The experience of the recent financial crisis has brought to the attention the role of short selling. Short selling has been identified as a factor that contributes to market informational efficiency. At the same time, however, short selling has been regarded as “dangerous” to the stability of the financial markets and has been banned in many countries. Interestingly, these two seemingly conflicting views are based on the same traditional wisdom that short selling affects only the way in which information is incorporated into market prices by making the market reaction either more effective or overly sensitive to existing information but does not affect the behavior of firm managers, who may shape, if not generate, information in the first place.
Archive for the ‘International Corporate Governance & Regulation’ Category
Our paper, Say on Pay in Italian General Meetings: Results and Future Perspectives, provides an analysis of the empirical data of shareholders’ say on pay in Italian general meetings in 2012, 2013 and 2014. Say on pay, a shareholders’ advisory vote on a company’s remuneration policy, was introduced in Italy following the European Commission (EC) Recommendations N. 2004/913/EC, N. 2005/162/EC, N. 2009/384/EC and N. 2009/385/EC, which allowed member States to choose between implementing a binding or non-binding advisory shareholder vote on a company’s remuneration policy. Like most European states, Italy has opted for the “weaker” non-binding option. Reference is made to both approval votes (by controlling shareholders) and dissenting votes sometimes casted by minority shareholders (mainly, foreign institutional investors). The dissenting vote, in particular, shows a paramount critical value as originating by shareholders who are independent from the directors involved by the resolution—unlike the controlling shareholders who have nominated and subsequently elected the directors (to whom may often be linked by family or economic ties). In recent years, a significant increase in voting by minority shareholders, mainly foreign institutional investors, regarding—but not limited to—remuneration policies has been noted. This is a direct consequence of the procedural changes introduced by the Shareholder Rights’ Directive n. 36/2007/EC (e.g. record date, reduction of threshold to call special meeting, relaxation of proxy voting and solicitation rules, extension of time—prior to general meeting—to release relevant information for the items of the agenda and translation of documents into English, etc.).
This post highlights what we believe to be the most significant developments during 2014 for financial institutions with respect to U.S. Bank Secrecy Act/anti-money laundering (“BSA/AML”) and U.S. sanctions programs, including sanctions administered by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”), and identifies significant trends. The overarching trend that is likely to continue for the foreseeable future is an intense focus on BSA/AML and sanctions compliance by multiple government agencies, combined with increasing regulatory expectations and significant enforcement actions and penalties.
The debate over board renewal is moving into sharper focus in Canada. New public company disclosure requirements demand greater transparency on such things as term limits and other renewal mechanisms, and some large investors are sending the implicit message that companies must renew the board or they will seek to do it instead. The ICD agrees that the composition and renewal of the board are vital processes that demand rigour and analysis and are best undertaken by the board pro-actively.
In the paper Beyond Term Limits: Using Performance Management to Guide Board Renewal we seek to provide a framework for boards to build a renewal process that increases accountability and achieves the right mix of skills and experience to create long-term effectiveness.
Across the world, difficulties in accessing external equity capital create a serious barrier to the development of new firms. In developed economies, this funding gap is bridged by angel investors and venture capitalists. In emerging economies however, contracting mechanisms and property rights protections are often insufficiently developed to support substantial venture capital activity. As a consequence, little is known about new venture funding in such economies and how external financing constraints are overcome.
In our paper titled “Does Group Affiliation Facilitate Access to External Financing? Evidence from IPOs by Family Business Groups,” which was recently made publicly available on SSRN, we investigate a major source of funding support for new firms—namely, internal equity investments by business groups, especially those controlled by families, and how this facilitates access to external equity markets. Our study is motivated by the pervasive nature of business group participation in international initial public offering (IPO) markets around the world: on average, 29 percent of new issue proceeds in each country is attributable to group-affiliated firms. This raises an important question regarding the role that business groups play in assisting new firms seeking to tap public equity markets. It also raises important questions about whether ignoring the existence of business groups creates serious biases in studies of international IPO activity.
