Global Corporate Governance Colloquia (GCGC) 2015

Global Corporate Governance Colloquia (GCGC) 2015

  • 05 - 06 June 2015
  • California, USA

The aim of the conference series is to attract current research papers of the highest scholarly quality in the field of corporate governance. The conferences are primarily ‘academic to academic’ events with some participants from industry and the public sector including the practitioner partners of GCGC and other invited panelists. The current practitioner partners are the European Investment Bank (EIB), Zurich Insurance Group, and Japan Exchange Group (JPX).

Attendance at this event was by invitation only. Researchers were invited to submit recent papers or extended abstracts and selected papers were presented at the conference. In addition, there were two panel discussions involving participants from industry and the public sector.

Information

Address:
Stanford Law School, Stanford, California, USA
Contact:
Elaine McPartlan
European Corporate Governance Institute (ECGI)

Day 1: Friday 5th June

08:45

Introduction Conference Chair: Professor Ronald Gilson, Stanford Law School

09:00

Morning session Session Chair: Professor Colin Mayer, Said Business School, University of Oxford

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Audit Oversight and Reporting Credibility

Time:
09:00h
- 09:45h

This paper examines how audit oversight by a public-sector regulator affects investors’ assessments of reporting credibility. We analyze whether the introduction of the Public Company Accounting Oversight Board (PCAOB) and its inspection regime have strengthened capital- market responses to unexpected earnings releases, as theory predicts when reporting credibility increases. To identify the effects, we use a difference-in-differences design that exploits the staggered introduction of the inspection regime, which affects firms at different points in time depending on their fiscal year-ends, auditors, and the timing of PCAOB inspections. We find that capital-market responses to unexpected earnings increase significantly following the introduction of the PCAOB inspection regime. Corroborating these findings, we also find an increase in abnormal volume responses to firms’ 10-K filings after the new regime. Overall, our results are consistent with public audit oversight increasing the credibility of financial reporting.

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Why Do Corporate Charters Waive Liability for Breach of the Duty of Care?

Time:
09:45h
- 10:30h

This paper clarifies why corporate governance arrangements in public firms generally do not make use of judicial evaluations of boards’ and managers’ business decisions. In principle, information generated in litigation, particularly discovery, could usefully supplement public information (particulary stock prices) in the provision of performance incentives. In particular, the optimally adjusted combination of standard performance pay and litigation could impose less risk on boards and managers than standard performance pay alone. Caps, indemnification, or insurance could achieve the requisite tailoring of litigation payments; ruinous liability risk and ensuing risk aversion would not be an issue. Similarly, court biases can be offset by contractual adjustments. The appendix shows this in a formal model summarizing well-known results.

Consequently, the reason not to use litigation incentives is not absolute but a simple cost-benefit trade-off. Litigation is expensive, while the benefits from additional information are limited. Stock prices already provide fairly good information, courts have difficulties evaluating business decisions and thus provide only noisy information, and the agency conflict in standard business decisions is limited. A different result may obtain, however, when other governance mechanisms are weaker, particulary when stock prices or other reliable public signals are not available; when courts can measure the decision against an accepted benchmark; or as the agency conflict becomes more severe.

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10:30

Coffee break

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Corporate Governance and Risk Management at Unprotected Banks

Time:
10:45h
- 11:30h

We examine bank governance and risk choices from the 1890s, a period without distortions from deposit insurance or other government assistance to banks. We link differences in managerial ownership to different corporate governance policies, risk, and methods of risk management. Formal corporate governance and high manager ownership are negatively correlated. Managerial salaries and self-lending are greater when managerial ownership is higher, and lower when formal governance is employed. Banks with high managerial ownership (low formal governance) target lower default risk. High managerial ownership rather than formal governance is associated with greater reliance on cash rather than equity to limit risk.

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Contractual Governance in the Absence of Law: Bylaws of Norwegian Firms in the Early 20th Century

Time:
11:30h
- 12:15h

We analyse a sample of 85 bylaws adopted by Norwegian corporations prior to the existence of corporate law in Norway. At that time, Norway had a free-contracting regime, granting individuals the right to freely found limited-liability companies and write their governance structures as they saw fit. All firms appoint a Board of Directors, which at the time, was more akin to a management board, but in a quarter of firms a co-existing Board of Representatives is established. Bylaws provisions display considerable heterogeneity, among others, in the extent to which firms allocate decision powers between the Board of Directors, the Board of Representatives, and the General Meeting. We find that the likelihood of delegating authority to the Board of Directors increases with the likelihood of having small owners. Furthermore, firms most likely to have dispersed ownership are more likely to mandate a Board of Representatives and allocate authority to it, at the expense of both the Board of Directors and the General Meeting.

