Monthly Archives: February 2017

CEO Value

Yannick Ouaknine is a senior analyst with the Socially Responsible Investing group at Société Générale S.A. The following post is based on an SG publication by Mr. Ouaknine, Daniel Fermon, Nimit Agarwal, Carole Crozat, and Niamh Whooley. This post relates to an SG publication titled “CEO Value,” issued June 6, 2016, available here.

Our CEO Value stock selection process makes a simple assumption: a company that has relatively sound corporate governance principles but that has underperformed peers over four years should see a turnaround in its share performance. Sound corporate governance principles should enable a company to fix weakness or at least prevent deterioration either by changing its strategy or management—or both.

We look for stocks that have the following characteristics: 1) underperformed peers by at least 15% over the past four years; 2) not changed CEO for the last three years—the time needed to implement a strategy and reap the rewards; 3) a ‘solid’ financial structure; and decisively, 4) ‘sound’ corporate governance standards.


Bank Regulation and Securitization: How the Law Improved Transmission Lines between Real Estate and Banking Crises

Erik F. Gerding is a Professor at the University of Colorado Law School. This post is based on his recent article.

Economists and economic historians have explored how financial crises become particularly severe when they involve either the banking industry, real estate, or both. The recent global financial crisis represented a confluence of crises in both sectors. In an article published in the Georgia Law Review, I explore how securitization formed a coupling rod that joined together real estate and banking crises and how changes in banking law improved this transmission line. Thanks to these legal changes, securitization became a new pathway for financial contagion.


Weekly Roundup: January 27, 2017–February 2, 2017

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This roundup contains a collection of the posts published on the Forum during the week of January 27, 2017–February 2, 2017.

Corporate Power is Corporate Purpose I: Evidence from My Hometown

Leo E. Strine, Jr. is Chief Justice of the Delaware Supreme Court, the Austin Wakeman Scott Lecturer on Law and a Senior Fellow of the Harvard Law School Program on Corporate Governance. This post is based on Chief Justice Strine’s recent essay, Corporate Power is Corporate Purpose I: Evidence from My Hometown, issued as a Discussion Paper of the Program on Corporate Governance and forthcoming in the Oxford Review of Economic Policy. Related research from the Program on Corporate Governance includes Can We Do Better by Ordinary Investors? A Pragmatic Reaction to the Dueling Ideological Mythologists of Corporate Law (discussed on the Forum here), and Toward Common Sense and Common Ground? Reflections on the Shared Interests of Managers and Labor in a More Rational System of Corporate Governance, both by Chief Justice Strine.

Leo E. Strine, Jr., Chief Justice of the Delaware Supreme Court, the Austin Wakeman Scott Lecturer on Law and a Senior Fellow of the Harvard Law School Program on Corporate Governance, recently issued an article that is forthcoming in the Oxford Review of Economic Policy. The article, titled Corporate Power is Corporate Purpose I: Evidence from My Hometown, is available here. The abstract of Chief Justice Strine’s essay summarizes it as follows:

This article is the first in a series considering a rather tired argument in corporate governance circles, that corporate laws that give only rights to stockholders somehow implicitly empower directors to regard other constituencies as equal ends in governance. By continuing to suggest that corporate boards themselves are empowered to treat the best interests of other corporate constituencies as ends in themselves, no less important than stockholders, scholars and commentators obscure the need for legal protections for other constituencies and for other legal reforms that give these constituencies the means to more effectively protect themselves.

Using recent events in the corporate history of E. I. du Pont de Nemours and Company—more commonly referred to today as DuPont—as a case study, this article makes the point that the board of directors is elected by only one constituency—stockholders—and that core power structure translates into corporate purpose. DuPont is an American icon, creator of household names like Nylon and Mylar, which prided itself on its core values, which included commitments to the safety and health of the communities in which DuPont operated and to treat its employees with dignity and respect. But when an activist investor came, DuPont reacted by preemptively downsizing—cutting jobs, and spinning off assets. After winning the proxy fight, DuPont failed to meet the aggressive earnings it used in its campaign. More job cuts came, the CEO was replaced with a member of her proxy fight slate, and DuPont soon embraced a merger consistent with the activists’ goals. At the same time, DuPont demanded tax and other incentives from the affected community it had asked to rally around it in the proxy fight. It did all this even though at no time was there a threat of a lawsuit or judicial intervention from unhappy shareholders. The DuPont saga illustrates how power dictates purpose in our corporate governance system. DuPont’s board knew that only one corporate constituency—the stockholders—called the shots and that they were expected to make their end investors’ best interests, even if that meant hurting other constituencies. The DuPont saga isn’t a story about bad people, but a reminder to those with genuine concern for non-shareholder constituencies to face the truth and support changes in the power dynamics affecting corporate governance that make due regard for non-shareholder constituencies a required obligation for the conduct of business.

The complete article is available for download here.

Are Top Investors Listening to Proxy Advisors on Pay?

Seth Duppstadt is Senior Vice President at Proxy Insight. This post is based on a Proxy Insight publication authored by Mr. Duppstadt.

Large investors are not following the recommendations on executive compensation set out by Proxy Voting Advisers (“PVA”), a study by data company Proxy Insight has found.

