Lax corporate governance has caused executive pay spiral, says Myners

by James Brockett, for People Management, February 9, 2010.

Institutional shareholders should exercise more power to clamp down on executive pay, financial services minister Lord Myners said today.

In a speech to the NAPF seminar on corporate governance, Myners bemoaned the “upward spiral” of boardroom remuneration in the last decade and said that major shareholders such as pension funds has a duty to impose more scrutiny on the issue. The failure of the banks in particular demonstrates the risk of large firms becoming “ownerless corporations” with no effective shareholder governance, he said.

“Over the past decade people who owned shares in UK banks have enjoyed a return of little more than zero. Over the same period bank executives and traders have taken home many billions of pounds in remuneration,” said Myners. “If you owned a bank outright, that is to say you were the sole shareholder, you would never stand for such a situation – but collectively we have. Somewhere in the fragmentation of ownership of quoted companies… we appear to have lost the ability to hold the boards of some public companies to account.”

Myners referred to Incomes Data Services research showing that FTSE 100 chief executives earn 81 times the average pay of full-time workers. This multiple was less than 50 a decade ago, while management theorists historically believed that 20 was a healthy ratio. It is hard to explain this pay boom in terms of the demand or supply of talent, said Myners…(continue reading)

Ownership’s Powerful and Pervasive Effects on M&A

by John Coates, for The Harvard Law School Forum at Harvard Law School, Febraury 9, 2010.

Mergers and Acquisition (M&A) practices vary – indeed, practitioner lore is that every deal is unique.  But M&A deals have much in common.  M&A contracts, techniques, and outcomes vary systematically.  While practitioners exploit such patterns, few have been reported, analyzed, or considered in academic research, and not all practitioners fully reflect these patterns in their practices.  In a recent working paper, available here, I show that ownership dispersion is a first-order determinant of M&A practices.  Firms with dispersed ownership are more salient, and tend to be larger, but dispersion varies significantly even at large US businesses, and affects M&A deal size, duration, techniques, contract terms, and outcomes.

Privately held firms are an important part of the US economy, as is private target M&A. Most US business corporations had 100 or fewer owners, and those firms generated 20+% of corporate receipts in 2006.  Of businesses with more than $250 million in assets, only 18% were C corporations with 500+ shareholders.  Even at public companies, dispersion varies significantly.  A few have millions of record owners, and 500+ have 15,000+ shareholders. But 500+ “public” companies have fewer than 50 record shareholders, and over a third have fewer than 300 record holders.  These companies are the reverse of firms that have “gone dark” – they could deregister with the SEC, but instead voluntarily choose to “remain lit” and file regular reports…(continue reading)

Corporate governance and business ethics: Does it add shareholder value?

by Thinking Made Easy, February 09, 2010.

The testing of relationship between shareholder value within corporate governance and business ethics, there has been building of better relations with primary stakeholders like employees, customers, suppliers and communities could lead to increased shareholder wealth by helping firms develop intangible, valuable assets which can be sources of competitive advantage. On the other hand, using corporate resources for social issues not related to primary stakeholders may not create value for shareholders. Adhering to propositions with data from certain firms and find evidence that stakeholder management leads to improved shareholder value, while social issue participation is negatively associated with shareholder value. In recent years, there has been a surge in corporate governance reform around the world and the phenomenon is evident in the number of national corporate governance reports that have been produced.

The need to analyze national codes of corporate governance in order to determine how the relationship between corporate governance and business ethics as being perceived in lieu to shareholder value by providing background to the corporate governance reform process that still is in the making in such region…(continue reading)

Putting a stronger corporate governance culture into practice

by My Introducer, February 9, 2010.

Two new initiatives designed to support the ownership role of pension funds and continue to support raising corporate governance standards in the UK will be launched today by the National Association of Pension Funds (NAPF).

New guidance, “Pension Funds and the ISC Code – A practical guide” sets out how the Code’s Principles, covering shareholder engagement and reporting, can be applied in practice. It encourages pension funds to incorporate effective engagement monitoring into their fund manager reviews helping to build a stronger corporate governance culture.

The NAPF has also established a dedicated corporate governance service, Corporate Governance PensionsConnection, for funds and investment managers to give them access to expert thinking on a broad range of corporate governance issues.

Both form part of the NAPF’s role in promoting good corporate governance and supporting the ownership responsibilities of pension funds. They are being launched at the NAPF Corporate Governance Seminar…(continue reading)

Corporate Governance and Campaign Finance: Citizens United v. FEC (The Role [or Non-Role] of Delaware)

by J. Robert Brown, for The Race to the Bottom, February 9, 2010.

We are discussing Citizens United v. Federal Election Commission,  No. 08–205,  Jan. 21, 2010, the Supreme Court’s recent decision on campaign finance.

While Congress cannot abridge the right of corporations to expend funds on electioneering communications, states apparently can.  As the majority opined:

• Shareholder objections raised through the procedures of corporate democracy, see Bellotti, supra, at 794, and n. 34, can be more effective today because modern technology makes disclosures rapid and informative. A campaign finance system that pairs corporate independent expenditures with effective disclosure has not existed before today. . . .  With the advent of the Internet, prompt disclosure of expenditures can provide shareholders and citizens with the information needed to hold corporations and elected officials accountable for their positions and supporters…(continue reading)

UK Treasury’s Myners: UK Needs New Corporate Governance Body

by Adam Bradbery, for NASDAQ, February 9, 2010.

