Yearly Archives: 2016

Pay-for-Performance Update for the S&P 1500: 2015 Pay Outcomes

Posted by Shui Yu, Willis Towers Watson, on
Thursday, July 21, 2016
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Shui Yu is a senior executive compensation analyst at Willis Towers Watson. This post is based on a Willis Towers Watson publication by Ms. Yu, Chris Kozlowski, and Steve Kline, originally published on Willis Towers Watson’s Executive Pay Matters blog and reprinted here with permission. © Willis Towers Watson 2016. 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).

Financial and stock performance throughout the S&P 1500 deteriorated in 2015 as summarized in Figure 1. (For a more detailed analysis, see Year-end 2015 pay-for-performance update for the S&P 1500: Incremental improvement for 2016?, Executive Pay Matters, April 21, 2016.) Our review of proxy statement disclosures that were filed this spring reveals the impact those results had on CEO pay, namely, for the bonus payouts and “compensation actually paid” under long-term incentive plans.

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Berkshire’s Blemishes: Lessons for Buffett’s Successors, Peers, and Policy

Posted by Lawrence A. Cunningham, George Washington University, on
Thursday, July 21, 2016
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Lawrence A. Cunningham is the Henry St. George Tucker III Research Professor of Law at George Washington University. This post is based on a recent paper by Professor Cunningham.

While people routinely laud the value of Warren Buffett’s unique governance of Berkshire Hathaway, I have tallied the costs, highlighting lessons for Buffett’s successors, Berkshire’s peers, and public policy.

The most visible—and measurable—costs of the Berkshire model appear in capital allocation, principally acquisitions and investments. Buffett relies on himself in making these decisions, without board or executive input or oversight. While most such decisions have succeeded, many spectacularly so, some bloopers have appeared. The costs of error from such self-reliance could readily be mitigated by broader distribution of decision-making power.

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Institutional Investors and Corporate Political Activism

Posted by Rui Albuquerque, Boston College, on
Thursday, July 21, 2016
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Rui Albuquerque is Associate Professor of Finance at Boston College Carroll School of Management. This post is based on a recent paper authored by Professor Albuquerque; Zicheng Lei, Lecturer in Finance and Accounting at the University of Surrey; Jörg Rocholl, President and Professor at the European School of Management and Technology; and Chendi Zhang, Associate Professor of Finance at Warwick Business School. 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).

There is increasing evidence that state public pension funds preferentially direct their investments towards local corporations, creating a bias which cannot be justified by subsequent returns. In our paper, Institutional Investors and Corporate Political Activism, we investigate the political activism of firms and how it is influenced by the presence of state public pension fund ownership. The paper shows that state-level political connections appear to be an important mechanism of political activism by corporations with state public pension fund ownership.

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Yet Another Congressional Proposed Corporate Reform: Proxy Advisory Firms in the Crosshairs

Posted by Ed Batts, Orrick, Herrington & Sutcliffe LLP, on
Wednesday, July 20, 2016
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Ed Batts is partner and co-head of the M&A and Private Equity groups at Orrick, Herrington & Sutcliffe LLP. This post is based on an Orrick publication.

Over the past six months, U.S. legislators have engaged in an unusual burst of energy to introduce three separate bills regulating various areas affecting U.S. public company corporate governance:

  • The Cybersecurity Disclosure Act of 2015 would require disclosure of whether public company boards contained a cyber-security “expert” or, if not, why not. The bill, introduced by Senators Jack Reed (D-RI) and Susan Collins (R-ME), appears stranded in the Senate’s Banking, Housing and Urban Affairs Committee.
  • The Brokaw Act would shorten the trigger grace period for filing a Schedule 13D after acquiring 5% or more of an issuer’s stock from ten to two days. It also would require disclosure of any party who “coordinated” with the filer, targeting activist “wolf packs.” This bill, sponsored by Senators Tammy Baldwin (D-WI) and Jeff Merkley (D-OR), is sitting with the same Senate committee and may become subject to political season vagaries, particularly as supporters including Senators Bernie Sanders and Elizabeth Warren. However, ironically, it may find bipartisan support as the current ten day Schedule 13D filing period is viewed as archaic by many corporate issuers. At the very least, this proposed legislation has worried activist investor firms enough to band together in an unprecedented lobbying effort.
  • Last—but certainly not least—Congressmen Sean Duffy (R-WI) and John Carney (D-DE) introduced in the House Financial Services Committee the Proxy Advisory Reform Act of 2016, which appears to have the most impetus for movement through the labyrinth of legislative crafting.

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The Delaware Courts’ Increasingly Laissez Faire Approach To Directorial Oversight

Posted by Miles D. Schreiner, Monteverde & Associates PC, on
Wednesday, July 20, 2016
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Miles D. Schreiner is an attorney at Monteverde & Associates PC. This post is largely based on a recent memo by Mr. Schreiner. This post is part of the Delaware law series; links to other posts in the series are available here.

In a wave of recent cases, judges in Delaware, the state that has pioneered the nation’s corporate laws but holds less than one-third of one percent of the U.S. population, have issued opinions that dramatically curtail the rights of millions of shareholders across the country. For decades, legal scholars have opined that Delaware’s corporate-friendly laws attract droves of corporations with no actual ties to the state to incorporate there, to the detriment of investors. Several recent opinions regarding the effect of so-called shareholder “ratification” further solidify their argument that shareholders’ rights have hit rock-bottom under the stewardship of the Delaware courts, and that the time has come for legislative intervention, including federal regulation of directors’ fiduciary obligations.

