Monthly Archives: July 2016

Weekly Roundup: July 8–July 14, 2016

Posted by HLS Forum on Corporate Governance and Financial Regulation, on

Friday, July 15, 2016

This roundup contains a collection of the posts published on the Forum during the week of July 8–July 14, 2016.

Deposit Insurance: Savior or Subsidy?

Posted by Charles Calomiris, Columbia Business School, on Friday, July 8, 2016

Tags: Adverse selection, Bank debt, Banks, Capital requirements, Deposit insurance, FDIC, Financial institutions,Financial regulation, Insurance regulation, Liquidity, Moral hazard, Mortgage lending, Public interest, Risk-taking,Systemic risk

Shareholder Proposal Developments During the 2016 Proxy Season

Posted by Elizabeth Ising, Gibson, Dunn & Crutcher LLP, on Friday, July 8, 2016

Tags: Boards of Directors, Charter & bylaws, ESG, Institutional Investors, Institutional voting, Pension funds, Proxy access, Proxy materials, Proxy season, Shareholder activism, Shareholder proposals, Shareholder rights, Shareholder voting

Key Takeaways from the Fed’s 2016 Dodd-Frank Stress Tests

Posted by Dan Ryan, PricewaterhouseCoopers LLP, on Saturday, July 9, 2016

Tags: Banks, Capital requirements, Debt-equity ratio, DFAST, Dividends, Dodd-Frank Act, Federal Reserve, Financial crisis, Financial institutions, Financial regulation, G-SIB, Leverage, Liquidity, Shareholder value, SIFIs, Stress tests,Systemic risk

The New York Banking Regulator’s New AML and Sanctions Rule

Posted by Brad Karp, Paul, Weiss, Rifkind, Wharton & Garrison LLP, on Sunday, July 10, 2016

Tags: Bank boards, Banks, Board monitoring, Boards of Directors, BSA/AML, Compliance & ethics, Disclosure, Financial institutions, Financial regulation, International governance, Money laundering, New York, Oversight, Reporting regulation,Risk management, State law

Women on Boards in Finance and STEM Industries

Posted by Renee Adams, University of New South Wales and Tom Kirchmaier, London School of Economics, on Monday, July 11, 2016

Tags: Board composition, Board independence, Board leadership, Board performance, Boards of Directors, Diversity,Management

A Brexit Antitrust Primer

Posted by Paul McGeown, Wilson Sonsini Goodrich & Rosati, on Monday, July 11, 2016

Tags: Antitrust, Brexit, EU, Europe, Forum selection, International governance, Mergers & acquisitions, Securities enforcement, Securities regulation, UK

The Ever-Increasing Importance of the Shareholder Vote

Posted by Jason M. Halper, Orrick, Herrington & Sutcliffe LLP, on Monday, July 11, 2016

Tags: Boards of Directors, Business judgment rule, Delaware cases, Delaware law, Disclosure, Fairness review, Fiduciary duties, Financial advisers, Merger litigation, Mergers & acquisitions, Shareholder suits, Shareholder voting, Tender offer

Scoundrels in the C-Suite

Posted by David Larcker, Stanford Graduate School of Business, on Tuesday, July 12, 2016

Tags: Boards of Directors, Compliance & ethics, Conflicts of interest, Corporate culture, Executive performance,Management, Managerial style, Misconduct, Oversight, Public perception, Stock performance, Termination

Auditor Independence and PCAOB’s Investor-Protection

Posted by Steven B. Harris, Public Company Accounting Oversight Board, on Tuesday, July 12, 2016

Tags: Accountability, Accounting, Accounting standards, Audits, Boards of Directors, Compliance & ethics, Diversity, ESG,External auditors, Financial reporting, Investor protection, Oversight, Securities regulation, SOX, Sustainability,Transparency

The Law and Brexit

Posted by Thomas J. Reid, Davis Polk & Wardwell LLP, on Tuesday, July 12, 2016

Tags: Banks, Brexit, Broker-dealers, ESMA, EU, Europe, Financial institutions, Financial regulation, Financial technology,International governance, Investment banking, Legal systems, MiFID, UK

Earnings Warnings and CEO Welfare

Posted by Ping Wang, Pace University, on Wednesday, July 13, 2016

Tags: Bonuses, Disclosure, Earnings announcements, Earnings disclosure, Executive Compensation, Executive performance, Executive turnover, Firm performance, Management, Pay for performance, Stock options

Proxy Access Momentum in 2016

Posted by Holly J. Gregory, Sidley Austin LLP, on Wednesday, July 13, 2016

Tags: Boards of Directors, Charter & bylaws, Institutional Investors, Ownership, Proxy access, Proxy voting, Shareholder proposals, Shareholder voting

Taking the Ax to Corporate Accountability

Posted by Gary Retelny, Institutional Shareholder Services, Inc., on Wednesday, July 13, 2016

Tags: Accountability, Fiduciary duties, Financial Services Committee, Institutional Investors, Institutional monitoring,Investment advisers, Investment Advisers Act, ISS, Management, Proxy advisors, Proxy materials, Proxy voting,Shareholder voting, US House

Why Do Shareholders Condone Seemingly “Excessive” Executive Pay?

