Comply-and-Explain: Should Directors Have a Duty to Inform?, published recently in Duke Law School’s Journal of Law and Contemporary Problems, argues that the directors of publicly held companies in the United States should be subject to a new state law duty requiring them to explain to shareholders how the board is exercising business judgment and acting in the best interests of the corporation.

The duty is derived from: (1) the Model Business Corporation Act (MBCA) Section 8.30 that requires directors to act in the best interest of the corporation and to share information material to the exercise of the board’s decision-making or oversight functions; (2) Section 3.C.4 of the American Bar Association’s Corporate Director’s Guidebook, that sets forth a director’s “duty of disclosure”; and (3) the Department of Labor ERISA requirements governing the fiduciary duties of institutional investors and their exercise of proxy votes. The duty to inform also builds on concepts from the UK’s principles-based, comply-or-explain governance system that gives directors wide discretion to customize governance policies provided that they explain how their decisions are intended to achieve business goals and serve the best interests of the company and its shareholders.

…continue reading: The Directors’ Duty to Inform

The Principles for Sound Compensation Practices at financial institutions and their Implementation Standards issued in 2009 by the Financial Stability Board (FSB) are only the first step in a complex global reform process that is currently underway at both regional and national levels. This process is the outcome of an intense political debate conducted against the backdrop of the international crisis and popular resentment, within countries and across the international arena. When the G20 head of governments and the FSB considered the relevant issues, some of the political conflicts were no doubt diluted by the international and diversified membership of these institutions, and solutions were found at a sufficient level of generality to allow for adaptations and exceptions. However, when the implementation of the Principles is discussed at regional and national level, many of the underlying conflicts inevitably resurface, depending not only on the relative weight of the interest groups involved and the role of banks in the economy, but also on national culture and ethical values.

…continue reading: Flexibility of the FSB Principles for Sound Compensation Practices at Financial Institutions

According to our research, more than 300 companies subject to Dodd-Frank’s say-on-pay vote requirements have filed proxy statements thus far this year. Of those, 125 companies have held shareholder meetings at which shareholders have voted on advisory resolutions on the frequency in which say-on-pay resolutions should appear on the proxy ballot (commonly referred to as “say-on-frequency” or “say-WHEN-on-pay”), including 77 companies in the Russell 3,000 index and 55 companies in the S&P 1,500 index. Of the 125 votes submitted to date, more than 50% of companies have recommended triennial say-on-pay votes to their shareholders.

…continue reading: Early Results from 2011 Proxy Season Show Trends on “Say-on-Frequency” Resolutions

In our forthcoming Journal of Finance paper, Overconfidence, Compensation Contracts, and Capital Budgeting, we study the interaction of managerial overconfidence and compensation in the context of a firm’s investment policy. To do so, we develop a capital budgeting problem in which a manager, using his information about the prospects of a risky project, must decide whether his firm should undertake the project or drop it in favor of a safer investment alternative.

…continue reading: Overconfidence, Compensation Contracts, and Capital Budgeting

As anticipated, the U.S. Securities and Exchange Commission has proposed to readopt certain of its current rules, with no changes, in order to confirm that the Dodd-Frank Wall Street Reform and Consumer Protection Act did not alter the treatment of “security-based swaps” for purposes of determining “beneficial ownership” of equity securities under Sections 13 and 16 of the Securities Exchange Act of 1934. Comments on the proposal are due by April 15, 2011.

…continue reading: SEC Proposes Reaffirmation of Existing Treatment of Security-Based Swaps

Since their emergence about ten years ago, “top-up” options have become a common feature in tender offers forming the first stage in a “two-step” cash acquisition. A recent decision of the Delaware Court of Chancery confirms that properly structured top-up options will withstand legal challenge and effectively facilitate prompt completion of a back-end merger. Olson v. EV3, Inc., et al., C.A. No. 5583-VCL (Del. Ch. Feb. 21, 2011).

A top-up option granted by an issuer to the acquirer enables the acquirer, once it has obtained control of the target company in the tender offer, to immediately increase its ownership to the threshold required (90 percent in Delaware) to effect a short-form merger and secure full ownership of the target without having to hold a shareholder meeting. As Vice Chancellor Laster recognized in his recent opinion, this approach offers advantages to all parties. By avoiding the cost and delay of having to hold a special meeting whose outcome is a foregone conclusion, the buyer is able to close the back-end merger sooner, thus reducing transaction risk, facilitating efficient financing, and speeding integration of the acquired company. Target shareholders, for their part, also benefit from a reduction in transaction risk, and, importantly, receive their merger consideration months earlier than they otherwise would.

…continue reading: Delaware Decision Supports Properly Structured Top-Up Options in Tender Offers

In the paper, Do Pension-Related Business Ties Influence Mutual Fund Proxy Voting? Evidence from Shareholder Proposals on Executive Compensation, which can be found in a forthcoming issue of the Journal of Financial and Quantitative Analysis, we examine the relation between mutual fund votes on shareholder executive compensation proposals and pension-related business ties between fund families and the firms. Mutual funds have a fiduciary responsibility to act in the interests of their shareholders. Shareholder proposals provide one mechanism via which mutual funds can influence firm policies to benefit shareholders. However, mutual funds benefit when they receive pension fund business from firms, which creates a potential conflict of interest that creates an incentive for fund managers to support firm management and to vote against shareholder proposals. Rationally, fund families should trade off the economic benefit of self-interested voting against possible economic losses related to lower portfolio returns, damaged reputations, or potential lawsuits. Shareholder proposals that relate to executive compensation provide an excellent arena in which to examine the influence of pension-related business ties, since these proposals can directly affect the pay and benefits of managers with influence over which fund families receive pension business.

…continue reading: Do Pension-Related Business Ties Influence Mutual Fund Proxy Voting?

On March 1, 2011, the U.S. Supreme Court ruled in Federal Communications Commission v. AT&T Inc. that Freedom of Information Act Exemption 7(C) – which exempts from required public disclosure information “compiled for law enforcement purposes” the disclosure of which “could reasonably be expected to constitute an unwarranted invasion of personal privacy” – could not be invoked to protect against disclosure of records produced to an agency on the grounds that disclosure would constitute an unwarranted invasion of personal privacy of a corporation.

…continue reading: Supreme Court Holds Corporations Don’t Have Privacy Interest Assertable Under FOIA

Global Proxy Voting

In 2010, the SBA worked with The Corporate Library to analyze its proxy voting among nine externally managed foreign equity portfolios totaling approximately $9 billion. The vote audit examined a total of 33,729 individual ballot items (proxy voting decisions) across 257 distinct voting categories. The purpose of the foreign equity proxy vote audit was to evaluate the external managers’ voting activities as well as to benchmark those voting decisions against similar SBA votes and those of a major corporate governance research provider. The vote audit examined aggregate voting results, voting by each individual manager, and benchmarked external manager voting against SBA internal voting decisions.

…continue reading: Florida SBA Confronts Recent Corporate Governance Issues at Home and Abroad

In our forthcoming Journal of Finance paper, Did Structured Credit Fuel the LBO Boom? we study how large shifts in the availability of credit affected the corporate use of leverage by examining LBO transactions that rely heavily on debt financing. We argue that developments that led to the growth of structured credit contributed to increased credit supply that at least partially fueled the recent LBO boom. Our evidence highlights important linkages between structured credit, the dual role of banks in the structured credit markets as loan originators and underwriters, and the corporate use of leverage.

…continue reading: Did Structured Credit Fuel the LBO Boom?