LONDON -(Dow Jones)- The U.K. needs a new body to represent investors in their efforts to force better management of the companies in which they hold stakes, Paul Myners, financial services secretary to the U.K. Treasury, said Tuesday.

Myners’ comments come as he ramps up pressure on institutional shareholders to influence and veto management decisions on such areas as executive pay and bonuses.

“I am…keen to further the debate on establishing an independent industry body with a mandate to represent the institutional investor community and raise the profile of governance and engagement,” said Myners at a seminar run by the National Association of Pension Funds.

Myners said the body should be made up largely of the representatives of traditional “long-only” funds which are long-term investors in U.K. companies…(continue reading)

Corporate Governance and Campaign Finance: Citizens United v. FEC (Introduction)

by J. Robert Brown, for The Race to the Bottom, February 8, 2010.

We don’t ordinarily delve into campaign finance issues but  the Supreme Court’s recent decision in Citizens United v. Federal Election Commission,  No. 08–205,  Jan. 21, 2010,merits some unique attention.  As everyone who has not lived under a rock for the last several weeks knows, the Supreme Court largely threw out a provision of McCain-Feingold that restricted the right of corporations to expend funds on political campaigns, concluding that the restrictions interfered with the first amendment rights of corporations.

The particular provision at issue did not involve restrictions on corporate contributions to political campaigns or prohibitions on expenditures that expressly advocated the election or defeat of a candidate.  Instead, the case inolved language added in 2002 that prohibited expenses for anything deemed to be an  “electioneering communication.”  The term encompassed communications that referred “to a clearly identified candidate for Federal office” and was made 30 days before a primary or 60 days before a general election. See 2 U. S. C. §441b; see also 2 U. S. C. §434(f)(3)(A).  In short, corporations (and unions) could not pay for communications that referred by name to candidates just before an election…(continue reading)

SEC Releases Initiative to Foster Cooperation

by Eduardo Gallardo, for The Harvard Law School Forum at Harvard Law School, Febraury 8, 2010.

The SEC yesterday formally released an anticipated new initiative designed to encourage individual and company cooperation with SEC investigations and enforcement actions. [1] The initiative, laid out in a new section of the enforcement manual for the Division of Enforcement entitled “Fostering Cooperation,” (the “Initiative”) establishes incentives for early, substantial, robust cooperation with the stated goal of ensuring “that potential cooperation arrangements maximize the Commission’s law enforcement interests.” [2] The Initiative provides guidance for evaluating an individual’s cooperation and authorizes new cooperation tools, including cooperation agreements, deferred prosecution agreements and non-prosecution agreements. While the new Initiative provides more options for the Enforcement Division and individuals, only time will tell if it proves to be the “game-changer” that Enforcement Director Robert Khuzami anticipates.

I. Features of the New Initiative

A. Standards for Evaluating an Individual’s Cooperation

The revised Enforcement Manual includes a policy statement detailing an advisory framework of standards with which to evaluate an individual’s cooperation. There are four general considerations: (1) assistance provided by the individual; (2) importance of the underlying matter; (3) interest in holding the individual accountable; and (4) profile of the individual. The standards track the typical Department of Justice considerations for evaluating cooperation…(continue reading)

Compensation Season 2010 – Issues to Consider

by Jeremy Goldstein, for The Harvard Law School Forum at Harvard Law School, Febraury 6, 2010.

For many public companies, the new year marks the commencement of compensation season. Setting pay and targets for the new year, determining achievement of performance objectives for the past year and preparing the annual proxy statement contribute to a busy first quarter for compensation committees and management teams working with them. In 2010, companies will undertake these activities in a fluid environment, with executive compensation continuing to receive significant attention from shareholder activists, government and the media. As companies prepare for the upcoming compensation season, they should consider the following items.

New SEC Disclosure Requirements. Companies should take steps to ensure compliance with the new SEC rules which, among other things, address corporate governance matters, risk in compensation programs, independence of compensation consultants and the valuation of equity awards in the compensation tables (see see this Forum post or this Wachtell, Lipton, Rosen & Katz client memorandum for a description of the new rules). Companies should get an early start on organizing appropriate working groups, crafting necessary disclosures and preparing their directors so that they can meet their obligations with respect to upcoming filings…(continue reading)

Incorporating Corporate Governance

by Thoughtful Randomness, February 7, 2010.

Society bestows upon businesses the right to own and use land, labour and natural resources. In return, society has the right to expect these organisations to honour existing rights, limit their activities within boundaries of justice and bring about overall development of the society.

Business ethics is that set of reasons which govern the conduct of a business. Being ethical requires acting with an awareness of how products or services of an organisation can affect the society as a whole.

Globalization of economies has brought corporates to the centre stage of social development. In the process of decision making, managers contribute to the shaping of society. Therefore it is not a choice between profits and ethics, but profits in an ethical manner. This is Corporate Governance.

Corporate governance is about promoting corporate fairness, transparency and accountability.

A SEBI report defines corporate governance as “The acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders. It is about commitment to values, about ethical business conduct and about making a distinction between personal & corporate funds in the management of a company.”

Corporate governance measures include placing constraints on management power and ownership concentration, appointing non-executive directors as well as proper disclosure of financial information and ownership concentration. Many companies have established ethics committees to review strategic decisions and how they affect the society.

So why such a sudden interest in corporate governance?

Corporate governance is an old and established concept. However it gained popularity after a major corporate scandal surfaced called Enron. Several other large companies like Maxwell Corporation, WorldCom, HealthSouth and Peregrine Systems were also convicted of financial frauds…(continue reading)