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Corporate Governance is a contemporary issue in the business world. It could be described as a company’s overall efficient control to ensure transparency and full disclosure in organization business dealings. Despite organizations establishing various forms of Corporate Governance incidence of corporate failures still, occur which poses audit risk and affects auditors' reputation. This study was a form of explorative research which investigated how corporate governance affects Audit client audit risk. We carried out an in-depth study of past literature to gain a better understanding of the concepts of corporate governance and audit risk and to also know the findings of previous researches on the subject. Our study concluded that when there is good governance in the organization, the quality of the financial report will improve and this will ultimately reduce audit risk.
The COVID-19 pandemic brought with it economic downturn forcing businesses to compete with fewer resources and major operational hurdles. Historically, economic downturn yields more accounting fraud: Old fraud is uncovered amid heightened financial scrutiny [1] while the conditions for new fraud flourish. [2] We saw this in the 2008 financial crisis, but expect swifter and fiercer enforcement this time around, as the DOJ focuses on coronavirus-related frauds [3] and the SEC bolsters its Enforcement Division to ensure that “Main Street investors are not victims of fraud.” [4] Now more than ever, businesses must be extremely careful in preparing their financial statements. In this post, we argue for risk-mitigation strategies to curtail accounting fraud in three key coronavirus-impacted areas: disclosures, revenue recognition, and impairment.
Private equity (PE) firms are often said to use their industry expertise and operational know-how to identify attractive investments, to develop value creation plans for those investments, and to generate attractive investors returns by implementing their value creation plans. Although many studies refer to such value creation plans, there is no systematic evidence on what these plans typically look like or whether they help improve company operations or investor returns. In a recent paper, we open up the black box of value creation in private equity with the help of confidential information on value creation plans and their execution. We find that plans are tailored to each portfolio company’s needs and circumstances and have become more hands-on. Successful execution varies systematically across funds and is a key driver of investor returns. Company operations and profitability improve in ways consistent with successful execution, even beyond PE funds’ exit.
Companies will not survive Covid-19 unless they communicate with their stakeholders. As the world around them transforms, corporate leaders must welcome input from those on the front lines of corporate activity – primarily employees and consumers, but also local communities, NGOs, academic experts, and even government authorities and regulators. And they must put in place the corporate infrastructure necessary to cast a wide net and gather and analyze this information. In moments of crisis, the self-preservation instincts of a corporate executive call for reducing costs and conserving resources with large-scale wage cuts, layoffs, and shutdowns. Such measures are necessary, it is widely thought, to preserve value for the company’s ultimate owners, the shareholders. Protecting employees and assisting communities look like expendable luxuries available only in the foregone bull era. For example, with its entertainment parks closed, Disney furloughed 43,000 workers. When asked whether the company had considered alternatives, a Disney spokesman said, “I suggest you look up the definitions of ‘publicly traded company’ and ‘fiduciary duty’.”
As discussed in greater detail in some of our prior articles,[1] a shareholder rights plan is a defensive measure used by a public company to deter (though not necessarily prevent) a stockholder from exceeding a specified ownership percentage without prior approval from the company’s board. We have prepared a series of articles on some of the interesting and evolving features of rights plans and the various considerations that go along with them. This article is the second in the series and focuses on a clause in most rights plans that grandfathers existing stockholders whose ownership stakes are at or above the specified threshold at the time the plan is adopted. Rights plans commonly include a “grandfather clause” that exempts stockholders who, at the time of the rights plan’s adoption, have ownership stakes equal to or greater than the rights plan’s specified threshold. This allows these stockholders to maintain their stakes without immediately triggering the rights plan.
