January 11, 2010
Sunday – Dispatch No. 5 from New Orleans – Corporate Governance in the Aftermath
Posted by Erik Gerding

An interesting Business Association Section meeting (chaired by our own Lisa Fairfax) closed out AALS Sunday morning. The topic of the meeting was how the crisis and the government response changed our perspective on corporate governance.

The panel discussion was kicked off by an analysis of Alan Beller, a partner at Cleary Gottlieb and the former head of the SEC’s Division of Corporation Finance. Mr. Beller spoke on why the crisis got as bad as it did. He posited that one reason was that regulators mistook what was a solvency or capital crisis for what he said first looked like a liquidity crisis because of Bear Stearns.

Teresa Tritch of the NY Times editorial board then spoke how she was tracking how the change in change in proxy voting to enable shareholders to vote “no” was playing out. She speculated that even though directors were not being voted out in significant in significant numbers, no votes were sending a message of shareholder discontent. She argued that this discontent over corporate governance must be seen as a broader issue for policymakers not merely as a private matter within individual corporations.

Hilary Sale (Washington Univ. – St. Louis) asked the question, “How is Delaware responding to the crisis?” Her short answer: “not by doing very much.” She does believe that boards are working hard now to figure out risk should be managed, but noted that the Delaware courts have sent a clear message that the board does not manage risk, but oversees risk management.

Jeff Gordon (Columbia) responded by questioning whether the answer to the financial crisis was empowering shareholders. He argued that corporate governance was a “third order” contributor to the crisis and should be a third order policy response. He contended that making corporations more responsive to shareholders could be counterproductive as shareholders may prefer that corporations take actions that increase shareholder value but also increase systemic risk. Among the pieces of evidence he cited: although the U.K. affords shareholders greater rights, U.K. financial institutions fared no better in the crisis. He also parsed through an empirical study by Beltratti and Stulz, “Why Did Some Banks Perform Better during the Credit Crisis?”. Gordon says that the clearest conclusion from this study is that the banks with the most shareholder friendly boards fared the worst. Professor Gordon’s conclusion: we should give more thought to proposals to let bondholders vote in director election and tie banker compensation to enterprise value – that is to both share and bond values.

Renee Jones (Boston College) gave a tour of several of the scandals and crises in the past “Decade of Disaster”: stock analyst misdeeds, market timing by mutual finds, options backdating, and the current financial crisis. She argued that each of these incidents shared three common factors: (1) conflicts of interest, (2) issues of compensation, and (3) lack of accountability, including poor regulatory oversight. Her conclusion: conflicts of interest of key and the repeal of Glass Steagall -- which she faults for causing conflicts to mushroom -- needs to be revisited.

As you can see there were clear divergences over whether and what role corporate governance should play in response to the crisis, but there was consensus among some panelists on a few issues. For example, several panelists agreed with Professor Jones’ suggestion that, as an alternative to director liability, we should explore further barring directors of public corporations that have failed or committed misdeeds from being directors of other corporations (the panel didn’t specify what the trigger would be.

Panelists also agreed that more attention needs to be paid by scholars and policymakers to international dimensions of corporate governance, including cooperation among securities regulators.

A number of questions came on how to make regulators nimbler, stronger, and more aggressive to ward off future crises. Former regulator Beller agreed with the sentiment, but noted that regulators now face pressure to act with foresight, but if they attempt to regulate in anticipation of problems, they get pushback from industry – “how can you regulate if nothing bad has happened?”

Ms. Tritch also made an interesting point when referring to lobbying efforts by derivative “end users” and community banks to obtain exemptions from proposed derivative regulations. She argued that the arguments of these firms that they didn’t “cause” the crisis doesn’t mean that they should be exempted; all derivative counterparties were part of a system and it is the entire system that needs to be regulated.

AALS, Business Organizations, Corporate Governance, Financial Crisis, Legal Scholarship | Bookmark

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