Academic Papers & Studies
"Did New Regulations Target the Relevant Corporate Governance Attributes?" Reena Aggarwal and Rohan Williamson, McDonough School of Business, Georgetown University, November 2005.
http://www.issproxy.com/pdf/Reemaaggarwal-GovernanceandFirmPerformance0206.pdf

The study examines the changes in corporate governance practices during 2001-2005, analyzing 64 attributes in a sample of 5,259 U.S. firms. The findings indicate that the value of a company increased by 4 percent for each attribute of better governance that the firm implemented. By adopting 10 more governance attributes, firms increased their value, as measured by Tobin's Q, by an average of 40 percent, the study found. The average Tobin's Q ratio for the sample was 1.13. Tobin's Q is the market value of the firm divided by its book value on a replacement cost basis.

In the period prior to the adoption of the Sarbanes-Oxley Act, a significant positive relationship was found between governance attributes targeted by the new regulations and firm valuation. The results imply that overall the new regulations did address relevant governance attributes that the market perceived to be important.

"Social Policy Shareholder Resolutions in 2005: Issues, Votes and Views of Institutional Investors," Carolyn Mathiasen and Heidi Welsh, ISS Social Issues Service, February 2006. http://www.irrc.com/bookstore/index.cgi?func=show&what=05CSIRBTH

The study reviews a broad palette of social policy shareholder resolutions filed in 2005, which reached a record high. Energy and environment, board diversity, and equal employment opportunities, political contributions, and international labor and human rights concerns led the list of topics on which socially concerned institutional investors focused their attention.

The study provides vote results, intervention dynamics, trends, and commentaries not only issue by issue, but also by company and by selected institutional investors. It also notes the record number of agreements that resulted in withdrawals of proposals and the high number of resolutions that the Securities and Exchange Commission staff allowed companies to omit from their proxies.

"Shareholder Activism in the United Kingdom," Julian Franks, Centre for Corporate Governance, London Business School; Colin Mayer, Said Business School, University of Oxford; Marco Becht, Universite Libre de Bruxelles; and Stefano Rossi, Stockholm School of Economics, presented in London, Feb. 9, 2006.

The research examined the interrelation of intervention and market performance of 41 stocks held by the Hermes U.K. Focus Fund. The average holding period for these stocks was 691 days; the stakes held ranged from 1-15 percent. The fund had engaged with 30 of the companies it held, had decided not to engage with eight, and had yet to engage with three. The engagement revolved around three issues: restructuring, financial policies, and board changes.

The study looked at the performance of stocks held (adjusted for movements in the market) around the time of public announcements of events, such as restructuring, board changes, and payout announcements. It found that there was a statistically significantly better performance by the stock in which the fund engaged following the event, exceeding that of other stocks with similar events but without engagement of Hermes. It concluded that almost 70 percent of the fund's improved performance was attributable to events influenced by the fund's engagement. [A Hermes affiliate, Hermes USA Investors Venture, has an ownership interest in ISS.]

Journal Articles
"Corporate Governance: Director Compensation," David A. Katz and Laura A. McIntosh; Wachtell, Lipton, Rosen & Katz; New York Law Journal, March 23, 2006.

This article focuses on director compensation as a growing corporate governance issue. It notes changes in the level of compensation, its structure, and heightened focus on disclosure of director pay and perquisites.

The article reviews policy recommendations by various corporate governance advocates and public pension funds. It concludes, "To the extent that boards fail to explain the rationales underlying director compensation decisions, those boards are likely to experience greater scrutiny from institutional shareholders and corporate governance rating organizations."

"Does Corporate Governance Matter to Investment Returns?" Jay W. Eisenhofer and Gregg S. Levin, Grant & Eisenhofer, Corporate Accountability Report, Vol. 3, nr. 37, Sept. 23, 2005.

The article reviews recent literature examining empirical links between corporate governance and firm performance. It examines specific corporate governance factors--such as board declassification, CEO compensation, or related-party transactions--and correlates them with individual firm performance.

The authors also examine the changes that are taking place in socially responsible investment. They note the exponential growth in this type of investing and assert that a growing number of companies now make social responsibility an important part of their corporate culture. The article concludes that "a substantial number of studies support the notion that investing in companies with sound corporate governance programs and practices makes good economic sense, and that good corporate governance fosters long-term profitability. Simply put, good corporate governance does, in fact, pay."

"The Case for Increasing Shareholder Power," Lucian A. Bebchuk, Harvard Law School, Harvard Law Review, Volume 118, Nr. 3, January 2005.

The article argues for granting shareholders the powers to initiate and adopt rules-of-the-game decisions to change the corporate charter or state of incorporation. The legal rules that tie shareholders' hands and insulate management from shareholder intervention partly account for the power of management and the weakness of shareholders in such companies, according to Bebchuk.

