Monthly Archives: August 2016

Political Contributions and Lobbying Proposals

Yafit Cohn is an associate at Simpson Thacher & Bartlett LLP. The following post is based on a Simpson Thacher publication authored by Ms. Cohn, Karen Hsu Kelley, and Avrohom J. Kess. 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.)

Following the U.S. Supreme Court’s 2010 decision in Citizens United v. Federal Election Commission, the Securities and Exchange Commission (“SEC”) has been facing mounting pressure from certain members of Congress, interest groups and investors to require companies to disclose their political spending. Last year, for example, 44 Democratic Senators wrote a letter to SEC Chair Mary Jo White, urging the SEC to promulgate a rule requiring issuers to disclose how they use corporate resources for political activities. As part of its Disclosure Effectiveness Initiative, the SEC is currently soliciting public comment on whether to require disclosure of public policy issues, including political spending, though it has previously declined to require such disclosure, concluding that, absent a congressional mandate, “it generally is not authorized to consider the promotion of goals unrelated to the objectives of the federal securities laws when promulgating disclosure requirements.” Given comments made by Chair White during her tenure, suggesting that disclosure of political contributions does not appear to be in furtherance of the SEC’s mission, and in light of the fact that Congress recently prohibited the SEC from promulgating a rule requiring political spending disclosure for the rest of the fiscal year, it is unlikely the SEC will issue such a rule in the near future. In the absence of an SEC rule, investors seeking disclosure of issuers’ political contributions and/or lobbying payments and policies have continued to try to affect change through private ordering, submitting shareholder proposals on the issue.

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Executive Compensation: What Worked?

Steven A. Bank is Paul Hastings Professor of Business Law at UCLA School of Law. This post is based on a forthcoming article by Professor Bank; Brian Cheffins, Professor of Corporate Law at the University of Cambridge; and Harwell Wells, Associate Professor of Law at Temple University Beasley School of Law. 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.

There is a widespread consensus that something is seriously wrong with executive pay. Managerial compensation has generated controversy and criticism for at least a quarter-century, but various reforms aimed at curbing compensation have enjoyed little success. For those perplexed or frustrated that these reforms have not checked top pay, history can provide valuable lessons. American business enjoyed unparalleled success from the 1940s to the end of the 1960s, yet CEO pay at the time was comparatively modest. According to one study, in 1949 the median top executive at a large public manufacturing firm made 17 times the pay of the average worker. Most studies of CEO compensation today find that comparable multiples are now in the hundreds. In our new Article, forthcoming in the Journal of Corporation Law, we ask “what worked?” to constrain executive pay during this period, and speculate about what changed to end this regime of (relatively) moderate pay.

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Bankruptcy for Banks: A Sound Concept That Needs Fine-Tuning

Mark J. Roe is the David Berg Professor of Law at Harvard Law School, and David A. Skeel is S. Samuel Arsht Professor of Corporate Law at the University of Pennsylvania Law School. This post is based on a recent op-ed article by Professors Roe and Skeel published today in the New York Times DealBook, available here.

The House of Representatives is pushing to enact a bankruptcy act for banks.

It has passed a bankruptcy-for-banks bill, sent it to the Senate, and now embedded it in its appropriations bill, meaning that if Congress is to pass an appropriations bill this year, it may also have to enact the bankruptcy-for-banks bill.

Is that a good idea?

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CEO Pay-For-Performance

Ira Kay is a Managing Partner at Pay Governance LLC. This post is based on a Pay Governance memorandum by Mr. Kay, Lane T. Ringlee, Bentham Stradley, Brian Lane, and Blaine Martin. Related research from the Program on Corporate Governance includes Paying for Long-Term Performance (discussed on the Forum here) and the book Pay without Performance: The Unfulfilled Promise of Executive Compensation, both by Lucian Bebchuk and Jesse Fried.

Recent research [1] featured in the Wall Street Journal article, “Best Paid CEOs Run some of the Worst-Performing Companies,” [2] questions basic design premises of the public company CEO compensation model in the US. Specifically, the research [“study”] argues that delivering large equity grants—above the median of companies in the study—to CEOs is not an effective way to motivate long-term shareholder value creation (e.g., total shareholder returns). We believe this study is based upon an incorrect premise of executive motivation and an improper measurement of CEO pay.

Pay Governance, and others, have found a strong alignment between CEO pay and total shareholder returns (TSR) when pay is correctly measured using realizable or realized pay methods. This is contrary to the primary finding of the study, which is based on the accounting value of equity awards, and not the value realizable or realized after performance and vesting conditions are applied. It is well known among shareholders, their proxy advisors, directors, academics and corporate executives that stock grants [including performance shares, stock options, and RSUs] are highly motivational to executives overall.

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From Corporate Law to Corporate Governance

Ronald J. Gilson is Meyers Professor (Emeritus) of Law and Business at Stanford Law School, Marc & Eva Stern Professor of Law and Business at Columbia Law School, and a fellow of the European Corporate Governance Institute. This post is based on Professor Gilson’s recent essay, forthcoming in the Oxford Handbook of Corporate Law and Governance.

