May 12, 2009
The Schumer Corporate Governance Bill: Effect on Delaware Courts?
Senator Schumer will introduce next week and new bill, The Shareholder Rights Act of 2009, that will federalize the corporate structure of our publicly traded companies. It is a slap to Delaware -- both the courts and legislature. I do not know if the bill will pass; it might. This debate has a long, long pedigree. Even if the bill does not pass, it will undoubtabily affect the future of Delaware jurisprudence and SEC rule making. Delaware will lose its privileged position as the home of corporate governance law in the United States. Delaware will have to find a new niche. It has already begun to developed it. Delaware courtsare establishing a case law on the strict interpretation of contract language and encourage parties to elect Delaware as the forum of choice for interpretation and litigation of large scale business contracts. Why is Schumer doing this? He carries the water for the NYSE in New York and his bill will reduce the power of the exchange to set listing requirements that give it an edge in the market for company listings. Is he acknowledging that the NYSE listing requirements are a burden not a benefit and that the NYSE will not change them??
May 12, 2009 | Permalink
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Delaware has an answer, bookies.
Posted by: James Verdi | May 12, 2009 5:54:37 PM
Schumer's bill will likely do more harm than good. The bill augments shareholder rights, which in turn, will lead to a greater emphasis on short-term growth (unsustainable in many respects) and result with more economic turmoil. The emphasis on short-term, over-leveraged, unsustainable growth is a contributing factor to our present predicament. The recent emphasis on quarterly results is a harbinger of the short-term "flip it and quit it" approach of hedgefunds and money-managers. Emphasis needs to be placed on long-term sustainable growth. Emboldening shareholders will lead to an even greater emphasis on the short-term, as most people want a quick return. The long and the short of it is that there is no such thing as an easy buck. Schumer's plan, like most of the current legislation being crammed down our throats, lacks depth and an understanding of the shareholder's (meaning institutional investors) role in this fiasco.
Posted by: K | May 13, 2009 8:53:44 AM
Institutional investors are tasked with making money for their own investors. If that means that they must unwind long positions when new information changes the valuation of the company they are invested in, then they will act on it because it is in the best interest of their investors. In doing so, they provide an offer for anyone who disagrees with their valuation and needs an offer to lift. Ultimately, these differing opinions and shares changing hands will discover the true price of the stock. The emphasis on quarterly results is certainly not recent. It has always been there for publicly traded companies. Quarterly results convey information and information changes people's assumptions about the future. Blaming active trading for our current "predicament" is like blaming a careless and promiscuous person's breathing for contracting an STD.
Posted by: Methinks | May 13, 2009 8:29:44 PM
Read the entire post. I do not have a problem with "active trading" but unfettered shareholder activism will result in more economic instability. Hedgefunds are not concerned with the long-term growth of a company; they are interested in directing short-term gains. I'm not blaming active trading for our economic troubles. I am merely saying that continued shareholder activism can lead to a short-term focus which ignores long-term stability. Our economic problems stem primarily from liberal policies, namely, the community reinvestment act and forcing banks to loan money to people who can't pay it back.
Posted by: K | May 15, 2009 3:33:21 PM
I think it's very hard to get away from the short term focus. It's in the best interest of the company to have a long time horizon. Managers must be paid well before a long-term plan is fully realized. Investors want measurable growth to which managers' compensation is tied. Thus, the horizon is always shorter than optimal. In management consulting, I remember our compensation group's struggle with this problem in devising compensation schemes.
Posted by: Methinks | May 19, 2009 8:38:24 AM