Proxy Insight analyzed voting on Advisory Say on Pay (“SoP”) resolutions in the US and UK in 2015 and 2016 for 10 of the largest institutional investors and compared each vote to the recommendations from ISS and Glass Lewis. While voting by top investors correlated with ISS 90% of the time and Glass Lewis 83% of the time for all SoP resolutions, the link is drastically reduced for votes where ISS and/or Glass Lewis recommend against a SoP proposal.


2016 Year-End Securities Enforcement Update

Marc J. Fagel is a partner at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn publication.

Any attempt to assess the past six months is undeniably going to be overshadowed by what lies ahead. The change in administration is likely to be as tumultuous and unpredictable for the SEC as for any other federal agency, and the differences between the enforcement priorities under Chair Mary Jo White and Enforcement Division Director Andrew Ceresney and those of their successors may be more stark than other SEC transitions in recent years.


SEC Charges of Violations of Non-GAAP Financial Measures Rules

Cydney S. Posner is special counsel at Cooley LLP. This post is based on a Cooley publication.

The Corp Fin staff have been dropping hints for quite a while about potential enforcement actions in connection with abuses of non-GAAP financial measures (see, e.g., this PubCo post), and an interesting one has now materialized. In an Order released [January 18, 2017], the SEC announced settled charges against MDC Partners, Inc., a publicly traded marketing firm, for failure to comply with the rules related to non-GAAP financial measures. In addition, the company was charged with failure to disclose millions in perks awarded to its former CEO.


Promoting Long-Term Value Creation—The Launch of the Investor Stewardship Group (ISG) and ISG’s Framework for U.S. Stewardship and Governance

Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton memorandum by Mr. Lipton, Steven A. RosenblumKaressa L. CainSabastian V. Niles, and Sara J. Lewis. Additional posts by Martin Lipton on short-termism and corporate governance are available here. Related research from the Program on Corporate Governance includes Can We Do Better by Ordinary Investors? A Pragmatic Reaction to the Dueling Ideological Mythologists of Corporate Law, by Leo E. Strine (discussed on the Forum here) by Chief Justice Leo Strine; and The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here).

A long-running, two-year effort by the senior corporate governance heads of major U.S. investors to develop the first stewardship code for the U.S. market culminated today in the launch of the Investor Stewardship Group (ISG) and ISG’s associated Framework for U.S. Stewardship and Governance.  Investor co-founders and signatories include U.S. Asset Managers (BlackRock; MFS; State Street Global Advisors; TIAA Investments; T. Rowe Price; Vanguard; ValueAct Capital; Wellington Management); U.S. Asset Owners (CalSTRS; Florida State Board of Administration (SBA); Washington State Investment Board); and non-U.S. Asset Owners/Managers (GIC Private Limited (Singapore’s Sovereign Wealth Fund); Legal and General Investment Management; MN Netherlands; PGGM; Royal Bank of Canada (Asset Management)).

Focused explicitly on combating short-termism, providing a “framework for promoting long-term value creation for U.S. companies and the broader U.S. economy” and promoting “responsible” engagement, the principles are designed to be independent of proxy advisory firm guidelines and may help disintermediate the proxy advisory firms, traditional activist hedge funds and short-term pressures from dictating corporate governance and corporate strategy.


Board Committees Evolve to Address New Challenges

The following post is based on a publication from the EY Center for Board Matters.

Oversight responsibilities shouldered by boards are increasing in scope and complexity. Much of the pressure is a result of heightened regulatory requirements, shifting investor expectations and transformative global changes.

To better address evolving responsibilities, boards are increasingly creating additional committees—beyond the three key committees that oversee the critical board responsibilities of audit and financial reporting, executive compensation, and director nominations and board succession planning. The need for additional committees reflects changing board priorities and pressures, boardroom needs and company circumstances. For example, responsibilities such as strategy or risk may shift from one committee to another, be distributed among multiple committees or addressed by the full board.

The EY Center for Board Matters reviewed board structure at S&P 500 companies between 2013 and 2016 through the lens of the committee’s primary function and uncovered five observations about how S&P 500 boards are structuring committees to address oversight challenges:


Corporate Hedging and the Design of Incentive-Compensation Contracts

Sterling Huang is Assistant Professor of Accounting at Singapore Management University. This post is based on a recent paper authored by Professor Huang; Chris Armstrong, EY Associate Professor of Accounting at The Wharton School of the University of Pennsylvania; and Stephen Glaeser. 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).

The theoretical agency literature highlights the importance of risk-related agency conflicts—whereby undiversified executives are more averse to firm-specific risk than are diversified shareholders—as a potential source of wealth destruction. Although providing executives with incentives tied to stock price can sometimes alleviate these agency conflicts, doing so exposes them to risk that requires payment of a commensurate risk premium. Consequently, firms trade off the benefits of providing incentives against the costs of compensating executives for bearing the associated risk. While this tradeoff leads to relatively straightforward predictions about the effect of risk on executives’ compensation, the effect of risk on executives’ incentives is theoretically ambiguous (Jenter, 2002; Prendergast, 2002; Hemmer, 2006, 2012).


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