Yet again, the past year has witnessed a staggering array of massive financial settlements in regulatory and white collar matters. Prominent examples, among many others, include Toyota, which was fined $1.2 billion in connection with resolving an investigation into safety defects; BNP, which pleaded guilty and paid $8.9 billion to resolve criminal and civil investigations into U.S. OFAC and other sanctions violations; Credit Suisse, which also pleaded guilty and paid $2.6 billion to resolve a long-running cross-border criminal tax investigation; and the global multi-agency settlements with six financial institutions for a total of $4.3 billion in fines, penalties and disgorgement in regard to allegations concerning attempted manipulation of foreign exchange benchmark rates. The government also continued to generate headlines with settlements arising out of the financial crisis, including settlements with numerous financial institutions totalling more than $24 billion. We have no reason to expect that this trend will change in 2015.
The U.S. Department of Justice (“DOJ”) and the U.S. Securities and Exchange Commission (“SEC”) continue to deploy DPAs and NPAs aggressively. This past year left no doubt that such resolutions are a vital part of the federal corporate law enforcement arsenal, affording the U.S. government an avenue both to punish and reform corporations accused of wrongdoing. In early December, for example, U.S. Assistant Attorney General for DOJ’s Criminal Division, Leslie Caldwell, highlighted the importance of negotiated resolutions that allowed DOJ to “impose reforms, impose compliance controls, and impose all sorts of behavioral change.” She concluded: “In the United States system at least [settlement] is a more powerful tool than actually going to trial.” DOJ and the SEC have used negotiated resolutions, including DPAs and NPAs, to require companies to implement an effective compliance program. In 2014 we witnessed a number of notable developments in negotiated resolutions that demonstrate that the traditional hallmarks of DPAs and NPAs, including post-settlement compliance and reporting obligations, are here to stay.
On December 9, 2014, the Federal Reserve Board (FRB) issued a long-awaited proposal to impose additional capital requirements on the US’s global systemically important banks (G-SIBs). The proposal implements the Basel Committee on Banking Supervision’s (BCBS) G-SIB capital surcharge framework that was finalized in 2011, but also proposes changes to BCBS’s calculation methodology resulting in significantly higher surcharges for US G-SIBs compared with their global peers.
The proposal, which we expect will be finalized in 2015, requires US G-SIBs to hold additional capital (Common Equity Tier 1 (CET1) as a percentage of Risk Weighted Assets (RWA)) equal to the greater of the amount calculated under two methods. The first method is consistent with BCBS’s framework, and calculates the amount of extra capital to be held based on the G-SIB’s size, interconnectedness, cross-jurisdictional activity, substitutability, and complexity. The second method is introduced by the US proposal, and uses similar inputs but replaces the substitutability element with a measure based on a G-SIB’s reliance on short-term wholesale funding (STWF).
ISS recently issued updated guidelines for several of its benchmark global voting policies, which will be effective for analyses of publicly traded companies with shareholder meetings on or after Feb. 1, 2015. For the 10th year running, ISS gathered broad input from institutional investors, corporate issuers, and other market constituents worldwide as a key part of its policy development process. The 2015 updates reflect the time and effort of hundreds of investors, issuers, corporate directors, and other market participants who provided input through a variety of channels, including ISS’ annual policy survey, topical and regional roundtables, and direct engagements with staff.
On November 10th, the Financial Stability Board (FSB) issued a long-awaited consultative document that defined a global standard for minimum amounts of Total Loss Absorbency Capacity (TLAC) to be held by Global Systemically Important Banks (G-SIBs). TLAC is meant to ensure that G-SIBs have the loss absorbing and recapitalization capacity so that, in and immediately following resolution, critical functions can continue without requiring taxpayer support or threatening financial stability.
The FSB’s document requires a G-SIB to hold a minimum amount of regulatory capital (Tier 1 and Tier 2) plus long term unsecured debt that together are at least 16-20%  of its risk weighted assets (RWA), i.e., at least twice the minimum Basel III total regulatory capital ratio of 8%. In addition, the amount of a firm’s regulatory capital and unsecured long term debt cannot be less than 6% of its leverage exposure, i.e., at least twice the Basel III leverage ratio. In addition to this “Pillar 1” requirement, TLAC would also include a subjective component (called “Pillar 2”) to be assessed for each firm individually, based on qualitative firm-specific risks that take into account the firm’s recovery and resolution plans, systemic footprint, risk profile, and other factors.