Archive for May, 2010

Governance Gets Personal Under New U.K. Code

by Neil Baker, for Compliance Week, May 31, 2010

The directors of the top 350 U.K.-listed companies will face re-election every year, instead of holding the typical three-year tenure, under a revised version of the country’s influential corporate governance code.

The new code released today says performance-related pay should be aligned to the long-term interests of the company and its risk policy. And it includes new principles on how directors should be selected and what makes for a well-balanced boardroom.

The changes on board composition are aimed at avoiding “group think” and encouraging diversity, according to the Financial Reporting Council, the governance regulator responsible for the code.

The code says the board chairman should hold a regular “development review” with each director, and companies should bring in outsiders to organize board effectiveness reviews at least every three years.

It calls on companies to publish an explanation of their business model, and it includes an explicit statement that the company’s board is responsible for determining the nature and extent of the significant risks it is willing to take.

Tim Copnell, an associate partner at KPMG, said a focus on boardroom behavior in the new code meant that “governance will necessarily become more personal.”…(continue reading)

The Continued Federalization of Corporate Law

by Robert J Brown Jr., for the, May 28, 2010

Larry Ribstein has been posting on the corporate governance provisions in the financial reform legislation and has lamented the continued creeping federalization of corporate law.  Steve Bainbridge laments that the evolution of the law is increasingly a “struggle to keep the federal government from steadily encroaching on corporate governance to the point that we might as well adopt a federal corporations law.”  JW Verrett is breathing a sigh of relief that, notwithstanding the other provisions in the legislation, it did not include a ban on staggered boards.

We will have a number of posts on the governance provisions, including the sections that preempt not only state law but the authority of the stock exchange.  The legislation (at least on the Senate side) essentially gives the SEC authority over the voting of uninstructed shares by broker-dealers and the definition of independent director, at least in the context of compensation committees.

We note however, Larry’s comment that while none of the provisions “is individually earth-shaking, they cumulatively touch many major aspects of corporate governance formerly left to contract and state law.”  He is correct on that point but a couple of points need to be interjected into the debate….(continue reading)

The Corporate Governance Journey Continues

By Gillian Lees, for her blog at Chartered Institute of Management Accountants, May 25, 2010

Another milestone will be passed this week on the epic journey of corporate governance when the UK Financial Reporting Council (FRC) issues its revised corporate governance code for UK listed companies.  This follows a year-long review and reflects governance thinking in the light of the global financial crisis.  For another example of a post-crisis code, take a look at the King III report from South Africa which I looked at in a previouspost.

Back to the UK.  The first bit of good news is that for those of you who have been wondering why on earth it was called The Combined Code on corporate governance, the mystery will be laid to rest.  The code is to be renamed the UK Corporate Governance Code.

The main changes will be focused on emphasising key messages and behaviours rather than adding a long list of new requirements, but there is one particular new provision that is worth thinking about – in essence, companies are going to have to include in their annual reports an explanation of the basis on which they generate revenues and make a profit from their operations (the business model) and their overall financial strategy.  It looks deceptively simple, but it could provide a real challenge for companies to articulate their business models clearly.  Nevertheless, this could be one of those new requirements that provide something of real value as the very process of mapping out the business model could expose some useful learnings along the lines of ‘this model makes no sense whatsoever’ and could help to shed some light on how the model might be developed, for example, into new products or markets….(continue reading)

Nigeria Capital Market- Government to Enforce Code of Corporate Governance

by Clement Nwoji, for on May 26, 2010

Abuja — Given growing abuse of the Capital Market operations, the Federal Government has constituted a Committee to design Code of Corporate Governance in a bid to ensure transparency and maintain high ethical standards in line with international best practice.

Also, it has set up a Committee to review the Investments and Securities Act of 2007 so as to enable it meet the emerging challenges from the growth of the nation’s Capital Market. The two Committees would be inaugurated by the Minister of state for Finance, Mr. Remi Babalola on thursday May 27.