Posted by Martin C. Schmalz, University of Michigan, on Thursday, July 14, 2016

Tags: Antitrust, Engagement, Executive Compensation, Executive performance, Firm performance, Incentives,Institutional Investors, Institutional voting, Management, Mutual funds, Pay for performance, Shared ownership

HSR Violation Penalties More Than Doubled by FTC

Posted by Ronan P. Harty, Davis Polk & Wardwell LLP, on Thursday, July 14, 2016

Tags: Antitrust, Disclosure, FTC, Hart-Scott-Rodino Act, Securities enforcement, Securities regulation

Four Takeaways from Proxy Season 2016

Posted by Ann Yerger, EY Center for Board Matters, Ernst & Young LLP, on Thursday, July 14, 2016

Tags: Board composition, Board leadership, Boards of Directors, Engagement, ESG, Executive Compensation,Institutional Investors, Proxy access, Proxy disclosure, Proxy season, Say on pay, Shareholder proposals, Succession

Four Takeaways from Proxy Season 2016

Posted by Ann Yerger, EY Center for Board Matters, Ernst & Young LLP, on

Thursday, July 14, 2016

Board composition, Board leadership, Boards of Directors, Engagement, ESG, Executive Compensation, Institutional Investors, Proxy access, Proxy disclosure, Proxy season, Say on pay, Shareholder proposals, Succession
More from: Ann Yerger, EY

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.

Active—not just activist—institutional investors are reshaping the corporate governance landscape and challenging how boards think about fundamental issues such as strategy, risk, capital allocation and board composition. Large asset managers are increasingly outspoken on governance expectations and urging companies to think long term—and also making clear that they view corporate governance not as a compliance exercise but as an ownership responsibility tied to investment value and risk mitigation.

HSR Violation Penalties More Than Doubled by FTC

Posted by Ronan P. Harty, Davis Polk & Wardwell LLP, on

Thursday, July 14, 2016

Antitrust, Disclosure, FTC, Hart-Scott-Rodino Act, Securities enforcement, Securities regulation
More from: Arthur Burke, Arthur Golden, Jesse Solomon, Joel Cohen, Jon Leibowitz, Ronan Harty, Davis Polk

Ronan P. Harty is a partner at Davis Polk & Wardwell LLP. This post is based on a Davis Polk publication by Mr. Harty, Arthur J. Burke, Joel M. Cohen, Arthur F. Golden, Jon Leibowitz, and Jesse Solomon.

On June 29, 2016, the Federal Trade Commission (“FTC”) announced an increase in the maximum civil penalties it may impose for violations of the Hart-Scott-Rodino Act (“HSR Act”) and various other rules and orders governed by the FTC. The maximum civil penalty for HSR violations has increased from a daily fine of $16,000 per day, to a much larger fine of $40,000 per day. While these higher maximum civil fines will apply to any penalties assessed after August 1, 2016, they will also apply to violations that predate the effective date.

This recent announcement and significant penalty increase stems from the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015 (“IAAI Act”), which requires federal agencies to adjust civil penalties for violations of any acts that those agencies are tasked to enforce. The practical effect of the IAAI Act is that the agencies must adjust the statutory civil penalties they impose to account for inflation using a prescribed “catch-up adjustment” formula.

Why Do Shareholders Condone Seemingly “Excessive” Executive Pay?

Posted by Martin C. Schmalz, University of Michigan, on

Thursday, July 14, 2016

Antitrust, Common ownership, Engagement, Executive Compensation, Executive performance, Firm performance, Incentives, Institutional Investors, Institutional voting, Management, Mutual funds, Pay for performance
More from: Florian Ederer, Martin Schmalz, Miguel Anton, Mireia Gine

Martin C. Schmalz is Assistant Professor of Finance at the University of Michigan Ross School of Business. This post is based on a recent paper by Professor Schmalz; Miguel Anton, Assistant Professor of Finance at the IESE Business School; Florian Ederer, Assistant Professor of Economics at the Yale University School of Management; and Mireia Gine, Assistant Professor of Financial Management at the IESE Business School. Related research from the Program on Corporate Governance includes the book Pay without Performance: The Unfulfilled Promise of Executive Compensation by Lucian Bebchuk and Jesse Fried.

Seemingly “excessive” top management compensation has been the subject of a fiery public debate for a long time. Especially disturbing to many is top management compensation that is only loosely related to the performance of the firms they run. Indeed, the topic featured prominently in the presidential campaigns of all major candidates.