HONG KONG/NEW YORK (Reuters) - Who needs expensive lunches at glitzy hotels and fancy restaurants to court investors for bond deals or the sale of new shares on the stock exchange? In a world governed by quarantine and social distancing rules, even lead managers on multi-billion dollar deals have had to curtail travel and drop the personal touch in favour of video conferences and phone calls to woo potential investors. Warner Music Group WMG.O is one of more than a dozen companies that launched an initial public offering (IPO) in the aftermath of the COVID-19 pandemic and saw their shares soar on the first day trading. “The wear from a virtual roadshow is much less than the wear and tear on the old normal roadshow. I was pleasantly surprised,” Warner Music Group chief executive Stephen Cooper said in an interview following this company’s IPO this week. Some investors were also happy with the switch, because they saved time travelling to meetings with companies and their IPO advisers. “When you meet face-to-face, you have to get everyone together into the lift, some people need to get their Starbucks… that one hour turns into one-and-a-half hours,” said Khiem Do, head of Greater China investments at Barings in Hong Kong. All over the world, companies and their advisers have given up on the traditional multi-city investor roadshow - lasting up to two weeks - in favour of virtual sessions with investors that only last a few days.
Hedge funds are getting ready for another slump in stock markets after growing uneasy that surging prices do not reflect the economic problems ahead. Some managers fear that equity investors, used to buying the dips during the decade-long bull market that ended in March’s sharp sell-off, have become too complacent about how quickly economies can recover from the coronavirus crisis and how effective stimulus packages from central banks and governments can be. The S&P 500 index completed its best 50-day run in history on Wednesday, according to LPL Financial, closing within eight per cent of its record high of mid-February. “The markets are priced to perfection,” said Danny Yong, founding partner at hedge fund Dymon Asia Capital in Singapore. “The stability in equity markets does not reflect the job losses and the insolvencies ahead of us globally.” [...] “I believe we will see new lows in global equity markets later this year,” he added. “As March . . . has shown us, prices cannot diverge from fundamentals for too long.”
The coronavirus pandemic has led to the genesis of a new class of bonds, paving the way for fund managers to springboard from socially responsible investing to putting money toward the health crisis. Governments, banks, companies and multinational organizations raised $151.5 billion globally by May 31 from selling Covid-19 bonds, or debt whose proceeds are broadly earmarked for work linked to the pandemic, according to research by BNP Paribas. [...] There aren’t set rules on what constitutes a Covid-19 bond, making it the latest example of investments with broad claims and murky definitions that have drawn large pools of money in recent years. Some part of the proceeds from the virus bonds are being used to fund the development of vaccines or treatments, or to bolster health-care systems and curtail the outbreak. In other cases, the funds may go toward relief efforts, but there is no system in place to track their ultimate use. [...] The debt has proven particularly attractive to investors who are interested in socially responsible investing, and who value environmental, social and governance practices. The growth of ESG investing in recent years helped the creation of virus-related bonds when the pandemic broke, allowing markets to quickly redirect the flow of capital to the health crisis, according to investors and bankers.
NYSE-listed companies must obtain shareholder approval for transactions that involve (i) the issuance of common stock (or securities that are convertible into or exercisable for common stock) equal to 20% or more of the common stock of the company or voting power outstanding before the issuance, other than (a) public offerings for cash and (b) bona fide private financings at a price at or above (1) the NYSE official closing price [5] immediately preceding the signing of the binding agreement and (2) the average NYSE official closing price of the common stock for the five trading days immediately preceding the signing of the binding agreement (the lower of (1) and (2), the “Minimum Price”); [6] (ii) the issuance of common stock (or securities that are convertible into or exercisable for common stock) to certain related parties [7] equal to 1% or more of the common stock of the company or voting power outstanding before the issuance (unless the only related parties in the transaction are substantial security holders and the price is at or above the Minimum Price, in which case the limit is increased to 5%); [8] and (iii) establishing or materially amending a stock option or purchase plan or other equity compensation arrangement pursuant to which stock may be acquired by officers, directors, employees or consultants (each of (ii) and (iii), a “Related Party Transaction”). [9]
Accounting fraud is a worldwide problem with potentially serious consequences, but it is often detected after the damage has been done. Hence, efficient and effective methods of detecting corporate accounting fraud would offer significant value to regulators, auditors, and investors. In a new study, we develop a state-of-the-art fraud prediction model using a machine learning. Following prior research in accounting fraud detection, we use as our sample the detected material accounting misstatements disclosed in the SEC’s Accounting and Auditing Enforcement Releases (AAERs). Our sample covers all publicly listed U.S. firms over the period 1991–2008. Although there are useful nonfinancial predictors of accounting fraud (e.g., an executive’s personal behavior), we use only readily available financial data to make sure that our model can be applied to any publicly traded firm at low cost, and we can easily compare our model’s performance with the performance of fraud prediction models from the extant literature.
