Archive for the ‘Comparative Corporate Governance & Regulation’ Category

Comparative Study on Economics, Law and Regulation of Corporate Groups

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday March 31, 2015 at 9:02 am
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Editor’s Note: The following post comes to us from Klaus J. Hopt, a professor and director (emeritus) at the Max-Planck-Institute for Comparative and International Private Law, in Hamburg and was advisor inter alia for the European Commission, the German legislator and the Ministries of Finance and of Justice.

The phenomenon of the groups of companies is very common in modern corporate reality. The groups differ greatly as to structure, organization, and ownership. In the US, groups with 100-per cent-owned subsidiaries are common. In continental Europe, the parents usually own less of the subsidiaries, just enough to maintain control. In Germany and Italy pyramids are frequent, i.e., hierarchical groups with various layers of subsidiaries and subsidiaries of subsidiaries forming very complicated group nets. The empirical data on groups of companies are heterogeneous because they are collected for very different regulatory and other objectives, for example for antitrust and merger control regulation or for bank supervision.

…continue reading: Comparative Study on Economics, Law and Regulation of Corporate Groups

Limited Commitment and the Financial Value of Corporate Law

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday February 17, 2015 at 9:04 am
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Editor’s Note: The following post comes to us from Martijn Cremers, Professor of Finance at the University of Notre Dame, and Simone Sepe of the College of Law at the University of Arizona. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

For at least 40 years, a large body of literature has debated the effects of state competition for corporate charters and the value of state corporate laws. The common assumption of these studies is that interstate competition affects the way state corporate laws respond to managerial moral hazard, i.e., the agency problem arising between shareholders and managers out of the separation of ownership from control (Jensen and Meckling, 1976). Nevertheless, scholars have been sharply divided about the importance of interstate competition, and particularly whether interstate competition fosters a “race to the top” that maximizes firm value (Winter, 1977; Easterbrook and Fischel, 1991; Romano, 1985, 1993) or a “race to the bottom” that pushes states to cater to managers at the expense of shareholders (Cary, 1974; Bebchuk, 1992; Bebchuk and Ferrell, 1999, 2001).

…continue reading: Limited Commitment and the Financial Value of Corporate Law

Delaware and the Transformation of Corporate Governance

Posted by Brian R. Cheffins, University of Cambridge, on Friday January 2, 2015 at 9:00 am
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Editor’s Note: Brian Cheffins is Professor of Corporate Law at the University of Cambridge. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

The corporate governance arrangements of U.S. public companies have been transformed over the past four decades. Independent directors now dominate boards (at least numerically), activism by shareholders has become more prevalent and executive pay has become more lucrative and more performance-oriented. The changes have been accompanied by a new nomenclature—the term “corporate governance” only came into general usage in the 1970s. How and why did this transformation of corporate governance come about? Delaware and the Transformation of Corporate Governance, which is based on the 2014 Francis G. Pileggi lecture, addresses these questions by assessing Delaware’s impact on key corporate governance trends.

…continue reading: Delaware and the Transformation of Corporate Governance

Corporate Governance Survey—2014 Proxy Season Results

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday December 31, 2014 at 9:12 am
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Editor’s Note: The following post comes to us from David A. Bell, partner in the corporate and securities group at Fenwick & West LLP. This post is based on portions of a Fenwick publication titled Corporate Governance Practices and Trends: A Comparison of Large Public Companies and Silicon Valley Companies (2014 Proxy Season); the complete survey is available here.

Since 2003, Fenwick has collected a unique body of information on the corporate governance practices of publicly traded companies that is useful for Silicon Valley companies and publicly-traded technology and life science companies across the U.S. as well as public companies and their advisors generally. Fenwick’s annual survey covers a variety of corporate governance practices and data for the companies included in the Standard & Poor’s 100 Index (S&P 100) and the high technology and life science companies included in the Silicon Valley 150 Index (SV 150). [1]

…continue reading: Corporate Governance Survey—2014 Proxy Season Results

Do Long-Term Investors Improve Corporate Decision Making?