In the academic literature, the discussion focuses on how pay structure relates to characteristics of corporate boards and compensation committees. In the real world, the debate has moved one level deeper: who are the shareholders that approve the compensation packages brought up for vote? In particular, how do the most powerful shareholders vote, and why?

Taking the Ax to Corporate Accountability

Posted by Gary Retelny, Institutional Shareholder Services, Inc., on

Wednesday, July 13, 2016

Accountability, Fiduciary duties, Financial Services Committee, Institutional Investors, Institutional monitoring, Investment advisers, Investment Advisers Act, ISS, Management, Proxy advisors, Proxy Advisory Reform Act, Proxy materials, Proxy voting, Shareholder voting, US House
More from: Gary Retelny, Institutional Shareholder Services Inc.

Gary Retelny is President and CEO of Institutional Shareholder Services, Inc.

In approving H.R. 5311, the so-called “Corporate Governance Reform and Transparency Act of 2016,” last month, members of the House Financial Services Committee delivered a blow to institutional investors, and, by extension, those on Main Street who invest their retirement hopes, college savings, pension dollars, and other hard-earned money in public companies. In a largely party line vote, committee members took the first step toward stifling the work of proxy advisory firms like mine, Institutional Shareholder Services (ISS), that help institutional investors monitor and vote at the companies they invest in, and, by doing so, hold CEOs and corporate directors accountable. If the lobbyists and powerful corporations behind H.R. 5311 get their way, we should all be deeply concerned that the significant progress made in corporate accountability over the past 30 years will be rolled back.

Proxy Access Momentum in 2016

Posted by Holly J. Gregory, Sidley Austin LLP, on

Wednesday, July 13, 2016

Boards of Directors, Charter & bylaws, Institutional Investors, Ownership, Proxy access, Proxy voting, Shareholder proposals, Shareholder voting
More from: Claire Holland, Holly Gregory, John Kelsh, Rebecca Grapsas, Thomas Kim, Sidley Austin

Holly J. Gregory is a partner and co-global coordinator of the Corporate Governance and Executive Compensation group at Sidley Austin LLP. This post relates to a Sidley Austin report by Ms. Gregory, John P. Kelsh, Thomas J. Kim, Rebecca Grapsas, and Claire H. Holland. Related research from the Program on Corporate Governance includes Lucian Bebchuk’s The Case for Shareholder Access to the Ballot and The Myth of the Shareholder Franchise (discussed on the Forum here), and Private Ordering and the Proxy Access Debate by Lucian Bebchuk and Scott Hirst (discussed on the Forum here).

Through the collective efforts of large institutional investors, including public and private pension funds, and other shareholder proponents, shareholders are increasingly gaining the power to nominate a portion of the board without undertaking the expense of a proxy solicitation. By obtaining proxy access (the ability to include shareholder nominees in the company’s own proxy materials), shareholders will have yet another tool to influence board decisions. Approximately 40% of companies in the S&P 500 have now adopted proxy access. We expect that proxy access will become a majority practice among S&P 500 companies within the next year.

Earnings Warnings and CEO Welfare

Posted by Ping Wang, Pace University, on

Wednesday, July 13, 2016

Bonuses, Disclosure, Earnings announcements, Earnings disclosure, Executive Compensation, Executive performance, Executive turnover, Firm performance, Management, Pay for performance, Stock options
More from: Linna Shi, Masako Darrough, Ping Wang

Ping Wang is Assistant Professor of Accounting at Pace University Lubin School of Business. This post is based on a recent article by Professor Wang; Masako N. Darrough, Professor of Accountancy at Baruch College/CUNY Zicklin School of Business; and Linna Shi, Assistant Professor of Accounting at SUNY Binghamton. Related research from the Program on Corporate Governance includes Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here).

When faced with an impending negative earnings surprise, CEOs have to decide whether or not to voluntarily issue earnings warnings. A warning (defined as negative earnings guidance) might be issued when a firm expects that its actual earnings will fall short of existing market expectations. Such a warning is typically issued near or after the end of a fiscal quarter, but before quarterly or annual earnings are announced. The extant literature on U.S. firms documents a number of reactions to the issuance of an earnings warning, including: an adjustment by the market of its expectations, typically through a reduction in share prices; a decrease in litigation costs; less information asymmetry among investors; increased analyst following; and increased chances of meeting or beating analysts’ forecasts. Given that these firms tend to be performing poorly (or at least below market expectations), the issuance of warnings appears to be an integral part of the timely disclosure of bad news.

The Law and Brexit

Posted by Thomas J. Reid, Davis Polk & Wardwell LLP, on

Tuesday, July 12, 2016

Banks, Brexit, Broker-dealers, ESMA, EU, Europe, Financial institutions, Financial regulation, Financial technology, International governance, Investment banking, Legal systems, MiFID, UK
More from: Thomas Reid, Davis Polk

Thomas J. Reid is Managing Partner of Davis Polk & Wardwell LLP. This post is based on a Davis Polk memorandum. Additional posts on the legal and financial impact of Brexit are available here.

