Corporate Governance Challenges in Controlled companies. USA versus EU

March 30, 2017 1 comment

Corporate Governance Challenges in Controlled companies. USA versus EU

María Gutiérrez and Maribel Saéz have recently published an enlightening article on this aspect of Corporate Governance, traditionally much more connected with the European reality than with the US case. (1)

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Their analysis covers the three mechanisms with which shareholders may react to underperforming companies, (exit, voice and loyalty or liability (2)), with an innovative approach; they understand their respective effectiveness depends on the type of controlling insider and on the nature of the outsider.  Controlling shareholders have been more common on Europe and other areas than in the US, although in recent times both the reduction of public firms and certain governance practices (dual-class shares…) have made them also more frequent in the US. Even if reality appears to converge, nevertheless governance practices differ as for the treatment that controlling shareholders receive, so that tunneling, self dealing and other rent-extraction methods by them against the minority shareholders or investors is still much more limited in the US than in Europe, (perhaps one of the reasons for the much more limited role of capital markets there). Read more…

The US Corporate Governance Framework

Literature on Corporate Governance (Corpgov) often comes from the US; many Corpgov institutions have been born in the US; the big controversies regarding board effectiveness, executive pay, and any other Corpgov matter are often raised in the US…..but what is the Corpgov framework in the US? I have ofter read about the US Corpgov without having a systemic knowledge about the framework that defines it. I will try to learn and offer a view of that in the present post. (1)

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The era after SOX (Sarbanes Oxley Act in 2002) unveils differences between the USA Corpgov system, (regulatory or hard law and “one size fits all” regime) and the UK one, (based on soft law or codes, and the “Comply or Explain” principle). Differences also affect gatekeepers, (subject to regulation by Agencies such as the SEC) and the market for corporate control.

 

  1. Peter V. Letsou describes the shared regulatory responsibility in the USA by the States and the Federal Government.

Read more…

Does your start-up need a board?

So you are the founder, you had the idea, you probably are the best to know where your  company needs to go…why should you involve anybody else in managing your company?

Particularly at a time when big and successful companies like Facebook and others have kept voting rights in excess of their economic stake after an IPO, isn`t it justified to avoid granting control to strange people?

Johanne Bouchard recently depicted how boards are at Unicorns, (1) these powerful but still at an early stage in their life companies. According to her, they use to be smaller, usually made of (relevant) investors and founders and other executives, (equity ownership at the board usually high), so that its leadership style adopts the shape below; these boards spend their time in value creation and growth related issues, which is perhaps their most relevant difference with mature or consolidated companies,  where (broadly speaking) compliance topics may reign. So, why should a founder have a board at all, particularly when the company hasn`t received large amounts of VC or early funds yet, when only you, your family and friends have contributed to launch the project? Read more…

The Duty of Loyalty

February 19, 2017 Leave a comment

The Duty of Loyalty is established in the Spanish Corporate Law (1) in articles 227 until 232. According to it directors need to act with good faith and in the best interest of the corporation; a breach would entail restitution of the damage suffered by the corporation plus the return of the profit the director could have made.

The legislator wanted to further explain the extent of the obligations:

a) Directors must use their powers with the aim they were granted to them.
b) They must keep confidentiality.
c) They must refrain from deliberation and vote when they face a conflict of interest. They also need to adopt measures not to incur in situations where their interests (or those of related parties) face those of the corporation.
d) They need to act free from instructions and criteria established by third people.

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Referring to the conflict of interest, the legislator further explains that it can appear when a director does a transaction with the corporation, when he uses the name of the corporation or its assets in its own interest, when he takes a business opportunity from the corporation, when he/she is paid by a third-party or acts in business as a competitor of the company.

The prohibitions to act may be relaxed if the shareholders general meeting (or in some cases the rest of directors if they are independent with regard to the affected director)) so decides. In general the approval can only be granted if no damage is produced to the company or if it is somehow compensated.

In connection with the Duty of Loyalty, some questions arise in all legal frameworks: Read more…

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).

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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).

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