Copyright (c) 2009 All rights reserved. http://works.bepress.com/bernard_sharfman Recent documents in Bernard S Sharfman en-us Mon, 09 Nov 2009 11:26:34 PST 3600 http://works.bepress.com/bernard_sharfman/14 http://works.bepress.com/bernard_sharfman/14 Mon, 26 Oct 2009 08:18:28 PDT Good corporate governance practices at a publicly held firm will not necessarily be good practices at a publicly traded firm in which there is a controlling shareholder. This is because board independence, a key concept in structuring appropriate corporate governance practices, has a different meaning when a controlling shareholder is present. However, identifying whether or not a board is truly independent is just the first step in evaluating the quality of corporate governance at a controlled corporation. After all, a controlling shareholder still has the power to dominate an independent board through his direct voting power and by threats of removal. Therefore, a proper evaluation requires knowledge of those corporate governance practices that a controlled company uses to monitor and manage the decision-making influence of the controlling shareholder. Furthermore, to make sure these practices are optimal, a subjective analysis of just how the controlling shareholder interacts with the board is required. In addition, the focus of such a subjective analysis must go primarily to an evaluation of the character of the controlling shareholder and his/her motivations regarding the welfare of the company. This paper explores how the personality of the controlling shareholder will also play a role in determining the most optimal corporate governance practices. In doing so, this paper takes the perspective of an institutional investor who is a current or prospective shareholder of a controlled corporation and is trying to evaluate the company's corporate governance practices or determine what changes may be necessary at the controlled company to increase value to all shareholders. An institutional investor will often find it necessary to do so because a significant number of public companies worldwide have controlling shareholders. Bernard S. Sharfman Corporate Governance http://works.bepress.com/bernard_sharfman/13 http://works.bepress.com/bernard_sharfman/13 Tue, 06 Oct 2009 06:43:57 PDT In the newly evolving case law of what constitutes a corrective disclosure, a recent U.S. District Court for the District of Arizona decision in In re Apollo Group, Inc. Securities Litigation has brought to the fore the issue of whether or not corrective disclosures must come only in the form of "hard facts," such as the public disclosure of prospective accounting restatements or the failure of the FDA to approve a drug for public use, or if they can also come in the form of "soft facts," i.e., a public disclosure of how a securities analyst has changed her opinion or valuation of a security based on the incorporation of hard facts into her analysis or valuation model(s). Such a change in an analyst's opinion will typically be communicated to the market by the public release of a written research report. In this essay, I argue that corrective disclosures must also include the later in order to be consistent with a correct understanding of how the mechanisms of an efficient financial market operate. If not, many investors who have been the victim of securities fraud will go uncompensated. Bernard S. Sharfman Securities Law http://works.bepress.com/bernard_sharfman/12 http://works.bepress.com/bernard_sharfman/12 Sun, 04 Oct 2009 09:33:27 PDT At the Loyola University (Chicago) Annual Conference on Risk Management and Corporate Governance (Oct 2009), I presented a paper that will soon be published in the Delaware Journal of Corporate Law, Volume 34, No. 3. The paper describes two intertwined stories, a corporate governance story and a corporate law story. Unfortunately, because the goal of my article was to identify a new tool of accountability under corporate law, I feel that the corporate governance story may not have been given the prominence it deserves. Therefore, my presentation at the conference focused on the corporate governance story. The presentation described how Margaret Blair and Lynn Stout's team production approach to corporate governance can be used to explain the compensation decisions made by Wall Street boards prior to and during the financial crisis of 2008. More specifically, it showed how the boards of Wall Street firms were required to act as "mediating hierarchies" when dealing in an environment where implicit contracts and short time horizons dominated.According to Blair & Stout, team members can claim a residual interest in the firm when they make firm specific investments. However, identifying the firm specific investments made by investment bankers and traders was not so obvious. First, asset specificity was absent. That is, the skills and abilities possessed by traders and investment bankers were assumed to be fully transferable to other firms and therefore not dependent on the assets of any particular firm. Nevertheless, firm specific investments were created as a result of traders and investment bankers simply demanding and receiving a piece of the action (residual). Conceptually, these employees received a unique class of non-voting stock in exchange for providing their unique skills and abilities and thereby created residual interests that rivaled the residual interests of shareholders. Thinking in terms of options, traders and investment bankers can be viewed as receiving an in-the-money European call option in exchange for providing their services. Several significant conclusions result from the telling of this corporate governance story. First, shareholder primacy is not a workable norm where implicit contracts dominate. Second, it can be conceptualized that shareholders indirectly contract away the shareholder wealth maximization norm to the extent they allow the firm to enter into implicit contracts. Shareholders allow this to happen because they trust the board to adequately perform its duty as a mediating hierarchy. If the board performs adequately, the shareholders believe they will be better off. Third, the relatively slow acceptance of Blair and Stout's conception of the board as a mediating hierarchy may have been due to the lack of examples where it was clearly applicable. However, Wall Street has helped solved this problem. Bernard S. Sharfman Corporate Governance http://works.bepress.com/bernard_sharfman/11 http://works.bepress.com/bernard_sharfman/11 Thu, 20 Aug 2009 05:54:46 PDT Bernard S. Sharfman Corporate Governance http://works.bepress.com/bernard_sharfman/10 http://works.bepress.com/bernard_sharfman/10 Fri, 06 Feb 2009 10:44:00 PST Bernard S. Sharfman Corporations http://works.bepress.com/bernard_sharfman/9 http://works.bepress.com/bernard_sharfman/9 Tue, 03 Feb 2009 10:59:00 PST As a result of the financial crisis of 2008, the employment compensation policies and decisions of Wall Street corporate boards have come under close scrutiny. More specifically, the willingness to approve company wide compensation plans that resulted in the paying out of billions of dollars in bonuses even in the face of deteriorating financial and economic conditions. If only these and other Wall Street firms had retained the bulk of these large annual bonuses over the last several years when the financial markets were noticeably in decline, perhaps the economic impact of the current financial crisis would have been less severe. It is now understood that board approval of compensation policies that are heavily weighted toward large bonuses can encourage the pursuit of fake alpha and that the decisions to pay out huge amounts of company capital in the form of bonuses may primarily be the result of fake alpha being successfully achieved. In terms of corporate governance, these decisions reveal how opportunistic rent seeking stakeholders can pressure the corporate board into excessively risky decisions that can jeopardize the financial health of the corporation. The question then becomes whether corporate law needs to be modified to deal with this weakness in corporate governance and if so, how should it be done. In this essay, it is argued that the courts should require a public company's board, a board composed presumably of a majority of independent and disinterested members, to fulfill an enhanced duty in the process of deciding to approve policies or make decisions that on their face implicate both opportunistic rent seeking behavior on the part of one or more company stakeholders and the financial health of the firm. Such board decisions would necessarily include, among others, those decisions that involve moving massive amounts of cash out of the company and into the pockets of one or more stakeholders (huge company wide bonuses, large executive management team compensation, large dividend payouts, aggressive stock buybacks, etc). Bernard S. Sharfman Corporations http://works.bepress.com/bernard_sharfman/8 http://works.bepress.com/bernard_sharfman/8 Tue, 11 Nov 2008 13:56:44 PST The board of directors of a public company is only responsible for a relatively few of the almost infinite number of decisions that are made at a public company over any period of time. Yet, when a corporate board does make a decision, for example, the appointment of a chief executive officer or the approval and recommendation to shareholders of a merger agreement, the decision can have a major impact on the firm. Now, based on the fallout from the financial crisis of 2008, we can add corporate board approval of company-wide compensation policies to the list of board decisions that are of potentially major significance to the firm, at least for those public companies we can refer to as "Wall Street" firms (financial institutions with large financial trading and investment banking operations whether or not they are based in proximity to lower Manhattan). The significance of these employment policy decisions cannot be overstated. By comparison, what was at stake in the much publicized litigation involving the Walt Disney Company was almost trivial, since the facts of the Disney litigation did not involve a threat to the company's existence or billions of dollars of capital outflows.The elevation of company-wide compensation policies to the fore of corporate governance issues facing Wall Street firms requires both a change in perspective