Monthly Archives: December 2017

Do Professional Norms in the Banking Industry Favor Risk-taking?

Ernst Fehr is Professor of Economics at the University of Zurich; Michel Marechal is Associate Professor of Economics at the University of Zurich; and Alain Cohn is Assistant Professor of Information at the University of Michigan. This post is based on their recent paper.

Excessive risk-taking in the financial industry is thought to be one of the key contributor to the recent financial crisis (e.g., Diamond and Rajan, 2009; Financial Crisis Inquiry Commission, 2011; Freixas and Dewatripont, 2012). Academics and policy makers have proposed several reasons for undesirably high levels of risk taking, including flawed compensation practices (Krugman 2009), poor corporate governance (Freixas and Dewatripont, 2012), and low capital requirements (Admati and Hellwig, 2013). One explanation that has received increased attention in recent years is the financial sector’s risk culture, i.e., the norms and informal rules of behavior that may favor inappropriately high levels of risk taking. Consequently, policy makers and regulators have called for a change in the risk culture (e.g., House of Commons Treasury Committee, 2008; Power, Ashby, and Palermo, 2013; International Monetary Fund, 2014). However, there is little or no empirical evidence showing that the unwritten rules of behavior in the financial industry encourage financial professionals to take greater financial risks.

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Remarks on ETFs, Disclosure, and Investor Trust

Kara M. Stein is a Commissioner at the U.S. Securities and Exchange Commission. The following post is based on Commissioner Stein’s recent address at the Investment Company Institute’s 2017 Securities Law Developments Conference. The views expressed in the post are those of Commissioner Stein and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

I would like to start out by thanking everyone in this room for what you do every day to help investors from all over the world save for retirement, college, and other important priorities. Although your client in the investment company space may be the fund sponsor, the investment adviser, or the fund itself—depending upon your role—the person who relies on all of you is ultimately the investor. Investors trust in you to design, operate, and service a product that gets them to where they want to go smoothly, and without problems caused by a design or compliance flaw. In many ways, you are like aircraft designers. Passengers need to have confidence in the safety and soundness of the aircraft. Likewise, investors need to have confidence in the safety and soundness of investment products. Of course, investor trust cannot be designed or manufactured. Trust must be earned—through diligence, through restraint, and through experience.

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Audit Committee Disclosure Trends in Proxy Statements

Deborah DeHaas is vice chairman, chief inclusion officer and national managing partner at the Center for Board Effectiveness, Deloitte US; Henry Phillips is vice chairman and national managing partner at the Center for Board Effectiveness, Deloitte & Touche LLP; Consuelo Hitchcock is principal, Regulatory Affairs, at Deloitte & Touche LLP. This post is baed on a Deloitte publication by Ms. DeHaas; Mr. Phillips; Ms. Hitchcock; Bob Lamm, independent senior advisor at the Center for Board Effectiveness, Deloitte LLP; and Debbie McCormack, managing director at the Center for Board Effectiveness, Deloitte LLP.

Over the past several years, investors and other governance groups have sought expanded disclosures on how audit committees execute their duties. The Securities and Exchange Commission (SEC) also weighed in on the discussion when it issued a request for public comment in a July 2015 concept release titled Possible Revisions to Audit Committee Disclosures.

The SEC has not yet changed audit committee disclosure requirements in response to these efforts, and there is no indication that rule changes are likely any time soon. However, over the past several years, companies have generally increased voluntary disclosures about the role and activities of audit committees.

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Analysis of Statutory Appraisal Cases

Robert S. Saunders is a partner at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden publication by Mr. Saunders, Ronald N. Brown, III, and Ryan Lindsay, and is part of the Delaware law series; links to other posts in the series are available here.

Statutory appraisal actions remain one of the most closely watched areas of Delaware corporate law, and there have been significant developments in Delaware appraisal law. Recently, the Delaware Supreme Court provided additional guidance on appropriate valuation methodologies as it reversed and remanded the Delaware Court of Chancery in DFC Global Corporation v. Muirfield Value Partners, L.P., et al., C.A. No. 10107 (Del. Aug. 1, 2017). The Court of Chancery has issued two opinions in the past year that did not rely on the merger price as fair value. Notably, both decisions produced a fair value determination below the merger price. Two other opinions by the Court of Chancery issued in the past year continued a trend and relied on the merger price in determining fair value. Most recently, the Delaware Supreme Court heard oral argument in the appeal of In re Appraisal of Dell Inc., C.A. No. 9322-VCL (Del. Ch. May 31, 2016), where the Court of Chancery gave no weight to deal price and relied on a discounted cash flow analysis to produce an appraised value that was roughly 28 percent above the merger price.

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Excluding Shareholder Proposals Based on New SLB 141

Ning Chiu is counsel at Davis Polk & Wardwell LLP. This post is based on a Davis Polk publication by Ms. Chiu. Related research from the Program on Corporate Governance includes The Case for Increasing Shareholder Power by Lucian Bebchuk and The Case for Investor Ordering by Scott Hirst (discussed on the Forum here).

Apple has submitted a letter to the SEC Staff arguing that the company should be able to exclude a shareholder proposal because its board has made a determination that the proposal is part of the company’s ordinary business.

