Monthly Archives: May 2017

Five Investor Trends Driving Say on Pay in 2017

Chris Wightman is a founder and Partner at CamberView Partners. This post is based on a CamberView publication by Mr. Wightman.

Although the strong stock market in 2017 has provided a helpful start to the year for many companies, it has not curtailed investor focus on improving the corporate governance practices—from sustainability to board composition—of their portfolio companies. With 2017 annual meeting results already rolling in, early data suggests that one perennial topic remains top of mind for shareholders: executive pay. As the contours of this year’s proxy season take shape, here are five compensation trends that boards and management teams should be aware of as they approach their annual meeting.


Shareholder Wealth Effects of Border Adjustment Taxation

Jeffrey Hoopes is Assistant Professor of Accounting at the University of North Carolina at Chapel Hill. This post is based on a recent paper by Professor Hoopes; Fabio Gaertner, Assistant Professor at University of Wisconsin; and Edward Maydew, David E. Hoffman Distinguished Professor of Accounting at the University of North Carolina at Chapel Hill. Additional posts addressing legal and financial implications of the Trump administration are available here.

We examine the effects of a proposed border adjustment tax (also referred to as the “BAT”) on the shareholder wealth of publicly traded firms. Border adjustment has emerged as a controversial feature of proposed U.S. corporate tax reform, as it would be a dramatic departure from longstanding corporate tax policy (Avi-Yonah and Clausing 2017; Auerbach and Devereux 2017; Feldstein 2017; Rubin 2017). With a border adjustment tax, export revenue would be exempt from tax, while the domestic costs to produce the revenue would continue to be tax deductible. The cost of imported goods and services, however, would no longer be deductible for tax purposes. According to some proponents, a border adjustment tax is a way of encouraging exports and discouraging imports. Conversely, many leading academics argue there are economic reasons to believe that exchange rates would adjust to offset any tax reduction to exporters and the additional taxes on importers (Auerbach et al. 2017). Belief in this prediction, however, is not universal, even among academics, and depends on several assumptions that may not hold in practice (Graetz 2017; Summers 2017). Many economists in the private sector appear to take a middle ground, predicting less than full exchange rate adjustment, such that border adjustment would result in winners and losers among corporations (Amiti et al. 2017).


Insider Trading: When Hackers Target Corporate Shares

Evan Bundschuh is vice president and commercial lines head at Gabriel Bundschuh & Assoc. Inc. This post is based on a GB&A publication by Mr. Bundschuh.

When data breaches target credit card numbers and personal information, the damage can be quantified, however when hackers explicitly target a company’s shares that damage is much more unpredictable. Insider-Trading hacks are akin to coming home to find your house has been (somewhat silently) broken into—but was anything stolen? And how long will it take to discover? Did they vandalize anything in the process? Did they install any backdoors? These are big problems when shareholders are involved.


Expanding the Reach of the Commodity Exchange Act’s Antitrust Considerations

Gregory Scopino is an Adjunct Professor of Law at Georgetown University Law Center and a Special Counsel with the Division of Swap Dealer and Intermediary Oversight (DSIO) of the U.S. Commodity Futures Trading Commission (CFTC). This post is based on a recent article authored by Professor Scopino, who wrote the article in his personal capacity and not in his official capacity as a CFTC employee. The analyses and conclusions expressed in the article (and this post) are those of Professor Scopino and do not reflect the views of other members of DSIO, other CFTC staff, the CFTC itself, or the United States.

In recent years, a small group of financial institutions have paid billions of dollars to settle civil and criminal claims that they formed cartels to rig the prices of certain critically important financial instruments and to stifle competition in others. For example, bankers would rig global benchmark interest rates, such as the London Interbank Offered Rate (LIBOR), for the purposes of benefitting their trading positions in over-the-counter (OTC) interest-rate swaps, which are bets on future interest rate movements. By conspiring with horizontal competitors to fix the benchmarks that were components of the prices of financial instruments, financial institutions and their employees harmed competition by distorting the normal market factors that governed the prices of those instruments. These collusive schemes were facilitated by the fact that the markets for certain types of derivatives are oligopolies dominated by a handful of global banks.


Roadblocks to Redemption: Delaware Chancery Court Makes Preferred Stock Redemptions More Challenging

Michael J. Kendall is a partner and Joseph F. Bernardi, Jr. is counsel at Goodwin Procter LLP. This post is based on a Goodwin Procter publication by Mr. Kendall and Mr. Bernardi, and is part of the Delaware law series; links to other posts in the series are available here.