on how these policies should be implemented as well as a reconsideration of whether the protections of the business judgment rule as applied to corporate board decisions under corporate law need to be adjusted accordingly. Bernard S. Sharfman Corporate Governance http://works.bepress.com/bernard_sharfman/6 http://works.bepress.com/bernard_sharfman/6 Wed, 24 Sep 2008 08:38:19 PDT In today's world of corporate governance, the board of directors of a publicly held firm ("public company") will almost certainly be made up of a majority of independent directors. Armed with such independence, it is hoped that corporate boards can better monitor for managerial opportunism and enhance firm performance relative to management dominated boards. The criterion for selecting outside board members is to choose members who enhance the efficiency of board decision-making. For that to occur, we must have an understanding of how the corporate board of a public corporation is to operate in an efficient manner. As proposed by Professors Margaret Blair & Lynn Stout, in order for the corporate board of a public corporation to operate efficiently, it must operate as a mediating hierarchy, consistent with a team production approach to corporate law and governance. Given this approach, a board composed of members that can best understand how the corporation operates as a mediating hierarchy should be the board that operates the most efficiently. For guidance on how we should select board members using a team production approach, we rely on the work of Kaufman & Englander. Bernard S. Sharfman Corporate Governance http://works.bepress.com/bernard_sharfman/5 http://works.bepress.com/bernard_sharfman/5 Tue, 15 Jul 2008 07:34:32 PDT It has been over seven years since the public was first made aware that Enron (or the "Company") was a troubled firm, ultimately doomed to bankruptcy and much litigation, both civil and criminal. Yet, the Enron debacle continues to fascinate researchers and the general population alike. Over a recent one year period, the Social Science Research Network posted 71 papers that referenced Enron in their abstracts. What appears most baffling to many observers, specifically those interested in corporate governance, was the inability of the Enron board of directors to get a handle on the massive fraud that occurred under its watch. For example, Charles M. Elson, director of the Center for Corporate Governance at the University of Delaware stated in regard to the repeated warning signs that the Enron board received during this time, "They should have inquired further" and "they were unwilling to ask and pursue tough questions." Yet, for all the research done, a satisfactory explanation has yet to be provided that explains why the Enron board, a board that was considered one of the best in the United States just prior to the Company's downfall, failed to detect the fraud and stop it before it destroyed the company. Obviously, something was amiss at the top of the Enron pyramid and we think it had something very much to do with the composition of the Enron board, no matter how impressive the backgrounds of its individual members. We, of course, are not alone in this opinion as the Enron debacle led to enhanced independence requirements for board members. As a response to the facts of the Enron scandal, we certainly endorse the board member independence requirements of the stock exchanges and the enhanced independence guidelines as recommended by proxy advisory companies, but it is our position that corporate boards of publicly held firms would be better off and less prone to error if other rules or guidance were in place that required or strongly encouraged corporate board nominating committees to select members who were prominent and respected, but less prone to what we refer to as "dysfunctional deference." Bernard S. Sharfman Corporate Governance http://works.bepress.com/bernard_sharfman/4 http://works.bepress.com/bernard_sharfman/4 Fri, 14 Mar 2008 05:57:28 PDT This article first establishes that there are still a number of reasons why being informed does matter, despite the ability to incorporate an exculpation clause into a Delaware corporation's certificate of incorporation. This is followed by an explanation of how Delaware's business judgment rule became transformed from a doctrine of abstention to a standard of review in the context of procedural due care. Throughout this article, it is understood that the business judgment rule exits within a framework of corporate authority and accountability and that it serves as a significant tool for the protection of corporate board authority. The article recommends that the Delaware courts adopt a lenient gross negligence standard that can be consistently applied when trying to answer the question of whether or not a board was sufficiently informed when making a business decision. However, in recognition of the understanding that the Delaware Supreme Court's decisions in Van Gorkom and Cede do not conform to such a lenient gross negligence standard in a merger situation, a less lenient gross negligence standard should be applied in that rather narrowly defined fact pattern. Bernard S. Sharfman Corporations