The proposal asks the company to establish a Human Rights Committee to enhance its policies and practices on human rights, noting concerns about the company’s operations in China and that government’s views on censorship. The company spends nearly two pages of its letter explaining the importance of human rights to its business, including the “substantial time and resources” devoted by the company to “safeguarding and upholding” human rights. In the letter, the company discussed its efforts in making education accessible, providing safer working conditions, creating opportunities for workers and increasing transparency around its supply chain. The letter also touches on multiple other rights, with senior management leading initiatives on practices ranging from advocating for government policies that protect individual privacy and civil rights to making high-technology products more accessible to people with disabilities.

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CoCo Insurance and Bank Fragility

Wei Jiang is Professor of Finance at Columbia Business School. This post is based on a recent paper by Professor Jiang; Stefan Avdjiev, Senior Economist and Deputy Head of International Banking and Financial Statistics at the Bank for International Settlements; Bilyana Bogdanova, Senior Research Analyst at the Bank for International Settlements; Patrick Bolton, Barbara and David Zalaznick Professor of Business at Columbia Business School; and Anastasia Kartasheva, Economic Advisor at the International Association of Insurance Supervisors hosted by the Bank for International Settlements.

When a financial crisis hits, regulators are often forced to bailout failing financial institutions, especially large ones. The alternative of putting the failed banks through resolution and imposing losses on depositors and other bank creditors has been seen as too destabilizing in the middle of a crisis. It is not surprising, therefore, that regulators were eager to create new instruments that would facilitate automatic bail-ins, i.e., an automatic deleveraging of distressed institutions, following the 2007-2009 crisis.

Contingent convertible capital securities (CoCos), which represent debt obligations that can be written-off or converted into equity when a trigger is breached, rose to center stage as a potentially seamless bail-in device in future crises. The introduction of the Basel III framework, which allows banks to meet part of their regulatory capital requirements with qualified CoCo instruments, created strong incentives for banks to explore CoCo issuances. Between January 2009 and December 2015, banks around the world issued a total of $521 billion in CoCos, through 731 different issues.

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Weekly Roundup: December 1-7, 2017


More from:

This roundup contains a collection of the posts published on the Forum during the week of December 1-7, 2017.

Do Managers Give Hometown Labor an Edge?


The ICO Gold Rush



Analysis of Updated ISS Voting Policies


Firm Age, Corporate Governance, and Capital Structure



Contract Rights and Spin-off Transactions


Institutional Investor Attention and Demand for Inconsequential Disclosures


Shareholder Proposals in an Era of Reform


SEC Chairman’s Remarks on Small Business Capital Formation


Analysis of SEC Enforcement Division Annual Report




Anatomy of Political Risk in the United States


Definitive Agreements


Activists at the Gate

Activists at the Gate

Edward B. Micheletti is a partner at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden publication by Mr. Micheletti, Jessica R. Kunz, and Chad Davis, and is part of the Delaware law series; links to other posts in the series are available here. 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)and Dancing with the Activists by Lucian Bebchuk, Alon Brav, Wei Jiang and Thomas Keusch (discussed on the Forum here).

Several recent decisions applying Delaware law offer helpful insight about the impact that activist investor involvement has on board decision-making leading to a transaction and how those decisions will be reviewed by the courts in any subsequent litigation. These cases demonstrate the importance of careful responses by boards of directors to satisfy their fiduciary duties in the face of activist pressure. Discussed below is a case addressing the implications of activism in the context of the Corwin doctrine and three cases addressing the potential effect activist involvement can have on the judicial standard of review of a transaction.

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Definitive Agreements

Glenn West is a partner and Kymberly Thoumaked is an associate at Weil, Gotshal & Manges LLP. This post is based on a Weil publication by Mr. West and Ms. Thoumaked.

Private equity deal professionals frequently enter into indications of interest, term sheets, letters of intent, and other preliminary agreements as part of the process of getting to a “definitive” agreement to acquire or sell a business. A previous post to Weil’s Global Private Equity Insights blog warned about the risk of accidentally contracting as a result of these preliminary agreements “based on objective manifestations of intent [in those preliminary agreements] that do not in fact match one’s subjective intent.” [1] That post also advised that the most common way to “avoid ‘surprise’ or ‘gotcha’ contracts” arising from these preliminary agreements is “to include language, in writings evidencing the preliminary stages of a deal, that specifically states that such writings are nonbinding,” and that “no binding legal relationship will be created unless and until the parties execute a fully negotiated, definitive contract.” [2] But, while we may all think we know a “definitive” agreement when we see one, do we?

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Anatomy of Political Risk in the United States

Stephan Hollander is Professor of Financial Accounting at Tilburg University. This post is based on a recent paper by Professor Hollander; Tarek A. Hassan, Associate Professor of Economics at Boston University; Laurence van Lent, Professor of Accounting and Economics at Frankfurt School of Finance and Management; Ahmed Tahoun, Assistant Professor of Accounting at London Business School.

From the UK’s vote to leave the European Union to the threats of the US Congress to shut down the federal government, recent events have renewed concerns about the effects of risks emanating from the political system on investment, employment, and other aspects of firm behavior. The size of such effects, and the question of which aspects of political decision-making might be most disruptive to business are the subject of intense debates among economists, business leaders, and politicians. However, quantifying the effects of political risk has often proven difficult due to a lack of firm-level data on the extent of exposure to political risk, as well as a lack of data on the kind of political issues firms may be most concerned about.

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