Transcript Measuring Efficiency in Corporate Law: The Role of

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