The Business Judgement Rule

January 29, 2017 4 comments

The last Spanish Corporate Governance reform introduced the Business Judgement Rule (BJR) concept, stemming basically from the US courts in Delaware.

We will make an effort to give a broad and modern vision on the BJR in this post, given its prevalence in modern Corporate law or practice. In this effort we will primarily follow D. Gordon Smith`s article on “The Modern Business Judgement Rule”, (1).


An initial BJR formulation by courts is recognized in 1927 Delaware court´s decision in the Bodell vs. General Gas & Electric Corporation case. A first approach would outline the BJR protects directors from liabilities stemming from “honest mistakes”either as to law or fact, somehow recognizing the human fallability, but also the fact that it reduces legal costs as directors find it difficult to please every shareholder, as S. Samuel Arsht stated in 1979 (2). Read more…

Short-termism, quarterly capitalism and capital flows evidence

January 15, 2017 Leave a comment

Media and business analysts have recently identified stock buybacks and dividend increases as an empirical evidence that companies in the USA are not doing their best efforts to maximize value in the long-term.

Academia has also been recently debating on the effects of hedge fund activism-led short-termism and its effects. (1) Empirical evidence though is difficult to seize.

A more concise effort started with William Lazonick`s research “Profits without Prosperity”, who focused on stock buybacks and dividends as a decision by firms to allocate net profits away from investment, innovation, etc. Since then asset managers, institutions and usual activism critics have taken the buyback and dividend payment as an evidence that short-termism led by activists and a certain quarterly capitalism approach was depleting firms` coffers and inhibiting firms from investing, growing and creating jobs.

On January 2017, Fried and Wang have tried to fully depict capital flows so as to verify if coffers are actually depleted or not. (2) They argue information about buybacks and dividends is partial, and does not include other funds sources that would be offsetting them, (their study analyzes S&P 500 companies and beyond). Read more…

Dissenting Directors, by ECGI

November 13, 2016 Leave a comment

In october 2016 Piergaetano Marchetti, Gianfranco Siciliano both from Bocconi University, and Marco Ventoruzzo from Bocconi University, Pennsylvania State University and ECGI, published an article (1) where they tried to provide some empirical evidence about the role of a director that either votes against a resolution of the board or resigns. They use data from the Italian market regarding both independent and non-independent directors.

According to the authors, the Italian legal framework is very appropriate for the survey for several reasons:

  • List voting favors diverse boards, thus higher levels of debate within the boardroom; list voting allows minorities to nominate directors on their own;
  • As the case of controlling shareholders is common, the number of dissenting directors should be scant;
  • Information is otherwise abundant.


In Italy there are three types of directors, executives, non-executives and independents. Even if directors are elected by minorities, they all owe fiduciary duties to the corporations and all shareholders. Dissenting (not resigning) may reduce legal liabilities for the director, with several formal requirements, (the minutes should record the dissent and so on).


The authors try to obtain answers to certain questions: Read more…

What to do with the “Comply or Explain” principle? (II)

In November 2015 I published a comment on an article by Hadjikyprianou, George C. (1) who considered the principle needed some practical reform, because both the quality of the explanations and its oversight by shareholders and supervisory bodies was defective. In order not to steal the shareholders ‘role and to reduce private monitoring costs he suggested that a public institution could create a rating system for the CG practice by public firms.

In 2014 the same concern had also led the EU to publish a recommendation on how to use the “comply or explain” principle, so apparently institutions started offering guidelines for better explanations instead of creating the rating system, (2).


The EU suggested that firms explain what CG guideline they did not abide by, how, why, the decision-making process they followed to decide not to comply (temporarily or not), and what action they were taking so as to follow best CG practices for their “size”.

In July 2016, and partly with the aim to give the EU guideline some additional public exposure, the Spanish SEC equivalent, CNVM, has published a Guide for best practices when applying the “comply or explain” principle, (3). Read more…

Executive Pay moderation: what worked until 1980?