Saying that the design of code of corporate governance for capital market operators would strengthen the regulators, Babalola said “Part of the factors that led to the recent capital market collapse was weak and ineffective supervision on the part of regulators” just as “the ISA Review Committee seeks to align the Act with current realities and international best practices.”…(continue reading)

Inside the Corporate Governance Complex

by Suzanne Stevens, for Harvard Law School Forum on Corporate Governance and Financial Regulation, May 20, 2010

In an article titled What Berle and Means have wrought in the May 17 issue of The Deal magazine and available on, my colleague Michael Rudnick and I map the well-funded, sprawling and interlocking set of institutions that have grown up around corporate governance over the past 30 years or so. This governance complex, with major outposts across the country at research universities, law firms, the federal government, institutions, activist hedge funds and even blogs like this one, generates considerable intellectual and financial firepower. We lay out some of its fissures, schism and alliances, and talk to movers and shakers including legal icons Ira Millstein and Martin Lipton, Harvard’s Lucian Bebchuk, Stanford’s Joe Grundfest, Relational Investors’ Ralph Whitworth, Calpers’ Anne Simpson and The Corporate Library’s Nell Minow.

Why now? The financial crisis has propelled the issue of the role of boards and balance sheet transparency high onto regulatory and legislative agendas. Congress is threatening to reach deep into corporate boardrooms on executive pay, and the Obama-era SEC is taking a more activist approach to governance than at any time since the Enron Corp. and WorldCom Inc. scandals of the early 2000s…(continue reading)

Directors face annual election under new corporate governance rules

By Helia Ebrahimi, for Telegraph UK, May 20, 2010

British business faces one of its biggest ever corporate governance shake-ups next week when new rules are published that could impose external reviews on board performance, force directors to face annual election and spell out the responsibilities of non-executive directors and chairmen.

The Financial Reporting Council (FRC) will publish the first part of an overhauled Combined Code in the wake of Sir David Walker’s review into the banking crisis last year which called for a changes in boardroom accountability.

The UK Code of Corporate Governance, due to be published next Friday, will deal exclusively with corporate governance for boardroom directors and companies. It is set to be made active by the Financial Services Authority on June 30 on a “comply or explain” basis.

The second part of the new code, which deals with the responsibilities of investors – to be called the Stewardship Code – will be published one month later at the end of June…(continue reading)

Ketchum Creates Advisory Board to Offer Best-in-Class Client Counsel on Corporate Governance Issues

By Ketchum for PR Newswire, May 19, 2010

Significant changes to corporate governance in the U.S. – touching areas such as SEC reporting rules, New York Stock Exchange broker discretionary voting and proxy access – and the promise of new regulations in the coming year, frame the backdrop for the launch of the Ketchum Corporate Governance Advisory Board. The board is composed of a diverse group of experienced industry experts.

With the formation of this board with leaders from securities law, academia, and shareholder and investor relations, Ketchum will be uniquely positioned to provide valuable counsel and strategic approaches to its clients on emerging regulatory issues surrounding the profound changes impacting investor communications.

“The changes to corporate governance laws require companies to make a number of changes to their business practices, including the way they communicate and share information,” said Raymond L. Kotcher, senior partner and CEO, Ketchum. “By partnering with this extraordinary group of experts, Ketchum will be even better positioned to counsel its corporate clients on new regulations and the importance of transparent communications. The members of the newly formed Ketchum Corporate Governance Advisory Board represent some of the industry’s leading voices in the rapidly changing shareholder rights landscape, and we are thrilled at the possibilities and client benefits that this partnership creates.”…(continue reading)

Estimating the Effects of Large Shareholders Using a Geographic Instrument

In our paper, Estimating the Effects of Large Shareholders Using a Geographic Instrument, forthcoming in the Journal of Financial and Quantitative Analysis, we develop and test a new instrumental variable framework which allows us to separate selection effects from treatment effects for a large group of blockholders and to quantify their impact on several aspects of firm behavior. We start by documenting that non-managerial individual shareholders hold blocks in firms that are headquartered close to where they live. We then use this empirical fact to create an instrumental variable (the geographic variation in the density of wealthy individuals) for the presence of a large shareholder in a publicly traded U.S. firm. This instrument predicts the presence of a block in a firm with surprising power, and it is robust to the inclusion of variables that vary geographically, reducing concerns about its validity.