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12:15

Lunch break

14:00

Afternoon session Session Chair: Professor Kon Sik Kim, Seoul National University

14:00
- 14:45

The Great Pyramids of America: A Revised History of US Business Groups, Corporate Ownership and Regulation, 1930-1950

Speakers:
Discussant:
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The Great Pyramids of America: A Revised History of US Business Groups, Corporate Ownership and Regulation, 1930-1950

Time:
14:00h
- 14:45h

Most listed firms are freestanding in the U.S, while listed firms in other countries often belong to business groups: lasting structures in which listed firms control other listed firms. Hand-collected historical data illuminate how the present ownership structure of the United States arose: (1) Until the mid-20th century, US corporate ownership was unexceptional: large pyramidal groups dominated many industries; (2) About half of these resembled groups elsewhere today in being industrially diversified and family controlled; but the others were tightly focused and had widely held apex firms; (3) US business groups disappeared gradually, primarily in the 1940s, and by 1950 were largely gone; Their demise took place against growing concerns that they posed a threat to competition and even to society; (4) We establish a link between the disappearance of business groups and reforms that targeted them explicitly – the Public Utility Holding Company Act (1935) and rising intercorporate dividend taxation (after 1935), or indirectly – enhanced investor protection (after 1934), the Investment Company Act (1940) and escalating estate taxes. Banking reforms and rejuvenated antitrust enforcement may have indirectly contributed as well. These reforms, sustained in a lasting anti-big business climate, promoted the dissolution of existing groups and discouraged the formation of new ones. Thus, a multi-pronged reform agenda, sustained by a supportive political climate, created an economy of freestanding firms.

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Corporate Chartering and Federalism: A New View

Time:
14:45h
- 15:30h

In a system of federated states such as the United States and the European Union, there are, in general, three alternative approaches to chartering business corporations. The first is the real seat doctrine, under which corporations are required to be chartered in – and hence their governance is determined by the law of – the member state where they have their principal place of business. The second is free incorporation (or, as it is labeled in the United States, the internal affairs rule), under which a corporation is free to obtain its charter from, and be subject to the governance rules of, any member state in the federation, whether or not the corporation does business in that state. The third approach, in turn, is federal chartering, under which a corporation receives its charter, not from an individual member state, but from the federal government that oversees the federation as a whole.

For more than 40 years, academic debate about the choice among these three regimes in the U.S. and the EU has focused intensely on what has come to be called regulatory competition. The familiar idea is that if – as has long been the case in the U.S. and only more recently in the EU – the prevailing choice-of-law regime provides for free incorporation, the result will be competition among the member states to induce business firms to choose them as the firm’s state of incorporation.

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15:30

Coffee break

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Seeking Alpha: Excess Risk Taking and Competition for Managerial Talent

Time:
15:45h
- 16:30h

We present a model where firms compete for scarce managerial talent (“alpha”) and managers are risk-averse. When managers cannot move across firms after being hired, employers learn about their talent, allocate them efficiently to projects and provide insurance to low-quality managers. When instead managers can move across firms, firm-level coinsurance is no longer feasible, but managers may self-insure by switching employer to delay the revelation of their true quality. However this results in inefficient project assignment, with low quality managers handling too risky projects. The model has several empirical predictions and policy implications.

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19:00

Reception followed by dinner

Day 2: Saturday 6th June

08:45

Morning session introduction Session Chair: Professor Gerard Hertig, Swiss Federal Institute of Technology

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Financing Disruption

Time:
09:00h
- 09:45h

‘Disruptive’ innovations are powerful forces for reshaping activities and generating growth. Yet by definition, the properties (what they can do) and consequences (whether they disrupt) of innovations are not widely understood when they are first explored. This aggravates agency problems in financing innovative projects, increasing the cost of capital. Policymakers, keen to stimulate innovation, are exploring a number of ways of facilitating capital-raising by innovative firms. These range from modifications to securities laws to facilitate ‘crowdfunding’, through the toleration of entrenchment by founders of tech companies that go public, to outright subsidies for investment in innovative firms. We argue that to the extent the source of the problem lies in lack of understanding—a knowledge gap—it is desirable to raise finance from persons with comparative advantage at understanding the innovation in question. Whilst this obviously describes a stylised venture capitalist, we argue that it also helps explain financial contracts between innovative firms and capital markets (dual-class structures), consumers (crowdfunding), and employees (restricted stock). We develop this claim by reviewing contracting practices in relation to both nascent and established firms engaged in innovation, and use it to evaluate various policy initiatives.

