young LLP. The following post is based on a report from the EY Center for Board Matters, available here.

Nominating committees are facing heightened scrutiny from investors and other governance specialists who are intensifying their focus on board composition and director qualifications. This is driven by several developments, such as the push for greater diversity in the boardroom (including recent comments by U.S. Securities and Exchange Commission Chair White indicating that she’s requested a review of existing company disclosures on board diversity), [1] increased investor and company interest in board assessments, the growing influence of hedge fund activists who may question board performance and the emergence of, according to many governance specialists, proxy access [2] as a new leading practice.

In this post, we offer three tips for nominating committees facing this changing environment, informed by the EY Center for Board Matters’ review of the US corporate governance landscape, ongoing conversations with investors and the broader governance community, and use of our proprietary corporate governance database. [3]

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2016 CCAR Instructions and Supervisory Scenarios

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.

The Fed issued its Comprehensive Capital Analysis and Review (CCAR) instructions and accompanying supervisory scenarios on January 28th. These documents apply to capital plans due in April for the CCAR 2016 cycle. The following are our early takeaways:

Integration of CCAR assessments into year-round supervision begins. The CCAR 2016 instructions make clear that the Fed will be looking for integrated, business-as-usual capital planning processes that meet or exceed supervisory expectations. As a result, we expect supervisory teams’ year-round reviews of risk management, internal controls, audit, and governance (and any areas where weaknesses have been identified previously) to play a more significant role in informing the overall qualitative CCAR assessment this year. This ongoing interaction enables the Fed to form a view of capabilities ahead of the formal submission and provide strong and early feedback where practices fall short of expectations. The approach is also consistent with the Fed’s effort to bring more transparency to its qualitative assessment of capital plans and to reduce surprises in final qualitative objection decisions.

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2015 Annual Corporate Governance Review

Rajeev Kumar is a senior managing director of research at Georgeson Inc. This post is based on the executive summary of a Georgeson report; the full report is available here.

The stage for the 2015 proxy season was set early by the actions of the New York City Comptroller’s Office in sponsoring 75 shareholder proposals, with proxy access playing out as the dominant governance issue. The total number of shareholder proposals, as a result, reversed its decline and registered its highest total in the past five years. Support for say-on-pay proposals remained high, support for director elections continued to increase and the issues of board composition and succession planning remained in the spotlight. There were continued calls for engagement between issuers and shareholders, emphasizing increased participation by directors and a focus on long-term value creation and related issues. Proxy fight activism continued to raise interesting issues and discussions about how best to deal with activists.

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Weekly Roundup: February 5–February 11


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This roundup contains a collection of the posts published on the Forum during the week of February 5, 2016 to February 11, 2016.











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