Monthly Archives: October 2016

SEC Commissioner Piwowar Dissenting Statement on Universal Proxy

Michael S. Piwowar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Piwowar’s statement at a recent open meeting of the SEC, available here. The views expressed in this post are those of Mr. Piwowar and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Several months ago, Chairman Scott Garrett of the House Subcommittee on Capital Markets and Government Sponsored Enterprises raised questions about how the Commission has been prioritizing its resources. [1] As he noted, the universal proxy initiative has been pushed for years by special interest groups and it would increase the likelihood of proxy fights at public companies, thereby distracting management and employees from carrying out their core mission. [2]

The ultimate losers in these fights will be the public shareholders of these companies. As today’s release itself notes, a universal proxy may empower specific groups of shareholders, who may use their increased influence to advance their own special interests at the expense of other shareholders. [3]


2016 Annual Corporate Directors Survey

Paula Loop is Leader of the Governance Insights Center at PricewaterhouseCoopers LLP. This post is based on a PwC publication by Ms. Loop, Catherine BromilowTerry Ward, and Paul DeNicola.

Overseeing a company is no small task. Disruptive technologies are changing companies’ business models, geopolitical turmoil is impacting supply chains and investment opportunities, and increased regulatory complexity is affecting innovation. Institutional investors and shareholder activists are also playing a more powerful role shaping corporate governance. Boards of directors have to keep up with all of these changes in order to be effective.

Our 2016 survey uncovered 10 key findings that have a major impact on how boards perform. Diversity in the boardroom remains a topic of debate in the governance world, and male and female directors have differing opinions about its benefits. Directors are aware of their fellow board members’ performance—but not all are impressed. More than one-third of directors think someone on the board should be replaced. And despite their increasing oversight responsibilities and the many new issues boards have to understand, most directors say their workload is manageable. Investors are also a factor in corporate governance changes. They are pushing for changes to board composition and capital allocation strategy—and are often getting their way.


Responding to a Negative Say-on-Pay Outcome

David Whissel is Vice President and Director of Corporate Governance at MacKenzie Partners, Inc. This post is based on a MacKenzie Partners publication.

In the fifth full season of the advisory vote on executive compensation (“say-on-pay”), average shareholder support for these proposals remains high—in excess of 91% so far in 2016, according to our research. However, although there have been slightly fewer “failed” votes this year, more than 10% of issuers receive a negative recommendation from at least one of the proxy advisors, and many more spend the early part of the proxy season scrambling to deal with executive compensation issues preemptively to ensure that they do not develop into a negative outcome.

For those companies that believe historical high levels of say-on-pay proposal support makes them less susceptible to shareholder opposition, consider this: More than 25% of the companies with “failed” say-on-pay votes in 2016 received support in excess of 90% the previous year, suggesting that performance issues, substantial one-time awards, and other unique circumstances can strain the patience of investors even if the underlying compensation plan is sound. As institutional investors and proxy advisory firms continue to enhance their scrutiny on executive compensation, it is important for issuers to be prepared for a potential negative outcome and to have a plan in place to respond accordingly.


Gender Differences in Executives’ Access to Information

H. Nejat Seyhun is Professor of Finance at University of Michigan Ross School of Business. This post is based on a forthcoming article authored by Professor Seyhun; A. Can Inci, Professor of Finance at Bryant University; and M.P. Narayanan, Robert Morrison Hoffer Professor of Business Administration at University of Michigan Ross School of Business.

As more women enter the upper echelons of large corporations (according to Catalyst, the proportion of CEOs in Fortune 500 firms has increased from 0.4% in 1998 to 4.6% in 2015 and the proportion of board members has increased from 9.6% to 19.9%), the natural question that arises is whether women executives have equal access to material and relevant information as their male counterparts. Clearly, establishing and comparing men’s and women’s access to relevant corporate information is difficult. We use a novel approach to explore this question. Our proxy for executives’ corporation-specific knowledge is the profitability of insider trading. To the extent executives have access to material, non-public information about their own corporation, they will be able to trade profitably.


The Impact of SEC Enforcement on Public Finance

Andrew Ceresney is Director of the Division of Enforcement, U.S. Securities and Exchange Commission. The following post is based on Mr. Ceresney’s recent keynote address at the Securities Enforcement Forum 2016; the complete text, including footnotes, is available here. The views expressed in this post are those of Mr. Ceresney and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Good afternoon and thank you for that very kind introduction. It’s a pleasure to speak with you all today [Oct. 13, 2016]. Before I start, I must give our standard disclaimer that the views I express today are my own and do not necessarily reflect the views of the Commission or its staff.

