About a year ago we restated Vanguard’s mission to read: “To take a stand for all investors, treat them fairly, and give them the best chance for investment success.” While the words were new, the ideals were not; they’ve been the consistent principles by which we’ve managed our enterprise since our founding.

As we stand on the cusp of “proxy season”—when investors in most U.S. companies will vote at shareholder meetings on matters including the election of directors and the approval of compensation plans—it strikes me that nothing better exemplifies our mission in action than our efforts to ensure that the companies in which our funds invest are subject to the highest standards of corporate governance.

…continue reading: Passive Investors, Not Passive Owners

Complaints that investors only look for short-term gains are nothing new. As early as 1990 an Economist article proclaimed: “The old bugbear of businessmen — that fund managers are too obsessed with the short term, and unwilling to buy shares in companies with ambitious research projects — is back on the prowl.”

Recently, the turnover of shares in listed companies has grown to numbers far exceeding those of 1990. Does this change in investor behavior influence the behavior of managers in listed firms?

The institutional innovation of freely tradable shares, traceable to Holland in the 17th century, made it possible for companies such as the Dutch East India Company to have longer investment horizons than individual investors. Listing shares ensured that an investor could recoup his money from other investors and that, as a result, companies didn’t have to repay individual investors. Seen in this light, one might assume that investor short-termism would have little influence on board decisions at listed companies and much more influence on board decisions at privately held companies. General opinion, however, disagrees.

…continue reading: Short-Termism of Institutional Investors and the Double Agency Problem

PwC U.S. recently released two reports on corporate governance considerations relating to public offerings. The first, titled “Going Public? Five Governance Factors to Focus on,” outlines key governance considerations companies should address when pursuing a public offering. Its companion document, “Governance for Companies Going Public: What Works Best™,” guides directors and executives of companies planning an IPO through the many governance decisions necessary; offers insights from interviews with directors, executives, investors and board advisors; reports results of PwC’s proprietary research on pre-and post-IPO governance structures; and assists those involved understand the governance landscape.

The five key governance considerations detailed in the report titled “Going Public? Five Governance Factors to Focus on” include:

…continue reading: Corporate Governance Planning for Companies Going Public

In our paper, Adoptive Expectations: Rising Sons in Japanese Family Firms, forthcoming in the Journal of Financial Economics, we examine a 40-year postwar panel of listed companies in Japan. In developed economies, inherited control is linked to poor firm performance (Morck, Stangeland, and Yeung, 2000; Smith and Amoako-Adu, 2005; Bertrand and Schoar 2006; Perez-Gonzalez, 2006; Bennedsen, Perez-Gonzalez, and Wolfenzon, 2007). Our panel of nearly all Japanese firms listed from 1949 (when markets reopened after World War II) to 1970, and followed until 2000, reveals inherited control more common than generally thought (Chandler, 1977; Porter, 1990) and heir-run firms performing well. These results are robust, and analysis of succession events shows heir control “causing” good performance.

…continue reading: Adoptive Expectations: Rising Sons in Japanese Family Firms

Concerns about the internal governance of hedge funds have dramatically increased in recent years. During the financial crisis of 2008, investors became frustrated when numerous hedge fund managers suddenly prevented them from withdrawing their capital yet nonetheless continued to charge them fees. Since the financial crisis, concerns about hedge fund governance have focused on transparency, operational practices, and the growing view that fund directors do not effectively monitor fund managers.

In my paper, Hedge Fund Governance, which was recently made publicly available on SSRN, I provide the first comprehensive scholarly analysis of hedge fund governance. In doing so, my paper makes several contributions. First, it contributes to the literature on corporate governance by conceptualizing the unique way in which hedge funds are governed and situating their style of governance within established paradigms. I argue that hedge fund governance is a type of responsive managerialism.

…continue reading: Hedge Fund Governance

Scholars have traditionally assumed that lenders that protect themselves using credit derivatives like credit default swaps (CDS) have limited interest in debt governance. The rationale behind this proposition seems straight-forward. Lenders that have bought credit protection should have little incentive to invest in monitoring and disciplining a borrower where they know they will be repaid under the CDS. Indeed, scholars argue, lenders that have purchased CDS protection have considerable interest in seeing a borrower fail. When this happens, they can easily and cheaply exit their investment by triggering repayment on the CDS.

