Corporate governance - Vigil

Do institutional investors work together to influence firm policies and governance? Researchers often think of owners as independent actors. This leads to the common view that dispersed ownership will result in poorer governance, all else equal, because small owners will not have the incentive to monitor individually (the “free rider” problem). However, in recent years it has become widely acknowledged that some investors do not act independently, but instead share information about their investment decisions and even work together to influence corporate policies in the firms they own (see, for example, Top US financial groups hold secret summits on long-termism, FT.com, February 2016).

On September 23, 2016, the Board of Governors of the Federal Reserve System (Federal Reserve) issued its long-expected proposed rule (Proposed Rule) relating to permissible financial holding company (FHC) commodities activities. [1] The Proposed Rule follows up on the Section 620 Study (Study) issued by the U.S. federal banking regulators two weeks earlier, in which the Federal Reserve recommended to Congress that it repeal Section 4(o) of the Bank Holding Company Act (BHC Act) and the Merchant Banking authority. [2]

A board’s performance relies on its understanding of the company and its operating environment. In today’s business landscape, the board cannot properly fulfill this responsibility without having directors who reflect the composition of its stakeholders, particularly its employees and customers.

In a recent decision, [1] Vice Chancellor Laster of the Delaware Court of Chancery clarified certain issues related to the obligations of a controlling stockholder that often arise in connection with going private and similar transactions. The case involved a relatively conventional proposal by a controlling stockholder (the Anderson family) to acquire the remaining shares of Books-A-Million, Inc. (“BAM”) from BAM’s minority stockholders. The family structured the proposal with the goal of satisfying the conditions of the MFW decision so that any challenge to the transaction would benefit from the favorable “business judgment” level of judicial review. [2]

A growing sentiment following the recent financial crisis is that CEOs are overpaid and that their large compensation dilutes shareholder value. This sentiment is partly rooted in the fact that the pay disparity between CEOs and other employees has rapidly grown over the last three decades.

On October 10, 2016, State Street Global Advisors (SSGA) issued a press release and published an article (discussed on the Forum here) expressing wariness about rapid settlements with activists without the input of long-term shareholders, a view shared by other large institutional investors. To address this concern, SSGA CEO Ron O’Hanley requested that “corporate boards develop principles for engaging with activist investors to promote long-term value creation.” Specifically, SSGA calls for companies to:

In an election year dominated by populist outsiders, politicians are learning that cozy relationships with corporate America can be a liability.

Netflix Inc. saw a wave of price target hikes Tuesday after the company reported much-stronger-than-expected earnings, sending its stock up by more than 19 per cent

Toronto -- Le Régime de retraite des enseignants de l'Ontario a annoncé lundi son acquisitio

On September 23, U.S. District Judge William Pauley refused to approve a settlement between the CFTC and Deutsche Bank covering the bank’s failure to report swaps properly. Instead of rubber-stamping the settlement, the judge asked the parties for additional briefing.

State Street Global Advisors (SSgA) recognizes that activists can bring positive change to underperforming companies, especially when boards or management ignore investor concerns about poor corporate governance practices.

A common strategy in corporate governance research is to build a corporate governance index and then see whether the index predicts firm value or performance. These indices are imperfect, but their use is widespread because researchers lack good alternatives. A major concern with governance indices is what they actually measure. The concept of governance is abstract and latent rather than concrete and observable, and we are not sure how to proxy for this vague concept using observable measures. This raises concerns about the degree to which the proxy (a governance index) measures what it claims to be measuring. The fit between the observable proxy or “construct” (the governance index) and the underlying concept (governance) is known as construct validity. This core issue is rarely addressed in corporate governance research. Larcker, Richardson and Tuna (2007) and Dey (2008) are exceptions.