Steven A. Bank, Brian R. Cheffins and Harwell Wells recently made available a draft of their analysis (1) of the levers that kept executive pay at acceptable levels in the USA since the 1940´s and until the early 1970´s.

They start presenting the facts: in that period executive pay didn`t follow the fantastic results firms were producing but remained flat and even declined versus the rank-and-file employees when adjusted for inflation. They nevertheless refer briefly to a different period, in the 1920´s. It is worth also recovering Kevin J. Murphy´s “Executive Compensation: Where We Are, And How We Got There”, where he presents the first wave of hired managers earning very large amounts in the 1920`s thanks to bonuses linked to profits; usually the amounts where similar to what we observe in the 20th century when inflation-adjusted. But as Bank, Cheffins and Wells report, in the 1930´s the story is quite different as some outrageous cases forced legislators to impose disclosure of executive pay. Although pay still increased during this decade, compensation soon started to drop, and particularly during the 1940`s. Stock options started to be common in the 1940´s, its nature of compensation (not capital gain at exercise) was recognized in 1946, but they didn´t represent abnormal amounts so that anemic growth for executive pay remained the rule in the 1950´s and the 1960´s. But executive pay started to rebound in the 1970`s and most relevantly in the 1980´s, thanks to the use of stock option and restricted stock option plans. Even more in the 1990`s. Criticism started to spread; an effort to link pay and performance also became evident, so that higher pay was needed to compensate for the riskier pay structure (as perceived by the executives). Only the crisis after 2008 was enough to stop this growth, although (according at least to part of the academic analysts) the distribution problem and compensation gap between executives and employees persists.


After that, they refer to the governmental efforts to curb and shape executive pay; as in the case of Murphy (2), they see more failures than merits, and they all even see many trends in executive pay having been engendered by pay reforms.

The authors then focus on the core of their study: what were the determinants of executive pay that kept it under control in the 1940-1970 decades? Read more…

Work and Pensions and Business, Innovation and Skills Committees: The BHS Report

The inquiry (1 and 2) has tried to shed light into the reasons why some 11.000 BHS workers may be considered direct losers, up to 20.000 when pensioneers are included, many more if we consider eventual job losses in BHS providers, and up to 11 million when current and future pensioneers in other firms, (all of them contributors to the Pension Protection Fund that will afford part of the damage) are counted.

The big numbers also point to some winners: the company was bought in 2000 for £200 million; in the period 2002-04 some £423 million were given in dividends, (more than the £208m in Net Profit), £307m paid to the Green family. Goodwill and some real estate transactions allowed to pay these amounts, but also reduced the firm capacity to fulfill its pension obligations, invest or later afford the loss-making period until 2009, so that in 2014 the company had negative equity and was largely financed  by debt, (part of it granted by Green`s other companies). Operations didn`t really go well, as sales remained flat and profits might have increased mainly as a result of cost cuts. Read more…

Why do institutional investors “exit” instead of raising their voice?

July 18, 2016 1 comment

A certain time ago, I published a post about Pescanova, (1) a rather small public firm. At the time its problems were unveiled by an investor who didn`t believe the accounts and management´s explanations about the CF trends, no “voice” had been raised against its managers, or its performance, the corporate governance structure, its strategy, capital allocation….What`s more, I remember a chorus of financial analysts that had been broadcasting their recommendations to buy the stock one or two years before. The story (if true as it has been told) is well-known: results had been introduced for some time from outside of the perimeter, while the “third party firms” were in fact firms controlled by the company or its managers, (and were full of debt that finally “exploded”).

Exit or Voice 2

 But I won`t talk about this today. Instead, I will try to guess why no voice had been produced about its corporate governance (CG) practices, that were apparently very defective, (as the Spanish regulator said –after everything was unveiled- ),(2). The distinction between “exit and voice”, or “active versus passive monitoring” was introduced by Hirschman (3) and is described by Tirole, (4). Read more…