Academic Roundup
Manifest-I presents a summary of recently released academic papers on international corporate governance
and corporate social responsibility issues.
Lucky Directors
Lucian Bebchuck, Yaniv Grinstein, Harvard Law School;
and Urs Peyer Johnson School of Management, Cornell University
This paper follows on from earlier research by the
authors on the practices relating to the granting of share options in the US.
While prior research and public attention have focused on the opportunistic
timing of executives' grants the authors now provide evidence that outside (or
non-executive) directors' options grants have also been timed. Examining the
option grants provided by public firms to outside directors between 1996 and
2005 it was found that 9% of these grants fell on days with a stock price equal
to a monthly low - making them 'lucky grant events'. It is estimated that about
800 lucky grant events were due to opportunistic timing and that about 460
companies and 1400 outside directors were associated with grant events produced
by this timing. The authors suggest that while the Sarbanes-Oxley Act reduced
the incidence of this it did not eliminate such opportunistic timing. Directors'
grant events were more likely to be lucky when executives also received a grant
on the same date and if there was not a majority of independent directors on the
board. The authors believe that the results of their research are relevant for
assessing the performance of outside directors and identifying the conditions
under which they can best perform.
Returns to Shareholder Activism: Evidence from a Clinical Study of the Hermes UK
Focus Fund
Marco Brecht, Julian Franks and Colin Mayer, European
Corporate Governance Institute; and Stefano Rossi, Stockholm School of
Economics. ECGI Finance Working Paper No. 138/2006.
Shareholder activism by institutional investors is often
seen as opportunistic and short-termist – a wisdom challenged by this paper,
which finds companies targeted by the Hermes UK Focus Fund substantially
outperform stock market indices. The paper studies the Focus Fund’s activism
over the period 1998-2004. The Fund, it is found, has been extremely successful
in generating returns for investors: 4.9% above the FTSE All Share Index from
1998-2004, an estimated 90% of which is due to activist outcomes. The paper also
finds that the Focus Fund’s activism is predominantly carried out through
private intervention rather than shareholder proposals. Indeed, engagement –
involving numerous meetings with chairmen, chief executives and chief financial
officers - rarely took a public form, which the paper suggests is in part due to
the potent threat of the Fund requisitioning an EGM.
Ultimately, finds the study, these results provide the
first substantive evidence that well-focused shareholder activism can result in
substantial public returns to outside shareholders as well as those actually
involved in the engagements. However, the authors do caution that these results
are for one fund only, and cannot be generalised to other activist funds in the
UK; and the study does not capture the extent to which the market could have
been updating its expectations of successful activism prior to the actual
outcome.
Corporate Law Reform and Delisting in Australia
Nicholas Lew and Ian Ramsay, Centre for Corporate Law
and Securities Regulation, University of Melbourne
Analysing 30 years of company delistings from the
Australian Stock Exchange (ASX), from 1975-2004, this paper seeks to determine
whether they were made in response to corporate law reforms or changes to their
reporting requirements. It finds no evidence to suggest companies are delisting
for these reasons: instead, the most common reasons for leaving the ASX were:
name or company code change (40.4%); capitalisation change (19.3%); the
acquisition of the company (18.8%); and failure to pay listing fees (8.1%). The
paper suggests there are at least two possible explanations for this finding in
regard to reform and reporting requirement changes: that Australia, unlike the
US, has not enacted many excessively prescriptive or burdensome corporate law
amendments; or that the country’s corporate reporting framework requires
virtually all companies to prepare and lodge financial reports with the
Australian Securities & Investments Commission, regardless of whether they are
listed or not.
The Psychology of Corporate Dishonesty
Katherine Hall, The Australian National University. Australian Journal of
Corporate Law, Vol. 19.
Katherine Hall here attempts to correct what she sees as the lack of
attention devoted to developing a detailed understanding of the human element of
corporate dishonesty. Companies do not by themselves act dishonestly: their
wrongdoing is a result of decisions made by individuals – yet, Hall argues,
there has been little scholarly effort to develop a psychologically informed
perspective on this problem.
Hall argues that in order to regulate this behaviour it needs to be understood
through reference to cognitive and organisational psychology. All regulation,
she states, relies on assumptions and predictions about human behaviour: if the
factors that affect dishonest corporate decision making are not recognised,
lawmakers are poorly equipped to design regulation that influences this conduct.
January, 2007
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