As directors and shareholders become increasingly attuned to ESG considerations and stakeholder-oriented governance, they have sought guidance about how to incorporate these imperatives into the board’s decision-making process—particularly regarding decisions that entail trade-offs or an allocation of resources between and among stakeholders and ESG objectives. Our answer to this question is rooted in the classic bedrock of board functioning: directors must exercise their business judgment. This is not only the practical answer—it is the essential animating principle of Delaware law. Recently, many who continue to advocate for shareholder primacy, and therefore reject stakeholder governance, have sought to portray stakeholder interests in a zero-sum competition, arguing that it is impossible to properly exercise business judgment to reconcile such diverging interests. In their view, stakeholder governance is not only a radical departure from Delaware corporate law but also corrosive of the very essence of capitalism.
The COVID-19 crisis will strengthen the ESG momentum as society re-prioritises what is most important. “We are never going back to the place we started from”(1). We are already seeing a greater focus on the ‘S’ and the ‘G’ (whereas previously the focus was much more on the ‘E’ ). [...] We’ve created a top 10 checklist to help directors focus on ESG requirements:
(1) How do ESG factors affect your company?
(2) Do you need an ESG strategy?
(3) How does ESG impact your decision-making?
(4) How does climate change affect your long-term sustainable success?
(5) Can you show you understand the ESG impact on your shareholders/stakeholders?
(6) Is your board diverse enough?
(7) What about ESG and your workforce?
(8) Does ESG impact how you market your products?
(9) How does ESG affect your supply chain?
(10) How are ESG factors affecting M&A transactions?
TOKYO -- Japan is heading into its peak season for annual shareholder meetings with companies racing to implement safety measures and find effective ways for investors to meet and vote amid the coronavirus pandemic. June is usually a whirlwind of annual general meetings across Japan. Large companies welcome thousands of investors to events that are part official business, part marketing opportunity, with shareholders enjoying corporate hospitality and the odd freebie. [...] The company is developing a system to allow shareholders to vote and ask questions through the internet. Sugino expects participation to increase tenfold compared with its usual AGM, "as it will give shareholders easier access." "The number of questions will likely jump, too, since shareholders won't have to worry about speaking in front of other people when it's through the internet," he added, expressing hopes that this year's AGM will inspire dialogue between management and shareholders. [...] But Allen said a complete shift toward virtual AGMs would be unacceptable. He said investors still value the experience of seeing top management at a physical AGM -- particularly retail shareholders who do not have the same opportunities as institutional investors to hold regular meetings with company leaders. "If companies start diminishing their physical AGMs in size, it could lead to possible manipulation and loss of transparency, which would be a step back in corporate governance," Allen said.
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For Whiting Petroleum Corp. Chief Executive Officer Brad Holly, filing for bankruptcy had at least one perk: a US$900,000 pay raise. Across the oil industry, leaders of failing companies are hitting the jackpot even in the aftermath of COVID-19 lockdowns that destroyed energy demand, crushed prices and threw almost 100,000 rank-and-file employees out of work. Some 35 executives at Whiting, Chesapeake Energy Corp. and Diamond Offshore Drilling Inc. stand to share almost US$50 million in payouts as their companies careen toward -- or have already embraced -- bankruptcy protection. California Resources Corp. warned investors last last month that there’s “substantial doubt” it will stay afloat. Nonetheless, executives were guaranteed their 2020 bonuses. [...] Corporate directors defend the multimillion-dollar paydays as vital to preventing a scramble for the exits and retaining management teams with deep knowledge of the company’s assets. But in an era of growing income inequality and social discord, the lavish compensation packages strike some observers as especially egregious.