Our evidence contributes in three ways to existing research on blockholders and more generally to corporate governance research. First, we find that blocks are not randomly allocated to firms, but are systematically allocated based on where the benefits to additional monitoring are more significant. This result confirms a suspicion about block ownership endogeneity that researchers have had at least since Demsetz and Lehn (1985). Importantly, the non-randomness of blocks matters. The inferences about the impact of large shareholders change significantly once we control for selection effects….(continue reading)

Red Flags for Say-on-Pay Voting

Update: In related news on say-on-pay, the first U.S. public company has lost a say-on-pay vote. Only 46% of votes cast at Motorola’s annual meeting this year voted “yes” on the company’s say-on-pay resolution, which it included in this year’s proxy voluntarily, available here.

For investors, the advent of advisory shareowner votes on executive compensation — at more than 300 companies in 2010 — is an opportunity and a challenge. These votes can be catalysts for shareowner discussions with directors and management about pay concerns, including the structure and size of executive compensation. But they also oblige shareowners to analyze compensation in a thoughtful way.

Many investors, however, lack the time and resources to do deep dives on compensation at each of the hundreds of companies in their portfolios. They need rules of thumb to identify executive pay programs that are ticking time bombs. Poorly-designed incentives can promote excessive risk-taking and get-richquick mentalities — key contributors to the financial crisis.

Accordingly, the Council has developed the following list of red flags to help members target companies where pay deserves careful scrutiny and where dialogue may be most urgent. The list was crafted by Council staff after a thorough review of Council policies and comment letters on executive compensation, checklists developed by other organizations and the recommendations of 15 pay experts who briefed members in a series of teleconferences in 2009….(continue reading)

Financial Markets Recovery Project Launch Jakarta

by International Finance Corporation for the Global Corporate Governance Forum, March 2010

“Given the seriously disruptive impact of financial sector failures on the wider economy, the Forum was well inspired to launch its Financial Markets Recovery Project, which is aimed at improving capacity in bank boards of emerging countries. The ability of directors to recognize and apply sound principles should reduce the risk of reproducing mistakes that have brought about some of the disasters witnessed recently in even the most developed markets.“

Leo Goldschmidt
Honorary Managing Partner, Bank Degroof


The global financial crisis of 2007-2009 exposed significant weaknesses in corporate governance, and specifically risk governance, across the financial services industry. In response, the Forum launched its Financial Markets Recovery Project to help equip bank boards to lead with integrity, to hold the right skill sets to exercise oversight functions, and to properly manage risk. To do so, the project is deepening the risk governance module of its existing Board Leadership Training Resources program. The aim is to create self-sustaining board leadership training programs that address the unique challenges faced by directors of banks and financial institutions, thereby reducing their institutions’ vulnerability to future financial crises.

Supporting Banks in Emerging Markets

The Forum has developed supplemental materials, Governing Banks, as a training resource for bank board directors in emerging markets. The supplement is based on an extensive literature review, international consultations, peer reviews and interviews with directors, bankers, chief risk officers, regulators and independent experts reflecting perspectives from all regions of the world.

The supplemental materials form an integral part of the Forum’s Corporate Governance Board Leadership Training Resources, which has proven to be a major success in its global roll-out. It provides comprehensive material and guidance on all key aspects of board leadership, with particular emphasis on strategy formulation, financial controls, supervision and reporting, risk management, and corporate social responsibility.

As the supplement materials are rolled out globally, they will be contextualized to the particular market demands and regulatory framework where the Forum will support self-sustaining capacity for board training programs….(continue reading)



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Leaders in Corporate Governance



Blog da Governança

(in Portuguese) A weekly chronicle about shareholders' rights & duties, activism and capital markets regulation, by Renato Chaves.


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