Today I am going to talk about the Commission’s enforcement efforts in the area of public finance. Public finance, and the municipal securities market in particular, is a critically important area, and one on which the Enforcement Division needs to be, and has been, focused over the last few years. Our numerous recent enforcement actions have resulted in significant changes in the public finance market, where the Commission has brought many first-of-their-kind actions and used a range of legal theories and remedies.


Global Board Culture Survey 2016

Rusty O’Kelley is a member of the CEO and Board Services Practice; and Anthony Goodman is a member of the Board Effectiveness Practice at Russell Reynolds Associates. This post is based on a Russell Reynolds publication.

During the summer of 2016, 369 corporate (supervisory) large public company directors from a dozen countries participated in Russell Reynolds Associates’ Global Board Culture Survey. The goal of the survey was to better understand the director behaviors that create a high-performing board culture and drive board effectiveness.

Directors around the world were surprisingly consistent in the top five behaviors they named as key to a strong culture and an effective board. The survey showed that the attributes that define an effective director transcend cultural and national differences.


Shareholder Wealth Consequence of Insider Pledging of Company Stock as Collateral for Personal Loans

Jason Zein is Associate Professor at the University of New South Wales (UNSW) Business School. This post is based on a recent paper by Professor Zein; Ronald Masulis, Scientia Professor of Finance at UNSW Business School, University of New South Wales; and Ying Dou. 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).

Many publicly listed firms around the world allow their executives and other major shareholders to pledge their company shareholding as collateral for a personal loan. Pledging is valuable to corporate insiders because it allows them to nominally retain their ownership in the firm, while at the same time accessing the liquidity that is tied up in their firm’s stock. These liquidity benefits of pledging allow corporate insiders to enjoy valuable private benefits such as greater consumption or diversification of their personal wealth by funding other private investment opportunities.


CEO Pay Ratio and Income Inequality: Perspectives for Compensation Committees

Ira Kay is a Managing Partner and Blaine Martin is a Consultant at Pay Governance LLC. This post is based on a Pay Governance memorandum. Related research from the Program on Corporate Governance includes The CEO Pay Slice by Lucian Bebchuk, Martijn Cremers, and Urs Peyer (discussed on the Forum here).

At a recent Compensation Committee meeting, a director remarked, “As we discuss our CEO’s target compensation for next year, we need to remember that there is an ongoing debate about income inequality.” Income inequality and executive compensation are two of the most controversial issues in modern American economic and political discourse. The forthcoming mandated disclosure of the CEO pay ratio will link these two issues directly in the boardroom.

Many critics blame the rise in inequality over the past 20 years partially or heavily on the rise in public company CEO compensation. These critics use the “300 to 1” large company CEO pay multiple compared to average US employee pay as both the primary symptom and the definition of inequality. Inequality is more precisely and typically defined in economics as the percentage of total national income earned by the top percentages of households or taxpayers (e.g., top 1% or top .1%). Using this definition, it is well‐documented that US income inequality, historically among the highest relative to other developed countries, has continued to increase significantly. CEO pay also rose over that period.


Broadening Noteholders’ Ability to Receive Redemption Premiums Following Indenture Defaults

Gregory Fernicola is a partner at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden publication by Mr. Fernicola, Michael Hong, Stacy Kanter, and Michael Zeidel.

In a decision issued on September 19, 2016, the U.S. District Court for the Southern District of New York ruled that bondholders were entitled to a “make-whole” redemption premium, as opposed to a repayment at par, following a default by the issuer under the related bond indenture. The decision raises important considerations for issuers of debt securities that contain similar provisions.

On September 19, 2016, the U.S. District Court for the Southern District of New York granted summary judgment to Wilmington Savings Fund Society, FSB, with respect to claims brought against Cash America International, Inc. in Wilmington Savings’ capacity as trustee under the indenture governing $300 million of Cash America’s outstanding notes. Wilmington Savings claimed that Cash America violated a covenant in the indenture when it disposed of 80 percent of a wholly owned subsidiary to its shareholders in the form of a dividend of the subsidiary’s stock. Wilmington Savings also claimed that the proper remedy for Cash America’s breach would be an award requiring Cash America to redeem the notes, including payment of the specified “make-whole” redemption premium under the indenture, as opposed to accelerating the maturity date and a repayment at the par value of the notes.


Problems Using Aggregate Data to Infer Individual Behavior

Clifford G. Holderness is Professor of Finance at the Carroll School of Management at Boston College. This post is based on a forthcoming article by Professor Holderness.

Many studies in finance and beyond compare firms and markets across countries. These studies have been influential, especially in the area of corporate governance. There is a rarely discussed—indeed hardly noticed—split in how researchers seek to explain differences in firms or individuals across countries. Some papers form country averages of a particular characteristic, such as the use of internal rather than external financing. These country averages are then used as the dependent variable in any empirical analysis. Other papers use the underlying firm observations as the unit of analysis. None of these papers discuss their decision to go one route or the other.


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