One of the most remarkable recent developments with regard to shareholder power is how American shareholders have forced boards of directors to amend even charter provisions to strengthen shareholder rights. In stark contrast, shareholder proposals have (so far) been relatively rare in Europe. Is the American abundance of successful shareholder proposals the epitome of strong shareholder power? In a paper that is forthcoming in the Research Handbook on Comparative Corporate Governance (Edward Elgar), I critically analyze the role of such shareholder proposals and their effects on shareholder power and warn of too much euphoria. A comparative analysis of shareholder proposal rights and substantive shareholder rights yields two important lessons. First, shareholder power related proposals in American companies are essentially closing the gap in substantive shareholder power that existed between the United States and Europe. In the past fifteen years, shareholders have successfully made proposals in individual American corporations to de-stagger the board, to elect directors by majority instead of plurality vote, to allow shareholders to request special meetings and to allow shareholders to include director nominees on the company’s proxy. In doing so, they managed to break down or reduce some of the most important barriers for meaningful shareholder voice in director elections in Delaware companies—barriers that have been uncommon in Europe. At the same time, several European jurisdictions have gradually softened the rule of at will removal of directors, thus allowing directors a higher degree of protection against removal.
The COVID-19 crisis is one of the worst health emergencies the world has witnessed for a century, and its economic impact could be just as steep. While it took several quarters for unemployment to peak in other crises, the economic shock of the COVID-19 crisis has been larger than that of any previous crisis—and it materialized within weeks. Five weeks into the crisis, the weekly number of jobs lost in the United States continues to exceed any pre-COVID-19 record. In some sectors, demand came practically to a halt in a matter of days as a result of lockdown measures. Governments’ economic responses to the crisis is unprecedented, too: $10 trillion announced just in the first two months, which is three times more than the response to the 2008–09 financial crisis (Exhibit 1).1 Western European countries alone have allocated close to $4 trillion, an amount almost 30 times larger than today’s value of the Marshall Plan. The magnitude of government responses has put delivery into uncharted territory. Governments have included all shapes and forms in their stimulus packages: guarantees, loans, value transfers to companies and individuals, deferrals, and equity investments—as if advice from all modern schools of economic thought has been applied at the same time.
On May 28, the Federal Reserve published the structural and operational details of the Main Street Lending Program, releasing program documentation and updated FAQs. These documents are the final remaining pieces before the facilities open. Last week’s publication brings the Federal Reserve closer to a new frontier, where it will be able to lend against non-investment grade credits to small and mid-size nonfinancial corporates. Depending on uptake by eligible Lenders and Borrowers, the Main Street Lending Program has the potential to be an important supplement to the Paycheck Protection Program in supporting sectors of the economy most affected by the pandemic. Now the real work begins—potential Lenders and Borrowers will be evaluating the various documents, conditions and restrictions, paying particular attention to the certifications and covenants required of both Lenders and Borrowers. The documentation appears to strike a delicate balance between the Federal Reserve’s twin Congressional mandates to provide credit to businesses struggling with the pandemic-induced economic slowdown and to lend only to solvent borrowers on a satisfactorily secured basis.
HONG KONG, June 5 (LPC) - A bill that could force Chinese companies to delist over US$1trn of shares from US markets has sparked chatter among Asian lenders of an unprecedented wave of event-driven financings as a potential consequence. The latest attempt by US lawmakers to restrict China’s access to the world’s biggest stock market comes amid rising tensions between the two superpowers, prompting companies from Alibaba Group Holding to Baidu to review their reliance on US capital. Bankers, however, do not expect a wave of buyouts, given the challenge of raising the vast sums of debt required against a bleak outlook for the global economy in the wake of the coronavirus crisis. “Many of those companies are privately owned enterprises. With the growing uncertainties in the global markets, based on the risk and return involved, it would be challenging for some banks to support these take-private financings,” said a senior loans banker at an international bank. [...] “Our clients have been looking for months into different options to hedge the risk of a single listing in the US as the trade war continues,” said a senior loans banker at a Chinese investment bank. “Delisting is one of several options.” As of September 2019, 172 Chinese companies were listed on the three largest US exchanges, with a total market capitalisation of more than US$1trn, according to the US-China Economic and Security Review Commission. It would take just a few of those to decide to take their stock private to create significant demand for debt funding.
