Download Measuring Efficiency in Corporate Law: The Role of Shareholder

CURRENT DEVELOPMENTS IN U.S.
SECURITIES REGULATION AND
CORPORATE GOVERNANCE
Lecture at International School of Financial Law at
East China University of Political Science and Law
October 18 & 19, 2011
Jill E. Fisch
Sino-US Deans Summit – June 2011
Reverse Mergers & IPOs in US
• More than 400 Chinese companies have
entered US public capital markets by using
reverse mergers, 260 in 2010 alone
• Chinese companies accounted for 41 US
IPOs in 2010, 1/3 of all US IPOs
• Cultural and legal differences are creating
regulatory and accounting issues
Corporate Governance as
Securities Regulation
• Was the Financial Crisis of 2008 a
corporate governance failure?
• Dodd-Frank responded with corporate
governance reforms
• Is shareholder empowerment the way to
address these concerns?
• The effect of securities intermediation on
corporate governance and investor
protection
Dodd-Frank
• Proxy Access
• Say on Pay
• Independent compensation committees &
claw-backs
• Disclosure-based governance provisions
–
–
–
–
Separation of Chair and CEO
Policy on incentive-based compensation
Golden parachutes
Pay parity
Say on Pay
• Statistics show shareholders voted no on
2% of pay packages this year despite
overall increases in executive pay
approved
pay ifpackage
•Shareholders
Methodology
– howCitigroup’s
do we know
pay is
by a 92% vote
excessive?
• Empowerment of ISS; concerns about its
process and recommendations
• Litigation if issuer ignores no vote
• Costly process and unproven value
Proxy Access
• Tortured and highly politicized process
(culmination of years of proposed rules) led
to SEC adoption of Rule 14a-11 – the Proxy
Access Rule
• Rule 14a-11 is a terrible rule
– narrow
– vague
– full of internal contradictions
– frustrates potential private ordering
Proxy Access
• The rule was challenged in court and struck down
this past summer
• Ironically, the DC Circuit did not express any
concerns about the substance of the rule
• But invalidated the rule anyway because of the
SEC’s “flawed economic analysis”
• Potentially far-reaching effects of the court’s
analysis on the SEC’s power to adopt future rules
• Activists are currently drafting issuer-specific proxy
access proposals for upcoming proxy season
Dodd-Frank and Shareholder
Empowerment
• Two key provisions don’t seem to be a
success
• Are they conceptually flawed?
– Not clear that corporate governance reforms
were needed
– Hard to predict the effect of rule changes on
business performance
– Difficult to evaluate the effect of increased
shareholder power
Private Governance Initiatives
• Dodd-Frank is not the exclusive focus of
shareholder activism
• Shareholder proposals
– board declassification
– elimination or reduction of supermajority voting
requirements
– majority voting in uncontested director elections
– the right for shareholders to call a special meeting
– the right for shareholders to act by written consent
• Shareholder focus on board composition
– Diversity, experience, leadership
Intermediation in US Capital
Markets
• Growing intermediation of the markets
– Institutions own over 50% of public equity
– Percentage is closer to 80% at the largest public
companies
• Who are these shareholders that we are
empowering?
–
–
–
–
Public pension funds and unions
Mutual Funds
Sovereign Wealth Funds
Hedge Funds
Effect of intermediation on investors
• Growing percentage of retail investors are
“in the stock market”
• But US investors invest primarily through
intermediaries – mostly mutual funds and
pension funds
More than transactions
half of all US households
ownnovel
stock, but
most of them
• These
raise
agency
and
own it indirectly
investor
protection
concerns
One third of US
household assets
are invested in retirement
accounts
• Dodd-Frank
required study of a possible
Recent Morningstar study showed negative returns to investors over
the last decade in many
large mutualduty
funds to investors
broker-dealer
fiduciary
Implications of intermediation for
shareholder empowerment
• Do we trust institutions to enhance long
term firm value?
• Do institutions reflect “special
interests”?
– Short-termism
– Herding
– Political or other agendas
• How do we limit the potential for
abuse?
Effects of intermediated control
• Pension funds delegate to or follow the
advice of proxy advisory firms
• ETFs use mirror voting
• Hedge funds vote according to their net
economic interest
• Endowments vote according to the social
policy positions of students and faculty
• Sovereign wealth funds
Intermediation and the goals of
securities regulation
• Intermediaries may represent societal or
government objectives rather than pure
“shareholder” interests
• Dodd-Frank’s regulation of executive
compensation as a solution to wealth and
income disparities
• Is this investor protection or public law?
Thoughts on the Transplant of US Law
• Policy-makers have questioned whether it
is desirable to transplant features of US
corporate and securities law into China
• Extensive literature considers the viability
of transplant issues
• Considering transplant must be
approached with caution
Do Transplants make sense?
• Comparison of business and market structure
– Who are the investors? Retail vs. institutional ownership
– Are the markets efficient (well-informed)?
– What structures exist for disseminating information?
• Comparison of regulatory objectives
– Managerial agency costs vs. limits on controlling shareholders
– The government as substantial owner
– Goals – maximizing shareholder value, firm value or something
else
• Comparison of legal (judicial) environment
– Viability and desirability of private shareholder litigation