This paper, the New Market in Debt Governance, recently made available on SSRN, challenges this consensus and proposes a new theory of governance in the context of credit derivatives trading. While scholars have traditionally focused on lenders that protect themselves using CDS, they overlook the role of financial firms that sell this credit protection and thereby assume economic risk on the underlying borrower. These protection sellers take on the risk of a borrower defaulting, but possess no legal tools with which they can discipline the borrower to stave off default. As a result, unlike ordinary lenders, protection sellers have no direct means to control a borrower’s risk-taking. They possess no legal powers to influence how much leverage a borrower takes on, its use of collateral, cash reserves or its acquisitions and enterprise strategy. Given this precarious position, it follows that protection sellers possess powerful incentives to seek out ways to influence how a borrower company is run to better control how risky it is allowed to become.

…continue reading: The New Market in Debt Governance

The book, “Corporate Law and Economic Stagnation: How Shareholder Value and Short-termism Contribute to the Decline of the Western Economies” (Eleven International Publishers, 2013), introduces three hypotheses that put corporate law on the map of the causes of the current economic crisis and introduces a normative legal concept, “Long Governance” that can help take the economy out of the slump. Overall, the author takes a post-Keynesian approach to the theory of the firm and uses political economy analysis to expose corporate law’s contribution to a stagnating economy in the West.

The breakdown of the Bretton Woods monetary order in the early 1970s triggered a chain of political, economic and legal events that incrementally brought about “the Great Reversal in Corporate Governance”, i.e. the reorientation of corporate governance from the institutional logic of “retain and invest” to the logic of “downsize and distribute”, and “the Great Reversal in Shareholdership”, i.e. the shortening of the time-horizons of shareholders.

…continue reading: Corporate Law and Economic Stagnation

Each year, Equilar looks to highlight critical areas that can potentially affect those dealing with compensation and governance issues in the upcoming year. The 2012 Compensation & Governance Outlook Report aims to cover a variety of emerging trends in the fields of executive and director pay, equity trends, and corporate governance, while also providing an array of disclosure examples to illustrate unique approaches to strategic matters. The majority of firms will not encounter all, or even most, of the trends in this report in the New Year; it is primarily intended as a starting point for discussions that will take place over the course of 2013.

The 2012 year can be identified by a number of unique identifiers including the presidential election, high-profile public offerings, the second year of Say on Pay, record setting stock prices as well as an unfortunate natural disaster that helped bring together a country. Reverberations for such a dynamic year will no doubt be felt well into 2013 as potential changes to government and regulatory agencies could significantly alter the business landscape causing the need for firms to adjust. Discussions between companies and shareholders will continue to drive changes as firms ensure the story they want told is communicated through a variety of mediums and methods. Concerns surrounding fairness in a number of areas including stock structure and pay will cause struggles between conflicting parties as focus continues to shift towards the decisions in the boardroom. Topics including shareholder engagement, board dynamics, Say on Pay, and pay for performance dominate this year’s report.

…continue reading: 2013 Compensation & Governance Outlook Report

I. Introduction

The years since the onset of the financial crisis have served to further increase the demands on and scrutiny of public company boards of directors. The assault on the director-centric model of corporate governance continues in the shareholder activist and political arenas, and the challenges of planning for and investing in the long-term health of the corporation have become more daunting. As the power and organization of both governance and hedge fund activists have increased, the pressure to produce short-term results has only grown stronger, regardless of whether the steps necessary to produce those results may be harmful to the corporation in the long run.

In this environment, the challenge for directors is to continue to focus on doing what they believe is right for their corporations while maintaining a sufficient understanding of shareholder sensitivities to avoid a targeted attack that could undermine their ability to act in their company’s best interest. The primary focus of a director, of course, should be on promoting and helping to develop the long-term and sustainable success of their company. This encompasses a wide range of activities, including working with management on the company’s business and strategies, planning for the succession of the CEO and other key executives, overseeing risk management, monitoring compliance, setting the appropriate tone at the top and being prepared to step in to address any corporate crises that arise. At the same time, the board needs to be aware of and address shareholder demands in a constructive manner, consider how a hedge fund or other activist may view the company and its strategic alternatives and try to ensure that the company maintains a shareholder relations program that clearly articulates the reasons for the company’s strategies and engenders support from the company’s major shareholders. In some cases, this may include direct communication between board members and institutional shareholders.

…continue reading: Some Thoughts for Boards of Directors in 2013

In the paper, Governance in Executive Suites, which was recently made publicly available on SSRN, my co-author (Yao Lu) and I analyze the interplay between governance in executive suites and board monitoring. We find an exogenous shock increasing board independence weakens governance in executive suites. The empirical proxy for the strength of governance in executive suites is based on the governance mechanism identified by Landier et al. (2009), wherein dissenting executives steer CEOs towards more shareholder friendly decisions through “an efficient implementation constraint that disciplines the decision-making process.”

…continue reading: Governance in Executive Suites