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The Management of Political Risk

Posted by Campbell R. Harvey, Duke University, on
Wednesday, July 20, 2016
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Campbell R. Harvey is Professor of Finance at the Fuqua School of Business at Duke University. This post is largely based on a recent article, forthcoming in the Journal of International Business Studies, by Professor Harvey; Erasmo Giambona, the Michael Falcone Chair in Real Estate at the Whitman School of Management at Syracuse University; and John R. Graham, Professor of Finance at the Fuqua School of Business at Duke University. The complete article, including appendix, figures, and tables, is available here.

We explore a long standing prediction in the international business literature that managers’ subjective perceptions of political risk—not just the level of risk—are important for how firms manage political risk. The importance attributed to political risk by corporate executives has increased over the last 15 years and our results show that political risk is now considered more important than commodity (input) risk. Our analysis suggests that nearly 50% of firms avoid (not simply reduce) foreign direct investment because of political risk. Using a unique survey‐based psychometric evaluation of manager risk aversion, we show that firms with risk averse executives are more likely to avoid investment in politically risky countries—a key implication of behavioral models. This relation is economically stronger when agency problems are more likely to be severe: for example, when executives are less aligned with shareholder value maximization, and when executives are younger (and therefore might put their personal career’ concerns in front of shareholders’ interests). While numerous studies have shown that political risk affects foreign direct investment using objective measures of such risk (electoral uncertainty, conflicts, etc.), our study documents that executives’ subjective perceptions of political risk are also important for political risk management.

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Hot Topics for Boards from the 2016 Proxy Season

Posted by Holly J. Gregory, Sidley Austin LLP, on
Tuesday, July 19, 2016
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Holly J. Gregory is a partner and co-global coordinator of the Corporate Governance and Executive Compensation group at Sidley Austin LLP. This post is based on an article originally featured in Practical Law.

With the 2016 proxy season winding down, it is time for boards, corporate governance and compensation committees, and their advisors to take stock of voting results and consider their implications for board and committee agendas and shareholder engagement efforts in the year ahead. This article provides an overview of key mid-season voting results on:

  • „„Shareholder proposals.
  • „„Director elections.
  • „„Management say on pay proposals.
  • „„Equity compensation plans.

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ValueAct Settlement: A Record Fine for HSR Violation

Posted by Barry A. Nigro, Jr., Fried, Frank, Harris, Shriver & Jacobson LLP, on
Tuesday, July 19, 2016
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Barry A. Nigro Jr., is a partner in the Antitrust and Competition and Corporate Practices and chair of the Antitrust Department at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank publication by Mr. Nigro, Nathaniel L. Asker, and Aleksandr B. Livshits. Related research from the Program on Corporate Governance includes The Law and Economics of Blockholder Disclosure by Lucian Bebchuk and Robert J. Jackson Jr. (discussed on the Forum here), and Pre-Disclosure Accumulations by Activist Investors: Evidence and Policy by Lucian Bebchuk, Alon Brav, Robert J. Jackson Jr., and Wei Jiang.

The Antitrust Division of the Department of Justice announced that activist investor ValueAct Capital has agreed to pay a record $11 million fine to settle allegations that it violated the notification requirements of the Hart-Scott-Rodino Act. The settlement highlights two important trends in HSR enforcement: continued scrutiny of activist investors that seek to rely on the “investment-only” exemption to HSR filing requirements; and increased fines for violations of the HSR Act. In addition, the settlement deprives the broader investment community and issuers of potential judicial guidance on the scope of the investment-only exemption, which could have provided welcome clarity, particularly in the area of investor communications with management.

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Equity is Cheap for Large Financial Institutions: The International Evidence

Posted by Priyank Gandhi, Mendoza College of Business, University of Notre Dame, on
Tuesday, July 19, 2016
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Priyank Gandhi is Assistant Professor at the University of Notre Dame’s Mendoza College of Business. This post is based on a recent paper authored by Professor Gandhi; Hanno N. Lustig, Professor of Finance at Stanford Graduate School of Business; and Alberto Plazzi, Assistant Professor of Finance at USI Lugano.

In countries around the world, governments and regulators are commonly perceived by market participants to offer special protections to the depositors, bondholders, and other creditors of large financial institutions in times of financial distress. A key question is whether these implicit and explicit government guarantees—collectively referred to as “Too Big to Fail (TBTF)”—also protect the shareholders of large financial institutions. In our paper, Equity is Cheap for Large Financial Institutions: The International Evidence, we set out to measure the effect of these implicit shareholder guarantees by closely examining the returns on stocks of large financial institutions.

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The JOBS Act: Did It Accomplish Its Goals?

Posted by Michael J. Zeidel, Skadden, Arps, Slate, Meagher & Flom LLP, on
Monday, July 18, 2016
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Michael J. Zeidel is a partner in the Corporate Finance practice at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden memorandum by Mr. Zeidel, Kathleen A. Negri, and Brittany L. Turner.

In the wake of the 2008 financial crisis, Congress created the Jumpstart Our Business Startups Act (JOBS Act) to encourage capital formation in order to grow businesses, create jobs and spur economic activity. Congress and the Securities and Exchange Commission (SEC) continue to monitor and update the JOBS Act rules to further achieve this goal. Since its enactment in 2012, the JOBS Act has succeeded in increasing market activity by easing regulatory requirements for smaller companies going public as well as companies raising capital in the private markets.

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