Transcript Measuring Efficiency in Corporate Law: The Role of

CURRENT DEVELOPMENTS IN U.S.
SECURITIES REGULATION
CONFERENCE MEETING OF CHINESE FINANCING
DEVELOPMENT AND FINANCIAL LAW ENVIRONMENT
October 14, 2011
Jill E. Fisch
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
How do we advise Chinese
companies?
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Differences in securities regulation
Differences in corporate governance
Differences in business structure
Underlying norms and expectations
Possibility of regulatory arbitrage?
Challenges for global gatekeepers
Dynamic legal environment – example of
Dodd-Frank
Dodd-Frank and trends in US
Securities Regulation
• Regulatory response to the Financial
Crisis
• Extensive scope includes limited changes
in securities regulation
• Conceptual change – increased federal
regulation of corporate governance
• Regulatory perspective – perceived
deficiency in shareholder power
Background
• Distinction between securities regulation
and corporate law
– Securities regulation focuses on investor
protection
– US corporate law focuses on reducing
managerial agency costs
• Securities regulation traditionally has been
focus of the SEC and federal government
Dodd-Frank
• Proxy Access
• Say on Pay
• Independent compensation committees &
claw-backs
• Disclosure-based governance provisions
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Separation of Chair and CEO
Policy on incentive-based compensation
Golden parachutes
Pay parity
Say on Pay
• What was the problem?
– Excessive executive pay - maybe
• What was the solution?
– Advisory shareholder vote
• Has it worked?
– Executive pay has increased but
– Shareholders voted no on 2% of pay packages last
year
• Problems
– Shareholder competence, ISS, compliance costs,
litigation
Proxy Access
• SEC adopted Rule 14a-11 – the Proxy
Access Rule – in August 2010
• Designed to increase role of minority
shareholders
• Rule 14a-11 is a terrible rule
– Provides no meaningful access
– Lack of SEC justification
– Tension with state law regulation of shareholder
voting
Proxy Access
• Court invalidated the rule this past summer
• Ironically, the court rejected the rule for
process failures – finding the SEC had
conducted a “flawed economic analysis”
• Potentially far-reaching effects of the court’s
analysis on the SEC’s power to adopt future
rules
Merits of Increasing Shareholder
Power
• Is this an improvement in corporate
governance?
• Should a securities regulator make these
judgments
• Compare to Delaware corporate law
• Who are the shareholders?
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
• Range of US institutional investors
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Public pension funds and unions
Mutual Funds
Sovereign Wealth Funds
Hedge Funds
Effect of intermediation on investor
protection
• Growing percentage of retail investors are
“in the stock market”
• But US investors invest primarily through
intermediaries – mostly mutual funds and
pension funds
•More
Regulation
products
and
than half of all of
US investment
households own stock,
but most of
themsales
own it
indirectly
practices
One third of US household assets are invested in retirement accounts
Morningstar
showed negativein
returns
to investors
over the
•Recent
Limited
SECstudy
involvement
these
issues
last decade in many large mutual funds
Effect of intermediation on
corporate governance
• Do institutions 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?
Rethinking the goals of securities
regulation
• Shareholder wealth maximization versus
broader societal goals
• Dodd-Frank’s regulation of executive
compensation as a solution to wealth and
income disparities
• Does shareholder empowerment facilitate
this process?