The $10trn financial centre is in the eye of a geopolitical storm. The best way to get your head around the role that Hong Kong plays in the global financial system, says a business figure there, is to think of it as an electrical transformer that connects two circuits with different voltages. One is the global financial system with its freewheeling capital flows, open dissemination of information and the rule of law. The other circuit is China’s vast and growing financial system with its controls on capital, censorship and capricious enforcement of contracts. Over the past two decades, as China has risen to become the world’s second-largest economy, Hong Kong has skilfully cultivated its role in the middle, such that it has become the most important international financial centre after New York and London. Around Victoria Harbour, China’s tech tycoons flog shares to Californian hedge funds, its state-run banks issue loans to fund Belt and Road projects and its authorities intervene to control its tightly managed exchange rate. Much of the business is denominated in the world’s reserve currency, the dollar, organised by Western firms and overseen by independent courts and regulators that have more in common with their peers in the rich world than with their counterparts in Beijing or Shanghai. [...] The most likely scenario is that Hong Kong’s institutions face gradual decay and that it drifts away from being a globalised financial centre towards one that is more mainland Chinese. China would be left with more control over a less effective capital market, raising the cost of capital for its firms. The unlikely but not impossible worst case is that a miscalculation destabilises some of the $10trn edifice of cross-border financial claims that sits in Hong Kong, causing a shock that ripples across China and Asia. Local executives and officials often call this the nuclear outcome.
The all-male boards of hundreds of Japanese companies face a mass shaming this month as investors prepare to vote against the leadership of companies that do not have any female directors. The change in the voting policies of Goldman Sachs Asset Management and several other global fund managers has crystallised ahead of Japan’s annual shareholder meetings season in June, when typically more than 2,400 companies cluster their AGMs into the space of one week. Although asset managers have also toughened their pro-diversity voting policies in other developed markets, the disapproval of boards with no women could hit a disproportionately large number of listed Japanese companies. Last year, about 57 per cent had no female board representation, according to Tokyo Shoko Research. [...] According to Mizuho Securities, companies face a record number of shareholder proposals this year, with demands ranging from the sale of key assets and the scrapping of poison pill takeover defences to pressure for higher dividends and the dismissal of auditors. While investors say they would accept delays to AGMs and slippage on key metrics such as return on equity because of the health crisis, they intend to hold firm on areas including diversity and governance, where progress by many Japanese companies has been slow. [...] “It is certainly going to be a unique proxy season,” said Chris Vilburn, head of stewardship at Goldman Sachs Asset Management Asia. “I think we will see some relaxation on the ROE-related side, but there will still be pressure on companies on environmental, social and governance issues.” [...] Proxy adviser Glass Lewis will also recommend rejecting the chair of a board that does not have an incumbent or proposed female director for companies listed on the first and second sections of the Tokyo Stock Exchange.
In a seminal paper, Asch (1946) finds that if a person is described as “intelligent, industrious, impulsive, critical, stubborn, [and] envious,” people form a more positive impression of that person than when the descriptors are provided in the reverse order. Subsequent psychological research confirms that information received first tends to overshadow information received later, and that first impressions have a lasting effect on perceptions and future behavior (Anderson, 1981). This first impression bias causes a decision maker, assessing the outcomes of some process, to place undue weight on early experiences (Anderson, 1965). If the first impression is particularly positive, then assessments about the future tend to be unduly positive; the reverse is the case if the first impression is negative. In our recent paper, we provide the first investigation of whether this bias exists in a field setting with finance professionals. We test whether an analyst’s first impression of a firm biases the analyst’s later forecasts and related behaviors. It is not immediately obvious whether this would occur, since analysts have pecuniary incentives to make accurate forecasts. On the other hand, forecasting future outcomes is a challenging and inherently subjective endeavor.