A recent decision in Delaware illustrates yet another difficulty investors face when using redemption of their stock as a liquidity strategy. In this case, a private equity fund, Oak Hill Capital Partners, and the directors of one of its portfolio companies (both outsiders and those designated by the fund) were sued for breach of fiduciary duty and other claims in connection with the redemption of preferred stock held by the fund. The court’s refusal to dismiss the case creates the potential for a long and expensive court battle and ultimately the possibility of liability for Oak Hill and the directors.


What Drives Differences in Management?

Nicholas Bloom is the William Eberle Professor of Economics at Stanford University, a Senior Fellow of the Stanford Institute for Economic Policy Research, and the Co-Director of the Productivity, Innovation and Entrepreneurship program at the National Bureau of Economic Research. This post is based on a recent paper authored by Professor Bloom; Erik Brynjolfsson, Director of the MIT Initiative on the Digital Economy, Professor at MIT Sloan School, and Research Associate at NBER; Itay Saporta-Eksten, Assistant Professor of Economics at Tel Aviv University; John Van Reenen, Professor, MIT Department of Economics and Sloan School of Management; and Megha Patnaik, Stanford University.

The focus of good corporate governance is making sure executives run their firms well. But how do we define success? One way is to look at performance in terms of profits, stock-prices or growth. But all these measures have a major component of luck and may be very poor signals of managerial quality. As any sports fan knows if your players are unlucky it’s hard to win games no matter how great a manager you are.

So how can we get a more direct measure of management skill?


LTIP-ing Point: Is This the End of Long-Term Incentive Plans?

Nick Dawson is Co-Founder & Managing Director at Proxy Insight. This post is based on a Proxy Insight publication. 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).

Long-Term Incentive Plans (LTIPs) seem to have become the latest focus point for shareholder anger over executive compensation. Most recently, a group of MPs called on the U.K. Government to ban LTIPs from next year, claiming that they create “perverse” incentives and encourage short-term decisions.

LTIPs usually constitute the largest element of executive pay, and are typically three years in length. Around 90% of FTSE 100 companies used LTIPs in 2013, up from 30% in the mid-1990s. Over the same period, the average LTIP payout to a FTSE 100 lead executive increased from 40% of pay to more than 200%.


Weekly Roundup: May 5–May 11, 2017

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This roundup contains a collection of the posts published on the Forum during the week of May 5–May 11, 2017.

An Activist View of CEO Compensation

David Larcker is James Irvin Miller Professor of Accounting at Stanford Graduate School of Business; Brian Tayan is a Researcher with the Corporate Governance Research Initiative at Stanford Graduate School of Business. This post is based on a paper authored by Professor Larcker; Mr. Tayan; G. Mason Morfit, Partner and President of ValueAct Capital; D. Robert Hale, Partner at ValueAct Capital; and Alex Baum, Vice President at ValueAct Capital. 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).

We recently published a paper on SSRN, An Activist View of CEO Compensation, that explains a framework developed by activist fund ValueAct Capital for evaluating executive compensation plans.

Understanding CEO compensation plans is a continuing challenge for boards of directors and investors. Disclosure rules and general industry practices rely heavily on calculating the “fair value” of compensation awards as of the grant date. The problem with this approach is that the fair value of awards is a static (expected) number that does not reflect how a plan scales to performance. The relation between pay and performance can sometimes be discerned from the details of SEC filings but they are not made explicit and often do not make it into the analyses upon which boards of directors make compensation decisions.


The Trouble with Trulia: Re-Evaluating the Case for Fee-Shifting Bylaws as a Solution to the Overlitigation of Corporate Claims

William B. Chandler III is a partner at Wilson Sonsini Goodrich & Rosati and former Chancellor of the Delaware Court of Chancery. Anthony A. Rickey is a solo practitioner at Margrave Law LLC. This post is based on a paper first presented at a symposium of the Lowell Milken Institute for Business Law and Policy at the UCLA School of Law. This post is part of the Delaware law series; links to other posts in the series are available here.

Confronted with a dramatic rise in deal litigation “beyond the realm of reason” in the early part of the 21st century, [1] Delaware’s legal community struck a grand bargain with its corporate citizens. As a first step, the legislature prohibited Delaware stock companies from enacting fee-shifting bylaws in the wake of the Delaware Supreme Court’s ruling in ATP Tour, Inc. v. Deutscher Tennis Bund, [2] despite the potential for such measures to deter “merger tax” lawsuits. Some saw fees-shifting bylaws as a threat to Delaware’s legal community, and others—including the Delaware State Bar Association (“DSBA”) and the plaintiffs’ bar—considered their likely effect on stockholder lawsuits to be “throwing the baby out with the bathwater.” In the course of promoting this legislation, the DSBA explicitly encouraged greater scrutiny of intracorporate litigation by the judiciary, and the adoption of forum selection bylaws by corporations, as an alternate means of reducing the incidence of socially wasteful litigation.


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