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday December 10, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Jarrad Harford, Professor of Finance at the University of Washington; Ambrus Kecskés of the Schulich School of Business at York University; and Sattar Mansi, Professor of Finance at Virginia Polytechnic Institute & State University.

It is well established that managers of publicly traded firms, left to their own devices, tend to maximize their private benefits of control rather than the value of their shareholders’ stake in the firm. At the same time, imperfectly informed market participants can lead managers to make myopic investment decisions. One of the most important mechanisms that have been proposed to counter this mismanagement problem is longer investor horizons. By spreading both the costs and benefits of ownership over a long period of time, long-term investors can be very effective at monitoring corporate managers.

We explore this subject in our paper entitled Do Long-Term Investors Improve Corporate Decision Making? which was recently made publicly available on SSRN. We ask two questions. First, do long-term investors in publicly traded firms improve corporate behavior? Second, does their influence on managerial decision making improve returns to shareholders of the firm? To answer these questions, we study a wide swath of corporate behaviors.

…continue reading: Do Long-Term Investors Improve Corporate Decision Making?

The Efficacy of Shareholder Voting in Staggered and Non-Staggered Boards

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday December 2, 2014 at 8:58 am
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Editor’s Note: The following post comes to us from Ronen Gal-Or and Udi Hoitash, both of the Department of Accounting at Northeastern University, and Rani Hoitash of the Department of Accountancy at Bentley University. Recent work from the Program on Corporate Governance about staggered boards includes: How Do Staggered Boards Affect Shareholder Value? Evidence from a Natural Experiment (discussed on the Forum here).

In our paper, The Efficacy of Shareholder Voting in Staggered and Non-Staggered Boards: The Case of Audit Committee Elections, which was recently made available on SSRN, we study the efficacy of audit committee member elections in staggered and non-staggered boards.

Voting in director elections and auditor ratifications is a primary mechanism shareholders can use to voice their opinion. Past research shows that shareholders cast votes against directors that exhibit poor performance, and these votes, in turn, are associated with subsequent board reaction. However, because a significant number of U.S. public companies have staggered boards, not all directors are up for election every year. Therefore, the efficacy of shareholder votes may not be uniform. Under the staggered board voting regime, shareholders and proxy advising firms can typically voice their opinion on any given director only once every three years. This election structure may increase the likelihood that directors who are not up for election following poor performance will be insulated from the scrutiny of shareholders and proxy advisors. In turn, this may influence the accountability of staggered directors and the overall efficacy of shareholder votes.

…continue reading: The Efficacy of Shareholder Voting in Staggered and Non-Staggered Boards

Corporate Investment and Stock Market Listing: A Puzzle?

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Thursday November 20, 2014 at 9:18 am
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Editor’s Note: The following post comes to us from John Asker, Professor of Economics at UCLA; Joan Farre-Mensa of the Entrepreneurial Management Unit at Harvard Business School; and Alexander Ljungqvist, Professor of Finance at NYU.

Economists have long worried that a stock market listing can induce short-termist pressures that distort the investment decisions of public firms. Back in 1985 Narayanan wrote in the Journal of Finance that “American managers tend to make decisions that yield short-term gains at the expense of the long-term interests of the shareholders.” More recently, a growing number of commentators blame the sluggish performance of the U.S. economy since the 2008–2009 financial crisis on short-termism. For example, in a recent Harvard Business Review article, Barton and Wiseman, global managing director at McKinsey & Co. and CEO of the Canada Pension Plan Investment Board, respectively, argue that “the ongoing short-termism in the business world is undermining corporate investment, holding back economic growth.”

