Monthly Archives: March 2017

Another “Choice” for Bank Regulatory Reform?

Luigi L. De Ghenghi and Margaret Tahyar are partners at Davis Polk & Wardwell LLP. This post is based on a Davis Polk publication.

[In] November 2016, we noted that the Financial CHOICE Act proposed by Rep. Jeb Hensarling was only the beginning. While many eyes continued to be fixed on the House Financial Services Committee and the much anticipated CHOICE Act 2.0, on Monday, March 13, FDIC Vice Chairman Thomas Hoenig made a regulatory reform proposal of his own in a speech to the Institute of International Bankers and in a more detailed term sheet. [1] Calling the Dodd-Frank Act “well intended” yet with “many and complicated” regulations that are “burdensome,” Vice Chairman Hoenig proposed a series of structural reforms that, in his view, would simultaneously end too-big-to-fail, provide regulatory relief to banking organizations and enhance competition in non-banking services and financial stability.

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Are Large Banks Valued More Highly?

Alvaro Taboada is Assistant Professor of Finance at Mississippi State University, and René Stulz is Everett D. Reese Chair of Banking and Monetary Economics and the Director of the Dice Center for Research in Financial Economics at The Ohio State University Fisher College of Business. This post is based on a recent paper authored by Professor Taboada, Professor Stulz, and Bernadette A. Minton, Professor of Finance and Arthur E. Shepard Endowed Professor in Insurance at The Ohio State University Fisher College of Business.

In Are Large Banks Valued More Highly?, we investigate whether the value of large banks, defined as banks with assets in excess of the Dodd-Frank threshold for enhanced supervision ($50 billion in 2010 constant dollars), increases with the size of their assets, using Tobin’s q and market-to-book as our valuation measures. There is a widely-held view that banks gain from becoming large enough to obtain access to a stronger regulatory safety net in the form of “too-big-to-fail” (TBTF) subsidies. If this view holds, large banks should be valued more because they have an asset that other banks do not have, namely a claim on public resources, and the value of this asset grows as these banks become larger. Yet, this popular view ignores the possibility that large banks may bear larger costs than other banks because they are TBTF. For example, these costs may be in the form of greater regulatory scrutiny, political risk, or regulatory requirements that force them to pursue suboptimal policies. With these potential higher costs, the issue of whether TBTF banks are valued more highly is an empirical matter.

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The Americas – 2017 Proxy Season Preview

Sean Quinn is the Head of U.S. Research at Institutional Shareholder Services Inc. This post is based on an ISS publication.

Proxy season is in full swing in Latin America, and is just beginning to heat up in Canada and the United States, and some early trends are already becoming evident across the Americas. Interestingly, there seems to be a slow but potent convergence of the governance world, composed of so many individual markets, as investor concerns expand to all markets and sectors. Things like boardroom composition, engagement practices, enhanced disclosure, continually evolving regulation, investor stewardship, environmental & social focus from investors and issuers, transparency in compensation, and pay that is aligned with performance are factors that are now being considered by investors in markets across the Americas. Activism, whether promulgated by traditional activists, large investors or small, concerned special-interest groups, or others, is appearing in every market, and gender diversity and climate-change response are concerns for issuers and investors alike.

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Did Say-on-Pay Reduce or “Compress” CEO Pay?

Ira Kay is a Managing Partner at Pay Governance LLC. This post is based on a Pay Governance publication by Mr. Kay, Blaine Martin, and Clement Ma.

In the Dodd-Frank Act legislation after the 2008 Financial Crisis, the inclusion of shareholder SOP voting was driven by bipartisan Congressional support to “control executive compensation…” at corporations. In 2009, a former SEC chief accountant said, “Executive compensation at this point in time has gotten woefully out of hand… The time to adopt ‘say on pay’ type legislation is certainly past due.” [1] Politicians, regulators, and some institutional shareholders clearly thought that, “The impetus for passage of Dodd-Frank’s say-on-pay requirement in 2011 focused on remedying ‘excessive’ CEO pay.” [2]

Some of the original economic, governance, and social objectives of this legislation are certainly debatable. However, the proponents clearly intended to reduce CEO pay levels.

After 5 years of SOP votes, it is now possible to review the pre- and post-SOP statistical impact on CEO compensation. With sufficient historical data post-SOP, we answer 2 fundamental questions regarding this legislation’s consequences:

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Does the Market Value Professional Directors?

Aida Sijamic Wahid is Assistant Professor of Accounting at University of Toronto Rotman School of Management; Kyle T. Welch is Assistant Professor of Accountancy at George Washington University School of Business. This post is based on a recent paper authored by Professor Wahid and Professor Welch.