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09:45
- 10:30

Privatized bankruptcy: a study of shipping financial distress

Speakers:
Discussant:
Dan Puchniak
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Privatized bankruptcy: a study of shipping financial distress

Time:
09:45h
- 10:30h

The current trend in bankruptcy legislation is to follow the US model of Chapter 11, whereby the courts have the authority to ‘stay’ the liquidation rights of the secured creditors. The alternative approach of freedom of contracting, whereby the courts limit themselves to strictly enforcing the rights of all parties, is largely ignored, for fear that such a system would be plagued by coordination failures among creditors. We study the resolution of financial distress in shipping, where the ex territorial nature of assets have distanced the industry from on shore bankruptcy legislation. We have three main findings. First, we demonstrate how financial distress can be effectively resolved by way of a contract and other private institutional arrangements. Second, that the economic cost of financial distress is low. Moreover, the cost seems to be driven by dysfunctional owners rather than uncoordinated creditors. Third, we estimate the fire sale discount, and demonstrate that much of the estimated discount is due to low maintenance of vessels and is largely concentrated in low valued vessels and corrupt ports. The shipping industry with its multitude of jurisdictions might be expected to provide for disorderly defaults; whereas in fact we find an industry close to Hayek’s ‘spontaneous order’. “There is only one law in shipping: there is no law in shipping”. Sami Ofer (shipping magnate)

Speakers

Discussants

Professor
Dan Puchniak

Conference Documents

10:30

Coffee break

10:45
- 11:30

The Wolf at the Door: The Impact of Hedge Fund Activism on Corporate Governance

Speakers:
Discussant:
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The Wolf at the Door: The Impact of Hedge Fund Activism on Corporate Governance

Time:
10:45h
- 11:30h

Hedge fund activism has recently spiked, almost hyperbolically. No one disputes this, but divergent explanations exist for it. Some see activist hedge funds as the natural champions of dispersed shareholders, who are not economically capable of collective action in their own interest. So viewed, hedge fund activism can bridge the separation of ownership and control. That, however, may assume what is to be proved. Others believe that hedge funds have interests that differ materially from those of other shareholders. We begin therefore with a more modest, two-part explanation for increased activism: First, the costs of activism have declined, in part because of changes in SEC rules, in part because of changes in corporate governance norms (for example, the sharp decline in staggered boards), and in part because of the new power of proxy advisors (which is in turn a product of legal rules and the fact that some institutional investors have effectively outsourced their proxy voting decisions to these advisors). Second, activist hedge funds have recently reaped high profits at seemingly low risk, and unsurprisingly, their number and assets under management have correspondingly skyrocketed. If the costs go down and the profits go up, it is predictable that activism will surge (and it has). But that does not answer the question (on which we focus) of whether externalities are associated with this new activism.

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11:30
- 12:15

Ownership, Investment and Governance: The Costs and Benefits of Dual Class Shares

Speakers:
Discussant:
Li Jin
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Ownership, Investment and Governance: The Costs and Benefits of Dual Class Shares

Time:
11:30h
- 12:15h

In this paper we show that dual-class shares can be an answer to agency conflicts rather than a result of agency conflicts. When a firm issues voting shares to raise funds, it increases the risk that manager-controlling shareholder could lose control of the firm and lose the associated private benefits. Thus, the incumbent may be willing to forgo positive NPV investments to maximize his overall welfare. Non-voting shares allow a firm to raise funds without diluting manager’s control rights; hence, it can alleviate the underinvestment problem .But use of non-voting shares dilutes dividends and facilitates entrenchment, reducing value-enhancing takeover bids. We obtain conditions under which the benefit of using non-voting shares outweighs its costs. We integrate the dual-class decision into the rich body of research on capital structure and underinvestment, and show that dual-class structures can be a solution to an agency driven underinvestment problem.

Speakers

Discussants

Professor
Li Jin

Conference Documents

12:15

Lunch break

14:00

Afternoon session Session Chair: Professor Ronald Gilson, Stanford Law School Stanford University

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The Changing Nature of Corporate Board Activity

Time:
14:00h
- 14:45h

Boards are working harder over time, but they may not be working better. Using a comprehensive sample of board data from 1996 to 2010, we document that a large proportion of board activity is carried out by committees. Pre-SOX, 36% of board activity takes place in committees. This increases to 47% post-SOX. Since board activity levels have risen substantially over time, this means more board activity is carried out in the absence of insiders. This change does not appear to be value-enhancing. Board committees are relatively understudied, but our results suggest that ignoring them leads to a very incomplete picture of board governance.

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Do mandatory board gender quotas reduce firm value?

Time:
14:45h
- 15:30h

A board gender quota reduces firm value if it forces the appointment of under-qualified female directors. We test this hypothesis using Norway’s 2005 board gender-quota law, which increased the average fraction of female directors from 5% in 2001 to 40% by 2008. Statistically robust analyses of quota- induced shareholder announcement returns, and of long-run stock and accounting performance, fail to reject the hypothesis of a zero valuation effect of this economy-wide shock to board composition and director independence. Evidence on female director turnover and changes in director networks also fails to suggest that qualified female directors were in short supply.

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15:30

Coffee break