The article concludes that empowering shareholders would result over time in improvements in a wide range of corporate governance rules. "It would provide a mechanism that could, without further regulatory intervention, address existing governance flaws, as well as new governance problems that arise in the future," the article claims.

"Toward a True Corporate Republic: a Traditionalist Response to Bebchuk's Solution for Improving Corporate America," Leo E. Strine, Jr., Vice Chancellor, Delaware Court of Chancery, Harvard Law Review, Vol. 119, nr. 5, March 2006.

Strine provides a detailed critique of the reform proposals by Lucian Bebchuk (see above) to grant shareholders greater control over corporate functioning, arguing from the perspective of traditionalist institutional investors. He argues that they put a high premium on maximizing managerial flexibility to take risks and harbor great concern over the potential adverse effects of giving shareholders more influence over corporate governance, which they feel is not likely to generate better corporate performance.

Strine suggests a number of changes in state laws (particularly Delaware) and SEC regulations that would bolster the ability of stockholders to run a competing slate of directors against an incumbent board they believe is performing poorly. These facilitation measures, including a formulaic proxy fight cost reimbursement, would be available every three years for companies with staggered boards, and annually to those with declassified boards.

"Reform along these lines would strengthen the hand of stockholders, but only insofar as institutional investors are serious about being active, involved long-term, and willing to devote reasonable efforts to improving the overall integrity and performance of American operating companies," Strine argues.

"Director Primacy and Shareholder Disempowerment," Stephen M. Bainbridge, UCLA School of Law, Harvard Law Review, Vol. 119, nr. 5, March 2006.

In another rebuttal to Lucian Bebchuk's call for greater shareholder empowerment (see above), Bainbridge argues that if greater authority for shareholders created value, this would be reflected in the market. Invoking his primacy model of corporate governance, the author argues that the current system including a plurality standard for the election of directors is "the majoritarian default and therefore should be preserved as the statutory off-the-rack rule."

The article argues that even institutional investors have a strong incentive to remain passive. "The majority vote requirement is an inadequate constrain on rent seeking by union and public pension funds (or other institutional investors, such as hedge funds, for that matter)," the author notes.

"A Theory of Corporate Scandals: Why the USA and Europe Differ," John C. Coffee, Jr., Columbia University Law School, Oxford Review of Economic Policy, Vol. 21, nr. 2. Summer 2005.

The article argues that dispersed ownership systems characteristic of the United States are more susceptible to various forms of earnings management, and that concentrated ownership systems typical of Europe are much less vulnerable. In the latter, corporate scandals tend to involve the appropriation of private benefits of control.

The paper argues that this difference is the likely source of, and motive for, financial misconduct and has implications for the design of legal controls to protect public shareholders. The difficulty in achieving auditor independence in a corporation with a controlling shareholder may also imply that minority shareholders in concentrated ownership economies face a higher risk.

"Rethinking the Board," Yoram Wind, Wharton School, University of Pennsylvania, Directors & Boards, Vol. 30, nr. 1, Fourth Quarter, 2005.

The author argues that companies would benefit from having two boards rather than one: an oversight board made up of experts with strong industry knowledge and backgrounds in finance and law; and a strategy board made up of members with management expertise. The oversight board would report to regulators and interact with shareholders, while the strategy board would be charged with maximizing value for stakeholders, identifying growth opportunities, and helping the company become more profitable.

The two boards would meet at least annually to collaborate on governance, nominations, and compensation. Both would have independent sources of information and separate budgets for information gathering. The only rationale for this model that the author proposes is that "using two separate boards might make it easier for companies to recruit qualified candidates," noting that the strategy board could attract candidates from overseas, since it would meet less frequently.

"The Role of Audit Committees," Michael W. Oshima, Arnold & Porter, The Practical Lawyer, Vol. 51, nr. 6, December 2005.

The article discusses the changing authority and responsibilities of audit committees after the passage of the Sarbanes-Oxley Act. It addresses financial reporting processes and internal controls, including the review of periodic reports and the adequacy of controls. It focuses on the risk management and compliance roles of the committee, its composition to ensure independence and expertise, and provides a checklist for matters that should be addressed in an audit committee charter.

The article also examines the role of independent auditors in evaluating performance, planning and conducting the audit, and providing other services. The article is directed to audit committee members in public companies and their advisors, but it is also relevant to private companies contemplating a public offering in the future.

"Nine Steps to Bulletproof Director Personal Liability," James Bowers, Day Berry & Howard, Directorship, Vol. 31, nr. 11, December 2005.

The article provides a checklist of steps directors should take to mitigate personal liability for their board activities. It examines the history of legal cases that are significantly changing the actual or potential application of the business judgment rule, concluding that the Delaware Chancery Court is "sending a strong signal that it will carefully examine director decision making under emerging contemporary standards, and that passive director conduct will no longer be countenanced."