September 8, 2006
This is Big, Big, Big: The AIG Case
There has been a huge development in the landscape of shareholder voting in publicly-traded corporations. The Second Circuit has sided with shareholders (The American Federation of State, County and Municipal Employees)in the AIG case and ruled against the Securities and Exchange Commission. The Second Circuit held that the SEC was wrong to allow AIG to omit a shareholder proposal from the firm's proxy card that would allow shareholders to vote for a bylaw that permits a three percent shareholder to nominate directors and put those nominations on the firm's proxy card as alternatives to the candidates nominated by the board itself. This is big, big, big. The ruling, if left alone, in conjunction with Delaware's law, if left alone, that allows shareholders to amend bylaws means that shareholders will have many, many more contested elections in board races. Existing management and their lawyers will fight this new ruling in the trenches. The SEC is already scrambling to revise the rule in time for the next proxy season. If the SEC was smart it would simply accept the new interpretation and leave the matter alone. I also suspect that the Delaware authorities are considering a revision to the Delaware code as well. If Delaware revises its law so that shareholders can be blocked from amending the bylaws, all is not lost as the Rule 14a-8 resolutions will "recommend" that the board put in the change and the board must decide whether or not to ignore its own shareholders. Sensible SEC action is the critical link. Again, if the SEC lets the ruling stand, corporate governance in the United States will change dramatically -- for the better -- immediately. This is big, big, big.
September 7, 2006
The Bar Attacks the Thompson Memo
I would be more sympathetic to the organized bar's attack on the Justice Department's Thompson memo if it did not reek of self-interest. Corporate payments of executive's legal fees line the pockets of large firm lawyers (allowing the levying of extraordinarily large fees) and claims for attorney/client privilege when lawyers do "internal investigations" on serious charges guarantee that outside law firms will do all the investigations. Convenient.
NYSE Euronext Deal
One wonders whether the NYSE, fresh off its acquisition of Archipelago and still experimenting with electronic trading, is biting off more than it can chew with is attempted acquisition of Euronext. It must fight foreign governments, a foreign bidder, and, if successful, assimilate a trading market with a very different culture. Perhaps the NYSE needs to focus on modernizing its United States operations, get its new electronic trading systems right, and then attempt to jump international.
The Hewlett-Packard Flap
The financial press is closely following the revelations on the board of director disagreements at Hewlett-Packard. The Chair's efforts to remove one director, for talking to the press, have led another director to resign. There is the usual interest in the blow-by-blow accounts of two power struggles in the company -- first, the Compaq merger that pitted the new CEO against the son of one of the founders (which the CEO won) and, second, the decision to fire the CEO when company performance lagged. But the revelations have two unwanted twists: first, the company's disclosure to the public (and the SEC) on the resignation of a director do not appear to have been as candid as one would expect. This is a securities law violation. And second, the company's internal investigation involved the highly questionable practice of using a private investigator who misrepresented himself as a board member (twice) to acquire the board member's phone records (pre-texting). Two states and two federal agencies had taken the position that this is illegal. Plaintiff attorneys, state attorney generals and the SEC are now interested in the company's conduct. More heads will roll at H-P (the Chair ?). For the rest of us, it is a reminder how far many large United States corporations are from being able to handle, civilly and professionally, disagreements at the board level. Until a healthy new culture of discussion develops at boards in the United States, we are going to hear more about petulant responses to dissent on boards of directors. I am commonly instructed on how a director who wants to dissent at the board level must do a complex and subtle choreographed dance, involving extreme tact and misdirection, to make even the mildest of objections. Those who miss a step (forget a required reservation; make a statement rather than a timid question) are gone. It reminds me of the clothing requirements of a ball in pre-republican France. The proper wigs and lace are required. We will also get more CEOs demanding loyalty oath equivalents, such as forcing new board members to sign over-reaching confidentiality agreements with draconian penalties.
