Posts Tagged ‘Management’

Real Effects of Frequent Financial Reporting

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Friday September 19, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Arthur Kraft of Cass Business School, City University London, and Rahul Vashishtha and Mohan Venkatachalam, both of the Accounting Area at Duke University.

In our paper, Real Effects of Frequent Financial Reporting, which was recently made publicly available on SSRN, we examine the impact of financial reporting frequency on firms’ investment decisions. Whether increased financial reporting frequency improves or adversely influences a manager’s investments decision is ambiguous. On the one hand, increased transparency through higher reporting frequency can beneficially affect firms’ investment decisions in two ways. First, increased transparency can reduce firms’ cost of capital and improve access to external financing, allowing firms to invest in a larger set of positive NPV projects. Second, increased transparency can improve external monitoring and help mitigate over- or under-investment stemming from managerial agency problems. On the other hand, frequent reporting can distort investment decisions. In particular, frequent reporting can cause managers to make myopic investment decisions that boost short-term performance measures at the cost of long run firm value. Which of these two forces dominate is an open empirical question that we explore in this study.

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The Spotlight on Boards

Posted by Martin Lipton, Wachtell, Lipton, Rosen & Katz, on Monday September 8, 2014 at 9:17 am
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Editor’s Note: Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton memorandum by Mr. Lipton.

The ever evolving challenges facing corporate boards prompts an updated snapshot of what is expected from the board of directors of a major public company—not just the legal rules, but also the aspirational “best practices” that have come to have almost as much influence on board and company behavior.

Boards are expected to:

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Military CEOs

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Thursday August 28, 2014 at 9:08 am
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Editor’s Note: The following post comes to us from Efraim Benmelech and Carola Frydman, both of the Finance Department at Northwestern University.

In our paper, Military CEOs, forthcoming in the Journal of Financial Economics, we examine the effect of military service of CEOs and managerial decisions, corporate policies, and corporate outcomes. Service in the military may alter the behavior of servicemen and women in various ways that could affect their actions when they become CEOs later in life. Militaries have organized, sequential training programs that combine education with on-the-job experience and are designed to develop command skills. Evidence from sociology and organizational behavior research suggests that individuals may acquire hands-on leadership experience through military service that is difficult to learn otherwise and that they may be better at making decisions under pressure or in a crisis (Duffy, 2006). It is possible, therefore, that military CEOs may be more prepared to make difficult decisions during periods of industry distress. Moreover, military service emphasizes duty, dedication, and self-sacrifice. The military may thus inculcate a value system that encourages CEOs to make ethical decisions and to be more dedicated and loyal to the companies they run rather than pursue their own self-interest (Franke, 2001).

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Survey of Board Leadership 2014

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday August 27, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Robert E. Hallagan and Dennis Carey, both Vice Chairmen at Korn Ferry, and is based on portions of a survey conducted by the Korn Ferry Institute. The complete publication is available here.

This is our second annual report on board leadership.

The numbers and trends are interesting but the subtleties and substance behind them are extremely valuable as the National Association of Corporate Directors (NACD) and Korn Ferry continue their study of high-performing boards. The thoughtful selection and performance of board leaders is one of two pillars of leadership that drive long-term shareholder value—the other being the CEO of the company.

There is universal agreement that each board must have an independent leader but how each company has achieved this takes many shapes.

In this year’s report, we see continued evidence of a slow and deliberate trend toward separation of the roles, higher in mid-cap companies than the large-cap S&P 500. Key catalysts included activism, and a transition of CEO leadership that prompted the board to elect to separate the roles. Between this report and the next, Korn Ferry and NACD will be in active discussion with companies that have changed leadership structures in the last several years and will ask the following questions to uncover what is driving long-term shareholder value:

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SEC Charges Corporate Officers with Fraud

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Sunday August 17, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from R. Daniel O’Connor, partner focusing on securities enforcement at Ropes & Gray LLP, and is based on a Ropes & Gray Alert authored by Mr. O’Connor, Marko S. Zatylny, Kait Michaud, and Michael J. Vito.

On July 30, 2014, the Securities and Exchange Commission (“SEC”) advanced a novel theory of fraud against the former CEO (Marc Sherman) and CFO (Edward Cummings) of Quality Services Group, Inc. (“QSGI”), a Florida-based computer equipment company that filed for bankruptcy in 2009. The SEC alleged that the CEO misrepresented the extent of his involvement in evaluating internal controls and that the CEO and CFO knew of significant internal controls issues with the company’s inventory practices that they failed to disclose to investors and internal auditors. This case did not involve any restatement of financial statements or allegations of accounting fraud, merely disclosure issues around internal controls and involvement in a review of the same by senior management. The SEC’s approach has the potential to broaden practical exposure to liability for corporate officers who sign financial statements and certifications required under Section 302 of the Sarbanes-Oxley Act (“SOX”). By advancing a theory of fraud premised on internal controls issues without establishing an actionable accounting misstatement, the SEC is continuing to demonstrate that it will extend the range of conduct for which it has historically pursued fraud claims against corporate officers.

