Monthly Archives: July 2017

How Important are Risk-Taking Incentives in Executive Compensation

Ingolf Dittmann is Professor in Finance at Erasmus University Rotterdam. This post is based on a recent article by Professor Dittman; Ko-Chia Yu, Assistant Professor at National Chiayi University; and Dan Zhang, Associate Professor at BI Norwegian Business School. 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); and Regulating Bankers’ Pay by Lucian Bebchuk and Holger Spamann (discussed on the Forum here).

There is an extensive theoretical discussion whether risk-taking incentives play a role in executive pay. In our article How Important are Risk-Taking Incentives in Executive Compensation? forthcoming in the Review of Finance), we analyse the problem with a calibration of a principal-agent model to observed contracts. We show that including risk-taking incentives does help to explain observed compensation practice. We also show that the provision of risk-taking incentives is consistent with efficient contracting. Besides, our model rationalizes the universal use of at-the-money options, which is often seen as evidence for managerial rent-extraction. In addition, we propose a new measure of risk-taking incentives (available online) that better describes the trade-off between the expected firm value and the additional risk a CEO has to take.


“Pre-Populated” Proxy Protocols and the Narrowing of Proxy Participation

Thomas J. Dougherty is a partner at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on an excerpt from the Foreword of the 2017 Edition of The Directors’ Handbook. The views expressed herein are not necessarily those of Skadden Arps or any one or more of its clients.

How many directors of U.S. publicly traded corporations are aware that the institutional investors that dominate share ownership, may utilize “pre-populated” voting instructions on shareholder vote issues rather than make individualized proxy vote decisions based on a reading of the issuer’s proxy statement? I submit that very few are aware. And perhaps fewer still are aware that the provider of this splendid short-cut service is none other than Institutional Shareholder Services (ISS), the self-appointed proxy voting advisory firm that (along with Glass Lewis) has become a dominant factor in shareholder vote decision-making. In practice, under this “pre-populated” voting instruction protocol, an institutional investor can specify its presumptive votes on proxy issues (even a merger vote) without reference to the particular proxy disclosures and nuances of particular issuer specifics. All this, based on pre-selected predilections translated into pre-populated voting instructions automatically sent through ISS to the issuer, subject only to a manual override provided that (a) the institution chooses to look at the specifics of the vote; (b) the institution makes a timely change to the pre-populated vote; and (c) the mechanics of implementing the exception, (d), are successfully executed to reverse prior pre-population.


Developments in the Asset Management Industry

Itzhak Ben-David is the Neil Klatskin Chair in Finance and Real-Estate at The Ohio State University’s Fisher College of Business. This post is based on a recent NBER research summary by Professor Ben-David.

Over the last two decades, the asset management industry has witnessed dramatic developments in both industrial organization and product offerings. Two or three decades ago, the industry was dominated by small asset managers primarily offering active portfolio management services. Today, the industry is significantly more concentrated and the leading products are index-based passive investment vehicles. My recent research examines some of the consequences of these developments.


The Delightful Dozen: Top Governance Advances in 2017

John Roe is Head of ISS Analytics and Managing Director at Institutional Shareholder Services, Inc. This post is based on an ISS publication by Mr. Roe.

Sometimes, watching corporate governance standards evolve seems like watching a glacier flow—and at other times it’s like witnessing a flash fire develop. Now that the 2017 proxy season in many global markets has come and gone, and many companies have made their updated governance disclosures for the year, we thought it is the ideal time to reflect and see where the glacier continues to flow—and where flash fires are burning with intensity.


Hedge Fund Activism and the Revision of the Shareholder Rights Directive

Alessio M. Pacces is Professor of Law and Finance at the Erasmus School of Law in Rotterdam. This post is based on a recent paper by Professor Pacces. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here); The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here); and Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System by Leo E. Strine, Jr. (discussed on the Forum here).

In my recent ECGI working paper, Hedge Fund Activism and the Revision of the Shareholder Rights Directive (SRD), I investigate whether the revised SRD promotes shareholder activism in Europe, as it intends to do. I find that the SRD includes a number of curbs to hedge fund activism for want of a longer-term engagement by institutional investors that cannot stand on its own feet. Overlooking that hedge funds are the key activators of institutional investors’ voice, the European Union (EU) legislator missed the opportunity to let individual companies choose the efficient regime towards hedge fund activism. The SRD’s prescriptive stance on the long-term characteristics of shareholder activism seems based on financial stability concerns. However, this approach undermines the efficiency of corporate governance.