September 6, 2006
Dana Bankruptcy Surprise
The federal bankruptcy judge in the Dana Corporation case, Judge Lifland, has ruled that the executive pay plan is illegal because it amounts to a prohibited retention payment. The ruling is a surprise because the payment was structured to technically be a bonus and not a "retention" payment, giving the Judge, if he choose to use it, a literal way of approving the payment. The Judge refused, using the "if it walks like a duck..." argument. The holding is a pleasant surprise because the bankruptcy judges have an incentive to encourage bankruptcy filings in their courts (insolvent companies shop for courts) and the holding will, no doubt, drive some filings away from the New York court. The ruling showed courage (not shown by the Delaware Supreme Court in the Disney case, a court also sensitive about the effect of its decisions on corporate elections to incorporate in the state).
ISS Up for Sale
The country's premier proxy advisory service, Institutional Shareholder Services, is up for sale for $500 million or so. ISS evaluates "objectively" all the shareholder votes and elections in publicly-traded companies for institutional investors. Whoever buys the company necessarily will be carefully investigated for conflicts of interest.
New Executive Compensation Tax Rules?
Reporters Charles Forelle and Kara Scannell ("Revisiting Executive-Pay Law") in today's Wall Street Journal write that Congress is looking to amend the 1993 provision that caps business expense deductions for executive compensation at $1 million to eliminate the performance-based compensation exemption, used primarily on "at the money" compensatory stock options. Since the $1 million cap is below market for most companies, it would increase taxes paid by most corporations. Most doubt it would affect overall levels of compensation however. It would limit a common public justification for stock options and could affect the composition of compensation packages, however. A complete overhaul of the tax rules on stock options needs to include the qualified option rules that give individual tax preferences to "qualified" at the money option programs for employees and discourage indexed and other forms of options and restricted stock grants.
September 5, 2006
Hedge Fund Ratings
Moody's Investors Service published today its first public rating of individual hedge funds. The ratings will help investors monitor their hedge fund investments and may lead hedge funds (particularly the repeat players who are constantly raising new funds) to be more transparent in an effort to improve their ratings. Moody's success will stimulate competitive private rating services. This is all to the good and shows that market forces can and will discipline the hedge fund industry.
September 3, 2006
Joseph Stiglitz on Globalization
I participated in a conference with Joseph Stiglitz several years ago on the causes of the 2001 high-tech crash. I am a great admirer of the work that won him the Nobel prize, the effect of asymmetric information in bargaining, work that looked carefully at bargaining details in context. At the conference he ripped corporate executives, no surprise there, but then decided that we need to lift the business judgment rule for executives. Executives would be liable for ordinary negligence in court (as opposed to gross negligence). Whoa... In private conversation I asked him whether he wanted judges to run United States corporations. He said, "of course, not"... I asked him to think of how his recommendation would play out in practice. Lost on him. After the conference I read his two new books; both are full of this kind of logic -- see a big problem; propose feel-good, grand scale institutional solutions that demand wealth redistribution; ignore the practical details in how we create or maintain the solutions. His demand, for example, that the United States cede sovereignty to an international tribunal to enforce his new global rules overlooks the minor detail of how to select the judges.
Pity. His Nobel prize winning work was the reverse -- look at the details of bargaining and minutely assess the effects of changing the informational context.
Ben Stein on MBOs
Ben Stein's column in the New York Times on MBOs ("There Ought to Be a Law"), leveraged buyouts of publicly traded companies that include the senior members of the management team, is correct. He noted the first notorious case of Metromedia (that stimulated an article by me in the 80s on the problems with MBOs) and notes that the basic situation (insiders use inside knowledge to buy the company cheap from the public shareholders) continues. I would not prohibit the deals but I would make them more difficult to do. MBOs managerial participants should disclose their pre-deal calculations for a personal profit (IRR calculations) on the MBO, their plans for the company once private, and should disclose why a privately held company and not a publicly traded company should undertake the plans. Curently, as noted in previous posts here, the HCA deal, an MBO, smells.