Third Country Passport Under MiFIR—
Panacea for Post Passport Pain?

A financial institution established in the UK can provide banking, fund management, payment and investment services throughout the rest of the EU using “passports” available under various EU directives. Since the outcome of the Brexit referendum was announced, the continuing availability of these financial services passports has emerged as the primary concern of larger financial institutions.

Auditor Independence and PCAOB’s Investor-Protection

Posted by Steven B. Harris, Public Company Accounting Oversight Board, on

Tuesday, July 12, 2016

Accountability, Accounting, Accounting standards, Audits, Boards of Directors, Compliance & ethics, Diversity, ESG, External auditors, Financial reporting, Investor protection, Oversight, Securities regulation, SOX, Sustainability, Transparency
More from: Steven Harris, PCAOB

Steven B. Harris is a Board Member of the Public Company Accounting Oversight Board. This post is based on Mr. Harris’ recent address at the International Corporate Governance Network (ICGN) Annual Conference.

I want to thank the International Corporate Governance Network (“ICGN”) for inviting me to speak today [June 28, 2016] before this impressive international gathering, which represents some 47 countries with approximately $26 trillion under management. I am grateful to you and your many members for, among other things, commenting on our rule making projects and serving on the Public Company Accounting Oversight Board’s (“PCAOB”) two advisory groups. I also want to thank CalPERS and CalSTRS for sponsoring this conference.

At the outset, I must state that the views I express are my own and do not necessarily reflect the views of the Board, any other Board member, or the staff of the PCAOB.

I have been asked to address the importance of the role of the auditor to the capital markets; the role of the PCAOB in investor protection; and to highlight a few issues that the Board is considering. Your input on these issues is extremely important to the Board.

Scoundrels in the C-Suite

Posted by David Larcker, Stanford Graduate School of Business, on

Tuesday, July 12, 2016

Boards of Directors, Compliance & ethics, Conflicts of interest, Corporate culture, Executive performance, Management, Managerial style, Misconduct, Oversight, Public perception, Stock performance, Termination
More from: Brian Tayan, David Larcker

David Larcker is Professor of Accounting at Stanford Graduate School of Business. This post is based on a paper authored by Professor Larcker and Brian Tayan, Researcher with the Corporate Governance Research Initiative at Stanford Graduate School of Business.

In our paper, Scoundrels in the C-Suite: How Should the Board Respond When a CEO’s Bad Behavior Makes the News?, which was recently made publicly available on SSRN, we examine the actions that corporations take in response to CEO misconduct that is questionable but not strictly illegal. The full text of this paper follows.

The board of directors has a duty to monitor the corporation on behalf of shareholders. This includes the obligation to investigate credible allegations that management has engaged in activity that is not in the interest of the company or its shareholders. If verified, the board should (and normally will) take corrective action, including termination, required leave of absence, reduction in pay, and changes to policies or procedures for executive conduct.

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Monthly Archives: July 2016

Weekly Roundup: July 8–July 14, 2016

Deposit Insurance: Savior or Subsidy?

Shareholder Proposal Developments During the 2016 Proxy Season

Key Takeaways from the Fed’s 2016 Dodd-Frank Stress Tests

The New York Banking Regulator’s New AML and Sanctions Rule

Women on Boards in Finance and STEM Industries

A Brexit Antitrust Primer

The Ever-Increasing Importance of the Shareholder Vote

Scoundrels in the C-Suite

Auditor Independence and PCAOB’s Investor-Protection

The Law and Brexit

Earnings Warnings and CEO Welfare

Proxy Access Momentum in 2016

Taking the Ax to Corporate Accountability

Why Do Shareholders Condone Seemingly “Excessive” Executive Pay?

HSR Violation Penalties More Than Doubled by FTC

Four Takeaways from Proxy Season 2016

Four Takeaways from Proxy Season 2016

HSR Violation Penalties More Than Doubled by FTC

Why Do Shareholders Condone Seemingly “Excessive” Executive Pay?

Taking the Ax to Corporate Accountability

Proxy Access Momentum in 2016

Earnings Warnings and CEO Welfare

The Law and Brexit

Third Country Passport Under MiFIR—
Panacea for Post Passport Pain?

Auditor Independence and PCAOB’s Investor-Protection

Scoundrels in the C-Suite

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HLS Faculty & Senior Fellows

Monthly Archives: July 2016

Third Country Passport Under MiFIR— Panacea for Post Passport Pain?

Subscribe or Follow

Program on Corporate Governance Advisory Board

HLS Faculty & Senior Fellows

Third Country Passport Under MiFIR—
Panacea for Post Passport Pain?