Professional directors, as often defined by academics and practitioners, are independent directors whose only vocation consists of serving as corporate directors on one or more boards. Such directors hold no other full-time employment. Currently, over 84 percent of corporate boards include at least one professional director. Since the 1970’s academics across disciplines have argued that professional directors enhancing corporate governance (e.g. Eisenburg 1975, Barr 1976, Gilson and Kraakman 1991, Fram 2005, Pozen 2010). Many argue that specialized labor on boards will lead to higher quality and more rigorous governance as more dedicated directors have fewer competing commitments (e.g. Fram 2005, Pozen 2010, Bainbridge and Henderson 2013). These arguments seemed to have gained currency in practice as the portion of boards composed of professional directors has increased over the last decade. In addition, a survey conducted in 2004 found that around 67 percent of directors asked were in favor of appointing professional directors to improve board quality (Felton 2004).

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New York Cybersecurity Regulations for Financial Institutions Enter Into Effect

Michael Krimminger is a partner at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb publication by Mr. Krimminger, Jonathan Kolodner, Daniel Ilan and Katie Dunn.

While the New York Cybersecurity Regulations represent a softening in key respects from the requirements set forth in the initial proposal, the regulations impose minimum standards that exceed existing federal standards and introduce new requirements, including obligations to critically evaluate cybersecurity practices to ensure compliance, maintain detailed documentation demonstrating compliance and report cyber events to the New York Department of Financial Services.

Overview

On March 1, 2017, the New York Department of Financial Services’ (DFS) Cybersecurity Regulations (the Regulations) entered into effect. [1] Under the Regulations, any individual or non-governmental partnership, corporation, branch, agency, association or other entity operating under a license, registration, charter, certificate, permit, accreditation or similar authorization under New York banking, insurance or financial services laws (with narrow exceptions described below) (Covered Entities) is required to formally assess its cybersecurity risks and establish and maintain a cybersecurity program designed to address such risks in a “robust” fashion.

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Corporate Governance Update: Preparing for and Responding to Shareholder Activism in 2017

David A. Katz is a partner and Laura A. McIntosh is a consulting attorney at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton publication by Mr. Katz and Ms. McIntosh.

Activist investors are taking advantage of favorable conditions in the 2017 market environment to further their activist agendas. Activists have an estimated $243 billion in assets under management and are eager to recoup losses from 2016, when the S&P 500 outperformed activist funds as a whole. Companies should review their overall preparedness, take a close look at their potential vulnerabilities to activist attack, and proactively shore up any weaknesses to the extent possible. Anticipating likely avenues of attack will help boards of directors to be prepared and, if necessary, to implement promptly a disciplined and focused plan of response.

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Is the American Public Corporation in Trouble?

Kathleen M. Kahle is Thomas C. Moses Professor in Finance at the University of Arizona and René M. Stulz is Everett D. Reese Chair of Banking and Monetary Economics and the Director of the Dice Center for Research in Financial Economics at The Ohio State University. This post is based on a recent paper by Professor Kahle and Professor Stulz.

In his famous 1989 Harvard Business Review article predicting the demise of the public corporation, Jensen argues that public companies are inefficient organizational forms because private firms can better resolve agency conflicts between investors and managers. His prediction initially appeared to be invalid. The number of public firms increased sharply in the years following the article’s publication. However, as Doidge, Karolyi, and Stulz show in the March 2017 issue of the Journal of Financial Economics, the number of listed firms peaked in 1997 and has since fallen by half, such that there are fewer public corporations today than forty years ago. Does this fall vindicate Jensen?  Is the public corporation in trouble?

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Weekly Roundup: March 17–23, 2017


More from:

This roundup contains a collection of the posts published on the Forum during the week of March 17–23, 2017.









Gender Diversity at Silicon Valley Public Companies 2016


Majority Voting: Latest Developments in Canada





The “Corporate Governance Misalignment” Problem

David J. Berger is Partner at Wilson Sonsini Goodrich & Rosati. This post is based on Mr. Berger’s recent remarks at the SEC Investor Advisory Committee, available here.

On March 9, 2017, the SEC’s Investor Advisory Committee (“IAC”) held an open meeting to discuss, among other things, unequal voting rights of common stock. I was one of four presenters to the IAC, and my presentation focused on how what I call the “corporate governance misalignment” has led many successful companies, especially technology companies, to adopt dual-class (or multi-class) stock in recent years.

The presentation asked an important—but unspoken—question in corporate governance today: if corporate governance is fundamental to good corporate performance (as I believe it is) why are many of today’s most innovative and successful companies considered to have bad (or at least below average) corporate governance? More broadly, why is the most dynamic sector of this country’s economy—the technology sector, best represented by Silicon Valley—also generally viewed to have poor corporate governance?

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