The Looming Specter: Post-Closing Fraud Claims in Private Company M&A Litigation

Eva Davis is a partner at Winston & Strawn LLP. This post is based on a Winston & Strawn publication by Ms. Davis, James Smith, Matthew DiRisio, and Alexandra Kushner.

So-called “reliance disclaimers” and “fraud carve-outs” in private company purchase agreements—designed, respectively, to preclude and preserve certain types of post-closing fraud claims—have taken on increased prominence for transactional lawyers drafting such agreements with an eye toward certainty of remedies in potential post-closing disputes. And with good reason. Few issues have permeated private company M&A litigation in recent years to the extent that such provisions have.

In a nutshell, non-reliance provisions seek to prevent buyers from circumventing the contractually agreed-upon remedial framework (typically, closely-negotiated indemnification rights) by including a representation that the buyer, in entering into the transaction, has not relied on any statements by the seller (or anyone else) other than the express representations and warranties in the agreement itself. Since a common law fraud claim requires both “justifiable” (or “reasonable”) reliance and reliance-in-fact, such provisions, if effective, prevent a buyer from pleading or proving a fundamental element of fraud with respect to any extra-contractual statements (including projections, diligence materials, etc.).


CalPERS v. IAC: Clear Win for Investors Protecting Shareholder Voting Rights

Blair A. Nicholas and Mark Lebovitch are partners at Bernstein Litowitz Berger & Grossmann LLP. This post is based on a BLB&G publication Mr. Nicholas and Lebovitch. Related research from the Program on Corporate Governance includes The Untenable Case for Perpetual Dual-Class Stock by Lucian Bebchuk and Kobi Kastiel (discussed on the Forum here).

Last Friday, litigation by the California Public Employees’ Retirement System against IAC/InterActiveCorp and its chairman, Barry Diller, achieved a significant victory for shareholder voting rights. After months of contentious litigation, defendants effectively conceded the case by abandoning their plan to entrench Diller’s control of the company by issuing a new class of non-voting stock.

CalPERS v. IAC/InterActiveCorp is a clear win for investors and a powerful illustration of how institutional investors have been successfully using litigation to defend their right to vote on corporate affairs.


Supreme Court to Hear Challenge to State Court Jurisdiction Over 1933 Act Class Actions

Inez H. Friedman-Boyce and Brian E. Pastuszenski are partners at Goodwin Procter LLP. This post is based on a Goodwin Procter publication by Ms. Friedman-Boyce, Mr. Patsuszenski, William M. Jay, and Ezekiel L. Hill.

The Supreme Court has agreed to decide whether the Securities Litigation Uniform Standards Act of 1998 abolishes state court jurisdiction over class action lawsuits that allege only claims under the Securities Act of 1933. The Court’s ultimate decision could have a significant impact on the future of securities class action litigation, as in recent years a substantial percentage of such cases have been filed in state court. The Court will receive briefing over the summer, hear argument in the fall, and likely render a decision on this issue in early 2018. An amicus brief supporting the defendants’ side would be due August 18, 2017, on the current schedule, but that time may be extended.


Director Attention and Firm Value

Patrick Verwijmeren is Professor of Corporate Finance and Rex Wang Renjie is a PhD candidate in Finance at the Erasmus School of Economics  at the Erasmus University Rotterdam. This post is based on a recent paper by Professor Verwijmeren and Mr. Wang Renjie.

A directorship is rarely a full-time job. Most directors have other occupations and many directors serve on multiple boards. Given that attention is not unlimited for directors, in our paper Director Attention and Firm Value, we ask the question whether directors can still fulfill their job effectively when their other occupations happen to require more of their attention.


Communications Challenges for the Post-Activist Proxy Contest World

Kal Goldberg is a Partner and Head of the US capital markets and transactions group and Charles Nathan is a Senior Advisor at Finsbury LLC. This post is based on a Finsbury publication by Mr. Goldberg and Mr. Nathan.

The New Normal for Activist Investor Campaigns

Over the past several years, the end game for activist investor campaigns has increasingly become a consensual settlement of some sort, rather than a proxy contest to “the death”. In 2016, 45 percent of activist proxy contests ended in a settlement, up from 35 percent in 2012. Looking further back, the trend becomes even starker—less than 20 percent of proxy fights in 2001 ended in settlement. The percentage of activist campaigns ending in settlements prior to initiation of a proxy contest, of course, is far higher.


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