That it is an urgent governance issue is underpinned by the capital structure of Twitter compared with Facebook. As corporate governance expert Professor Richard Leblanc points out, Facebook has a dual-class share structure giving Zuckerberg enormous power. Twitter does not, making Dorsey more accountable to his board. But the intervention also places Dorsey in the realm of “activist CEO”—a company leader making a stand on political or social issues. [...] In short, the company’s reputation was at stake. A CEO and a board cannot ignore that indefinitely. “Twitter is a teachable moment for board discussions with management on pushing back when politicians take steps that harm the reputation and goodwill of the company,” says governance expert Leblanc. Twitter’s action may well prompt other CEOs to take similar stands, especially when political actors play fast and loose with the truth. [...] In the end, the way social media companies respond to content may come down to governance structures, as mentioned earlier. Carum Basra, a policy adviser at the Institute of Directors, says: “Ultimately, for many of these entities it will be for their boards to determine where to draw the line in terms of what is acceptable. “However, some of these firms have governance structures that concentrate power in the hands of one or two individuals; more boardroom challenge might be what is needed.”
The Securities and Exchange Commission (SEC) has been putting pressure on companies that regularly file public reports to make detailed statements about the effects of the coronavirus pandemic on their businesses. Given the many uncertainties about those effects, the disclosures will produce limited benefits for the securities markets but are likely to lead to securities class actions of questionable merit. The SEC has encouraged extensive disclosures about a company’s current operating status and future operating plans under various Covid-19-related conditions. The guidance called for comments on the unknown future effects of the pandemic on a company’s business. The SEC’s chairman and another top SEC official urged public company communications to provide “as much forward-looking information as is practicable,” including how a company’s “operations and financial condition may change” as the efforts to fight the disease progress. Advice from the SEC disclosure staff acknowledged that the “impact of COVID-19 on companies is evolving rapidly and its future effects are uncertain” but advised that investors wanted to know “what management expects its future impact will be.”
Merger agreements involving acquisitions of private companies often contain terms creating post-merger obligations or “earnouts” in favor of certain classes of selling stockholders. To address potential claims that may arise from such post-merger arrangements, selling stockholders typically designate a “shareholder representative” to handle such claims on their behalf pursuant to specifically delineated rights and duties. In Fortis Advisors v. Allergan, the Delaware Court of Chancery addressed the scope of such rights and duties in the context of a discovery dispute. The Court considered the shareholder representative to be distinct from the selling stockholders on whose behalf the representative is acting, such that the selling stockholders were not deemed to be “parties” to a claim pursued by the representative. Thus, in a letter ruling, the Court held that the defendant could obtain discovery of the selling stockholders only through third-party discovery, not through party discovery directed to the shareholder representative. The Court based its decision on a strict reading of the terms of the agreements establishing the shareholder representative and negotiated information rights contained therein.
Shareholders will likely be asking these sorts of questions, and companies don’t want to become the target of shareholder activism. The novel coronavirus (COVID-19) pandemic continues to cause destruction along its path, and the way that companies respond to this crisis could invite shareholder activism. It’s unquestionable that COVID-19 has companies scrambling to stay afloat as they make efforts to evaluate the impact on employees, customers, communities and business relationships and to mitigate costs. Still, their response plans will be under scrutiny, and any shortcomings may attract activists looking to hold companies accountable for missteps. By the time the World Health Organization (WHO) declared COVID-19 a pandemic in March, many proxy statements had already been filed, and the subject of COVID-19 generally cropped up only in the context of annual meeting procedures, with some companies having moved to virtual-only meetings. Since then, however, COVID-19 has grown more and more severe, prompting shareholders to become more vocal. [...] Shareholder activism in the age of COVID-19 will likely lean towards pushing for better governance so that companies are positioned to weather the storm of the pandemic and any long-term effects. Some topics of discussion high on shareholders’ agendas will likely include (1) human capital management practices, (2) executive compensation, dividends and stock buybacks, (3) shareholder rights, and (4) board structure and effectiveness—all in line with the updated guidance that proxy advisory firms Institutional Shareholder Services (ISS) and Glass Lewis recently issued in light of the pandemic.
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