Shareholder voting has undergone a remarkable transformation over the past few decades. Institutional ownership of shares was once negligible; now, it predominates. This is important because individual investors are generally rationally apathetic when it comes to shareholder voting: value potentially gained through voting is outweighed by the burden of determining how to vote and actually casting that vote. By contrast, institutional investors possess economies of scale, and so regularly vote billions of shares each year on thousands of ballot items for the thousands of companies in which they invest.
Posts Tagged ‘Conflicts of interest’
I recently posted my forthcoming book chapter, From Institutional Theories to Private Pensions (in Company Law and CSR: New Legal and Economic Challenges, Ivan Tchotourian ed., Bruylant 2014) on SSRN.
Corporate governance is sometimes described by political scientists as a three-player game between capital, management, and labor. Yet, in most contemporary debates about corporate governance among lawyers and economists, especially in the English-speaking world, the agency problem and conflicts of interest between shareholders and management seem to be single conflict of interest to which much attention is paid. In this chapter, which builds on previously published law review articles, I attempt to put this observation into a larger historical context, arguing that the nearly exclusive focus on the concern of shareholders is historically and geographically contingent. Differences between conflicts of interest in different corporate governance systems have long been recognized in the scholarly literature. Most obviously, it is well known that the majority-minority agency problem is more salient than the one between shareholders and managers in countries where concentrated ownership is more common. However, it is also worthwhile to look at other conflicts in the tripartite structure of corporate governance that may be equally relevant, at least under certain circumstances. Most importantly, the interests of employees are often relegated either to employment law, or are interpreted as an aspect of corporate social responsibility and thus dismissed as an issue promoted by “sandals-wearing activists” that are effectively only a distributive concern.
Recently issued SEC staff guidance addresses concerns that have been raised about proxy advisory firms by emphasizing that the investment adviser that retains and pays a proxy advisory firm is uniquely positioned to monitor the proxy advisory firm and is required to actively oversee the firm if it wants to benefit from the firm’s services to discharge its fiduciary duty. As a result of the greater oversight exercised by all of their investment adviser clients, the proxy advisory firms will presumably respond by enhancing their policies, processes and procedures, as well as the transparency of these policies, processes and procedures. In turn, the corporate community may indirectly benefit to some degree.
The U.S. Securities and Exchange Commission (SEC or Commission) issued a cease and desist order on June 16, 2014 (the Order) against Paradigm Capital Management, Inc. (Paradigm) and its founder, Director, President and Chief Investment Officer, Candace King Weir (Weir).  The Order alleged that Weir caused Paradigm’s hedge fund client, PCM Partners L.P. II (Fund), to engage in certain transactions (Transactions) with a proprietary account (Trading Account) at the Fund’s prime broker, C.L. King & Associates, Inc. (C.L. King). Paradigm and C.L. King were allegedly under the common control of Weir. The Order further alleged that, because of Weir’s personal interest in the Transactions and the fact that the committee designated to review and approve the Transactions on behalf of the Fund was conflicted, Paradigm failed to provide the Fund with effective disclosure and failed effectively to obtain the Fund’s consent to the Transactions, as required under the Investment Advisers Act of 1940 (Advisers Act).
Drawing on insights from the literatures on street-level bureaucracy and on regulatory and audit design, our paper, Monitoring the Monitors: How Social Factors Influence Supply Chain Auditors, which was recently made publicly available on SSRN, theorizes and tests the factors that shape the practices of private supply chain auditors. We find that audits are conducted most stringently by auditors who are experienced and highly trained, and by audit teams that include female auditors. By contrast, auditors that have ongoing relationships with audited factories, and all-male audit teams conduct more lax audits, identifying and citing fewer violations. These findings make five key contributions and suggest strategies for designing audit regimes to more effectively detect and prevent corporate wrongdoing.
Mary Jo White, the Chair of the Securities and Exchange Commission (the “SEC”), recently delivered two speeches with important implications for the future structure of U.S. equity markets. The first (discussed on the Forum here), delivered on June 5, 2014, discussed various initiatives to improve equity market structure. The second (discussed on the Forum here), delivered on June 20, 2014, addressed the importance of intermediation in the securities markets and the roles that technology and competition play with respect to various types of market intermediaries such as exchanges, dark pools, brokers and dealers. In both speeches, Chair White expressed her belief that the equity markets are not rigged or fundamentally unfair, but nevertheless could—with updated or different regulations—function more efficiently and with even greater fairness than they currently do.
Regulation of proxy advisers is a widely discussed subject matter worldwide. The European Securities and Markets Authority (ESMA), the regulator responsible for enforcing European securities regulation, declared in its ESMA Final Report and Feedback Statement on the Consultation Regarding the Role of the Proxy Advisory Industry in February 2013, to favor a self-regulatory approach over mandatory regulation of the industry. “In order to ensure a robust process in developing, maintaining, and updating the Code of Conduct,” ESMA set up a list of key governance for developing a Code of Conduct for the industry (see ESMA, Final Report, at p. 11). These included, inter alia, a transparent composition and the appointment of an independent Chair that possesses the relevant skills and experience. The Code of Conduct was required to “adequately address the needs and concerns of all relevant stakeholders (including proxy advisors themselves, institutional investors, and issuers).” ESMA’s Final Report offered guidance for the detailed elaboration of the Code of Conduct on certain subject matters. In particular, ESMA asked the industry to respond to concerns regarding conflicts of interests and communication with issuers.
…continue reading: Best Practice Principles for Proxy Advisors and Chairman’s Report
The conduct of investment bankers often arouses suspicion and criticism. In Toys “R” Us, the Delaware Court of Chancery referred to “already heightened suspicions about the ethics of investment banking firms”  ; in Del Monte, it criticized investment bankers for “secretly and selfishly manipulat[ing] the sale process to engineer a transaction that would permit [their firm] to obtain lucrative … fees”;  and, more recently, in Del Monte, it criticized a prominent investment banker for failing to disclose a material conflict of interest with his client, a failure the Court described as “very troubling” and “tend[ing] to undercut the credibility of … the strategic advice he gave.”  While the investment bankers involved in the cases inevitably escaped court-imposed sanctions, because they were not defendants, they also escaped sanctions from the Financial Industry Regulatory Authority (FINRA), the regulator primarily responsible for overseeing their conduct.
On March 7, 2014, Vice Chancellor Travis Laster of the Delaware Court of Chancery found a financial advisor liable for aiding and abetting breaches of fiduciary duties by the board of Rural/Metro Corporation in connection with the company’s 2011 sale to an affiliate of Warburg Pincus LLC. In its 91-page, post-trial opinion, the Court concluded that the financial advisor allowed its interests in pursuing buy-side financing roles in both the sales of Rural/Metro and Emergency Medical Services (“EMS”) to negatively affect the timing and structure of the company’s sales process, that the board was not aware of certain of these actual or potential conflicts of interest, and that the valuation analysis provided to the board was flawed in several respects. Both the Rural/Metro board of directors and a second financial advisor to Rural/Metro settled before trial for $6.6 million and $5.0 million, respectively.
As dealmakers put the finishing touches on public M&A transactions, the question is no longer if there will be a lawsuit, but rather when, how many and in what jurisdiction(s). And while many of the cases remain of the nuisance strike-suit variety, recently it seems every few weeks there is an important Delaware decision or other litigation development that potentially changes the face of deal litigation and introduces new risks for boards and their advisers. Now more than ever, dealmakers need to be aware of, and plan to mitigate, the resulting risks from the earliest stages of any transaction.