Yearly Archives: 2016

Taking the Ax to Corporate Accountability

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

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Proxy Access Momentum in 2016

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

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Earnings Warnings and CEO Welfare

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

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The Law and Brexit

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

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Auditor Independence and PCAOB’s Investor-Protection

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

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Scoundrels in the C-Suite

Posted by David Larcker, Stanford Graduate School of Business, on
Tuesday, July 12, 2016
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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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The Ever-Increasing Importance of the Shareholder Vote

Posted by Jason M. Halper, Orrick, Herrington & Sutcliffe LLP, on
Monday, July 11, 2016
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Jason M. Halper is a partner in the Securities Litigation & Regulatory Enforcement Practice Group at Orrick, Herrington & Sutcliffe LLP. This post is based on an Orrick publication by Mr. Halper and Gregory Beaman. This post is part of the Delaware law series; links to other posts in the series are available here.

On June 30, 2016, the Delaware Chancery Court extended the Supreme Court’s holding in Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015), to two-step mergers under DGCL § 251(h). The Chancery Court concluded that acceptance of a first-step tender offer by a fully informed and uncoerced majority of disinterested stockholders insulates a two-step merger from challenge except on the ground of waste, even if a majority of directors were not disinterested and independent. See In re Volcano Corp. S’holder Litig., C.A. No. 10485-VCMR. In this situation, the business judgment rule is “irrebutable” and dismissal is typically appropriate given the high bar for proving “waste” and the unlikelihood that a majority of informed stockholders would approve such a transaction. In re Volcano is the latest decision underscoring the critical importance of securing an uncoerced and fully informed majority vote of disinterested stockholders if boards wish to benefit from this extremely deferential standard of review.

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A Brexit Antitrust Primer

Posted by Paul McGeown, Wilson Sonsini Goodrich & Rosati, on
Monday, July 11, 2016
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Paul McGeown is an antitrust partner in Wilson Sonsini Goodrich & Rosati’s Brussels office. This post is based on a WSGR memorandum by Mr. McGeown, Dr. Michael Rosenthal, and Götz Drauz. Related posts on the legal and financial impact of Brexit include Light at the End of the (Channel) Tunnel, from Akin Gump Strauss Hauer & Feld LLP; Brexit: Possible Options and Impact, from Shearman & Sterling; Brexit: Legal Implications, from Sullivan & Cromwell LLP; The Day After Brexit, from Cadwalader, Wickersham & Taft LLP; and The Legal Consequences of Brexit, from Davis Polk & Wardwell LLP.

The decision by the United Kingdom (UK) to leave the European Union (EU) will have far-reaching consequences for companies doing business in the UK and elsewhere in Europe. Specific details of the UK’s withdrawal agreement with the EU will be the subject of intense negotiation over the next two years or longer, but the current key takeaways for businesses as they relate to antitrust concerns are:

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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
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Renee Adams is Professor of Finance at the University of New South Wales and Tom Kirchmaier is a Researcher at the London School of Economics. This post is based on a recent article by Professor Adams and Dr. Kirchmaier.

Our forthcoming article in the American Economic Review (May Issue), Women on boards in Finance and STEM industries, is the first in a series of papers in which we connect two policy debates that are usually conducted separately: the debate about women’s underrepresentation in STEM fields and the debate about women’s underrepresentation on corporate boards (see also Adams and Kirchmaier, 2016). Using a comprehensive sample of board data for listed firms in 20 countries from 2001 to 2010, we show that the fraction of women on the board (Board Diversity) is lower for firms in the STEM and Finance sectors (STEM&F) than in non-STEM sectors. This finding is robust to controlling for firm and country characteristics and country and year fixed effects. On average STEM&F firms have 1.8% fewer women on boards than non-STEM firms. Relative to the sample mean of 7.56%, this represents an economically significant leadership gap in STEM&F fields.

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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
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Brad S. Karp is chairman and partner at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul Weiss client memorandum by Mr. Karp, Roberto Gonzalez, Michael Gertzman, Jessica Carey, and Roberto Finzi.

Following Maria Vullo’s confirmation as Superintendent earlier this month, the New York Department of Financial Services (“DFS”) yesterday finalized its closely watched proposed regulation on anti-money laundering (AML) monitoring and sanctions screening requirements for banks, branches, and other covered entities. According to DFS, the final regulation is motivated by its identification, through investigations, of shortcomings in monitoring and screening programs attributable to a “lack of robust governance, oversight, and accountability at senior levels.”

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