Yet, systematic empirical evidence of widespread short-termism has proved elusive, largely because identifying its effects is challenging. A chief challenge is the difficulty of finding a plausible counterfactual for how firms would invest absent short-termist pressures. In our paper, Corporate Investment and Stock Market Listing: A Puzzle?, which is forthcoming at the Review of Financial Studies, we address this difficulty by comparing the investment behavior of stock market-listed firms to that of comparable privately held firms, using a novel panel dataset of private U.S. firms covering more than 400,000 firm years over the period 2001–2011. Building on prior work, our key identification assumption is that, on average, private firms suffer from fewer agency problems and, in particular, are subject to fewer short-termist pressures than are their listed counterparts. This assumption is motivated by the fact that private firms are often owner managed and, even when not, are both illiquid and typically have highly concentrated ownership. These features encourage their owners to monitor management more closely to ensure long-term value is maximized.

…continue reading: Corporate Investment and Stock Market Listing: A Puzzle?

The Corporation in Society

Posted by Bill George, Harvard Business School, on Friday November 7, 2014 at 9:00 am
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Editor’s Note: Bill George is a Senior Fellow at Harvard Business School and former Chair and Chief Executive Officer of Medtronic.

On Monday, at the invitation of Professor Lucian Bebchuk, it was my privilege to conduct a discussion on the role of the corporation in society in his Harvard Law School course. Here are the charts I used to stimulate the discussion (see attachment). These led to a thought-provoking debate on some crucial issues that are being debated in corporate governance these days.

What Happens in Nevada? Self-Selecting into Lax Law

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday October 28, 2014 at 9:02 am
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Editor’s Note: The following post comes to us from Michal Barzuza, Professor of Law at the University of Virginia School of Law, and David Smith, Professor of Finance at the University of Virginia.

In our paper, What Happens in Nevada? Self-Selecting into Lax Law, forthcoming in the Review of Financial Studies, we study the financial reporting behavior of firms that incorporate in Nevada, the second most popular state for out-of-state incorporations, after Delaware. Compared to Delaware, Nevada law has weak fiduciary requirements for corporate managers and board members. We find evidence consistent with the idea that lax shareholder protection under Nevada law induces firms prone to financial reporting errors to incorporate in Nevada, and that lax Nevada law may also cause firms to engage in risky reporting behavior. [1] In particular, we find that Nevada-incorporated firms are 30 – 40% more likely to report financial results that later require restatement than firms incorporated in other states, including Delaware. These results hold when we narrow our set of restatements to more serious infractions, including restatements that reduce reported earnings, and to restatements that raise suspicions of fraud or lead to regulatory investigations.

…continue reading: What Happens in Nevada? Self-Selecting into Lax Law

Radical Shareholder Primacy

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday September 24, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from David Millon, the J.B. Stombock Professor of Law at Washington and Lee University.

My article, Radical Shareholder Primacy, written for a symposium on the history of corporate social responsibility, seeks to make sense of the surprising disagreement within the corporate law academy on the foundational legal question of corporate purpose: does the law require shareholder primacy or not? I argue that disagreement on this question is due to an unappreciated ambiguity in the shareholder primacy idea. I identify two models of shareholder primacy, the “radical” and the “traditional.” Radical shareholder primacy makes strong claims about both shareholder governance rights, conceiving of management as the shareholders’ agent, and also about corporate purpose, insisting that corporate law mandates shareholder wealth maximization. Because there is no legal basis for either of these claims, those who deny that shareholder primacy is the law are correct at least as to this model. However, the traditional version of shareholder primacy accords to shareholders a special place in the corporation’s governance structure vis-à-vis the corporation’s nonshareholder stakeholders, for example, with respect to voting rights and the right to bring derivative suits. Beyond this privileged position in the horizontal dimension, there is no maximization mandate and corporate law does very little to provide shareholders with the tools necessary to exercise governance powers; there is no primacy in the vertical dimension or on the question of corporate purpose. Nevertheless, this conception of shareholder primacy—modest as it is—is enshrined in corporate law. Those who deny that shareholder primacy is the law need to acknowledge this fact, but once it is understood that traditional shareholder primacy has little in common with the radical version there is no reason to be reluctant to do so.

…continue reading: Radical Shareholder Primacy

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