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Director Engagement on Executive Pay

Posted by Jeremy L. Goldstein, Jeremy L. Goldstein & Associates, LLC, on Friday August 15, 2014 at 9:00 am
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Editor’s Note: Jeremy L. Goldstein is founder of Jeremy L. Goldstein & Associates, LLC. This post is based on a publication by Mr. Goldstein.

Since the implementation of the mandatory advisory vote on executive compensation, shareholder engagement has become an increasingly important part of the corporate landscape. In light of this development, many companies are struggling to determine whether, when and how corporate directors should engage with shareholders on issues of executive compensation. Set forth below are considerations for companies grappling with these issues.

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Peer Effects and Corporate Corruption

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Thursday August 14, 2014 at 9:09 am
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Editor’s Note: The following post comes to us from Christopher Parsons of the Finance Area at the University of California, San Diego; Johan Sulaeman of the Department of Finance at Southern Methodist University; and Sheridan Titman, Professor of Finance at the University of Texas at Austin.

Traditional models of crime frame the choice to engage in misbehavior like any other economic decision involving cost and benefit tradeoffs. Though somewhat successful when taken to the data, perhaps the theory’s largest embarrassment is its failure to account for the enormous variation in crime rates observed across both time and space. Indeed, as Glaeser, Sacerdote, and Scheinkman (1996) argue, regional variation in demographics, enforcement, and other observables are simply not large enough to explain why, for example, two seemingly identical neighborhoods in the same city have such drastically different crime rates. The answer they propose is simple: social interactions induce positive correlations in the tendency to break rules.

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Compliance or Legal? The Board’s Duty to Assure Clarity

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday August 12, 2014 at 9:02 am
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Editor’s Note: The following post comes to us from Michael W. Peregrine, partner at McDermott Will & Emery LLP. This post is based on an article by Mr. Peregrine; the views expressed therein do not necessarily reflect the views of McDermott Will & Emery LLP or its clients.

A series of developments threaten to blur the important distinction between the corporation’s legal and compliance functions. These developments arise from federal regulatory action, media and public discourse, policy statements from compliance industry leaders, and new surveys reflecting the increasing prominence of the general counsel. If left unaddressed, they could lead to significant organizational risk, e.g., leadership disharmony, misallocation of executive resources, ineffective risk management, and the loss of the attorney-client privilege in certain circumstances. The governing board is obligated to address this risk by working with executive leadership to assure clarity between the roles of general counsel and chief compliance officer.

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Symbolic Corporate Governance Politics

Posted by Marcel Kahan, NYU School of Law, on Monday August 11, 2014 at 9:12 am
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Editor’s Note: Marcel Kahan is the George T. Lowy Professor of Law at the New York University School of Law. This post is based on a paper co-authored by Professor Kahan and Edward Rock, Saul A. Fox Distinguished Professor of Business Law at the University of Pennsylvania School of Law.

Corporate governance politics display a peculiar feature: while the rhetoric is often heated, the material stakes are often low. Consider, for example, shareholder resolutions requesting boards to redeem poison pills. Anti-pill resolutions were the most common type of shareholder proposal from 1987–2004, received significant shareholder support, and led many companies to dismantle their pills. Yet, because pills can be reinstated at any time, dismantling a pill has no impact on a company’s ability to resist a hostile bid. Although shareholder activists may claim that these proposals vindicate shareholder power against entrenched managers, we are struck by the fact that these same activists have not made any serious efforts to impose effective constraints on boards, for example, by pushing for restrictions on the use of pills in the certificate of incorporation. Other contested governance issues, such as proxy access and majority voting, exhibit a similar pattern: much ado about largely symbolic change.

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Socially Responsible Firms

Posted by Allen Ferrell, Harvard Law School, on Wednesday August 6, 2014 at 9:02 am
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Editor’s Note: Allen Ferrell is Greenfield Professor of Securities Law, Harvard Law School. The following post is based on the paper co-authored by Professor Ferrell, Hao Liang and Professor Luc Renneboog.

The desirability of corporations engaging in “socially responsible” behavior has long been hotly debated among economists, lawyers, and business experts. Two general views on corporate social responsibility (CSR) prevail in the literature. The CSR “value-enhancing view” argues that socially responsible firms, such as firms that promote efforts to help protect the environment, promote social equality, improve community relationships, can and often do adhere to value-maximizing corporate governance practices. Indeed, well-governed firms are more likely to be socially responsible. In short, CSR can be consistent with shareholder wealth maximization as well as achieving broader societal goals. The opposite view on CSR begins with Milton Friedman’s (1970) well-known claim that “the only social responsibility of corporations is to make money”. Extending this view, several researchers argue that CSR is often simply a manifestation of managerial agency problems inside the firm (Benabou and Tirole, 2010; Cheng, Hong, and Shue, 2013; Masulis and Reza, 2014) and hence problematic (“agency view”). That is to say, socially responsible firms tend to suffer from agency problems which enable managers to engage in CSR that benefits themselves at the expense of shareholders (Krueger, 2013). Furthermore, managers engaged in time-consuming CSR activities may lose focus on their core managerial responsibilities (Jensen, 2001). Overall, according to the agency view, CSR is generally not in the interests of shareholders.

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