In the 1960s and 1970s, corporate law and finance scholars recognized that neither discipline was doing a very good job of explaining how corporations were really structured and performed. For legal scholars, Yale Law School professor and then Stanford Law School dean Bayless Manning confessed that corporate law has “nothing left but our great empty corporation statutes—towering skyscrapers of rusted girders, internally welded together and containing nothing but wind.” Michael Jensen and William Meckling made a similar comment with respect to finance. The theory of the firm was an “empty box” or a “black box” that provided no theory about “how the conflicting objectives of the individual participants are brought into equilibrium.” The result of Jensen and Meckling’s seminal reframing of corporate law in agency cost terms, and so into something far broader than disputes over statutory language, was that both Manning’s empty skyscrapers and Jensen and Meckling’s empty box began to be filled. In my essay for the forthcoming Oxford University Press Handbook of Corporate Law and Governance edited by Jeffery Gordon and Georg Ringe, I show through analysis of three admittedly idiosyncratic examples how the progressively more successful effort to complicate corporate law—the move from corporate law to corporate governance—came to fill the empty skyscrapers and boxes.

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Estimating the Compliance Costs of Sarbox Section 404(B)

Dhammika Dharmapala is the Julius Kreeger Professor of Law at the University of Chicago Law School. This post is based on a recent paper by Professor Dharmapala.

An extensive literature across law, accounting, economics and finance has analyzed the compliance costs of securities regulation. In the US context, the Sarbanes-Oxley (hereafter SOX) legislation enacted in 2002 has been a particular focus of attention. However, its social welfare consequences remain controversial. My new working paper on Estimating the Compliance Costs of Securities Regulation: A Bunching Analysis of Sarbanes-Oxley Section 404(b) brings both a novel dataset and a new empirical approach to bear on this important question. Many of the most significant provisions of pre-SOX—in particular, auditor attestation of internal controls under Section 404(b)—have been applied only to firms at or above a threshold of $75 million of “public float” (i.e. the market value of shares held by non-insiders); firms satisfying this threshold are referred to as “accelerated filers.”

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Optimizing Board Evaluations

Yafit Cohn is an associate and Avrohom J. Kess is partner and head of the Public Company Advisory Practice at Simpson Thacher & Bartlett LLP. This post is based on a joint Simpson Thacher-Nasdaq publication authored by Ms. Cohn and Mr. Kess.

The effectiveness of a company’s board of directors is critical for ensuring that the company has a sound and long-term business strategy that is executed within an environment of prudent risk management. Board effectiveness contributes to the sustainability of the corporation over the long term and is therefore of vital importance to stockholders and other stakeholders. A periodic board evaluation has become part of the accepted governance landscape and, if conducted properly, can be a valuable tool to increase board effectiveness. In addition, board evaluations are now required by certain stock exchange rules and governance documents of many public companies.

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CEO Personality and Firm Policies

Anastasia Zakolyukina is Assistant Professor of Accounting and Neubauer Family Faculty Fellow at University of Chicago Booth School of Business. This post is based on a recent paper authored by Professor Zakolyukina; Ian D. Gow, Assistant Professor of Business Administration at Harvard Business School; Steven N. Kaplan; Neubauer Family Distinguished Service Professor of Entrepreneurship and Finance at University of Chicago Booth School of Business; and David F. Larcker, Professor of Accounting at Stanford Graduate School of Business.

In the paper, CEO Personality and Firm Policies, which was recently made publicly available on SSRN, we use two samples of high quality personality data for chief executive officers (CEOs) and the way they speak during question-and-answer (Q&A) portion of earnings conference calls to develop a measure of CEO personality in terms of the Big Five traits: agreeableness, conscientiousness, extraversion, neuroticism, and openness to experience. These personality measures have strong out-of-sample predictive performance and are stable over time. Our measures of the Big Five personality traits are associated with financing choices, investment choices, and firm operating performance.

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Securities Class Action Filings: 2016 Midyear Assessment

John Gould is senior vice president at Cornerstone Research. This post is based on a Cornerstone Research report.

Plaintiffs filed 119 new federal securities class action cases in the first half of 2016, a 17 percent increase over the last half of 2015, according to Securities Class Action Filings—2016 Midyear Assessment, a new report released by Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse.

The total represents an increase of 17 cases from the second half of 2015, and 32 more than the first half of 2015. The 119 filings were 27 percent higher than the semiannual average of 94 filings observed between 1997 and 2015.

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The Law and Brexit III

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.

August has arrived and, with it, little additional clarity on next steps in the Brexit process. Speculation remains rife about the objectives of the UK Government in the negotiations. Will it seek access to the single market, will it pursue a clean break from the EU, or will a hybrid engagement model emerge? What has become clear in recent weeks, however, is who will be leading the negotiations. David Davis, the Secretary of State for Exiting the EU, will manage the negotiations on the UK’s behalf, while Michel Barnier, a former European Commissioner responsible for financial services, will act as the EU’s chief negotiator.

In the third The Law and Brexit post, we examine the development of the Total Loss Absorbing Capacity (“TLAC”) and Minimum Requirement for Own Funds and Eligible Liabilities (“MREL”) standards applicable to financial institutions, the UK’s proposed implementation of these standards and how Brexit might affect such implementation. We conclude that the UK’s ability to influence the final EU standards is likely to diminish as it negotiates the terms of its withdrawal from the EU. In addition, while there may be some divergence in the way in which the TLAC and MREL standards will be applied in the UK and the EU, an overarching trend towards convergence may attenuate the adverse consequences that could result from parallel regimes.

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