Executive Pensions

Because public firms are not required to disclose the monetary value of pension plans in their executive pay disclosures, financial economists have generally analyzed executive pay using figures that do not include the value of such pension plans. This paper presents evidence that omitting the value of pension benefits significantly undermines the accuracy of existing estimates of executive pay, its variability, and its sensitivity to performance companies. Studying the pension arrangements of CEOs of S&P 500, we find that the CEOs' plans had a median actuarial value of $15 million; that the ratio of the executives' pension value to the executives' total compensation (including both equity and non-equity pay) during their service as CEO had a median value of 34%; and that including pension values increased the median percentage of the executives' total compensation composed of salary-like payments during and after their service as CEO from 15% to 39%.

Private Equity and Executive Compensation

After the financial crisis, Congress directed regulators to enact new rules on C EQ pay at public companies. The rules would address the possibility that directors of public conpani es put ranagers\u27interests ahead of shareholderswhen setting executive pay. Yet little is known about how CEOs are paid in companies whose directors have undivided loyalty to shareholders. These directors car be fbund in companies owned by private equity firms-the savvy investors long renowned for their ability to maximize shareholier value. this Artic. presents the first study of how CEO pay in companies owned by private equity firms differs from CEO pay in public companies. The study finds that directors appointed by private equity tirms tie CEO pay much more closely to performatnce by preventing CEOs from selling, or unloading, their holdings of the conpanss stock. -My ndings suggest that publiccorpan boards should also lirnit unloading to strengthen the CEO pay performartc link. Furthermore, reglators should require public corparties to disclose CEO stock holdings prominently. Both current law and post-crisis rulemaking emphasize transparency in pay levels rather than irincentives, a fbcus that perversely encourages directors to weaken the relationship between CEO pay and perfbrmance

Recent Cases: Appellate Procedure - Force of Circuit Precedent - Ninth Circuit Holds That Three-Judge Panels May Declare Prior Cases Overruled When Intervening Supreme Court Precedent Undercuts the Theory of Earlier Decisions

The nation\u27s courts of appeals have struggled to devise a coherent approach to harmonizing existing circuit case law with intervening decisions of the Supreme Court.\u27 When the Court directly overrules a decision of a court of appeals, it is agreed that the overruled decision loses the force of law. But when a Supreme Court opinion disfavors a circuit\u27s jurisprudential theory, the courts of appeals must determine to what extent cases relying on the rejected theory remain good law. Recently, in Miller v. Gammie (Gammie II),2 the United States Court of Appeals for the Ninth Circuit, sitting en banc, adopted an approach that directs three-judge panels to reconsider both panel and en banc decisions that would otherwise be binding precedent when those decisions are clearly irreconcilable with the reasoning or theory of intervening higher authority. \u273 This test is unbounded and will likely prove impossible to administer, a result foretold by the Gammie II court\u27s error in concluding that Ninth Circuit absolute immunity jurisprudence was effectively overruled by Supreme Court cases entirely compatible with existing circuit decisions. To preserve the predictability and coherence of their jurisprudence, courts of appeals should instead adopt a default rule that presumes the validity of case law not explicitly overruled by the Supreme Court

Stock Unloading and Banker Incentives

Congress has directed federal regulators to oversee banker pay. For the first time, these regulators are now scrutinizing the incentives of risk-takers beyond the bank\u27s top executives. Like most public company managers, these bankers are increasingly paid in stock rather than cash. The ostensible reason is that stock-based pay aligns manager and shareholder interests. But portfolio theory predicts that managers will diversify away, or unload, stock-based pay unless they are restricted from doing so. One way to deter unloading may be to require managers to disclose it, as investors and colleagues will assume that managers are unloading because they are unmotivated or think their stock is overvalued. Using rare data on stock unloading at Goldman Sachs, this Essay provides the first empirical study of incentives throughout a bank\u27s managerial hierarchy. I find that bankers paid in stock soon sell a nearly equivalent amount, unless they have to disclose, in which case they sell much less. These findings suggest that regulators concerned about incentives need information on bankers\u27 overall equity holdings, including the effects of unloading. They also suggest that pre-crisis disclosure rules encourage executives to maintain dangerously concentrated positions in their bank\u27s stock

Nine Justices, Ten Years: A Statistical Retrospective

The 2003 Term marked an unprecedented milestone for the Supreme Court: for the first time in history, nine Justices celebrated a full decade presiding together over the nation\u27s highest court.\u27 The continuity of the current Court is especially striking given that, on average, one new Justice has been appointed approximately every two years since the Court\u27s expansion to nine members in 1837.2 Although the Harvard Law Review has prepared statistical retrospectives in the past,3 the last decade presents a rare opportunity to study the Court free from the disruptions of intervening appointments. Presented here is a review of the 823 cases decided by the Court over the past decade. Of course, bare statistics cannot capture the nuanced interactions among the Justices nor substantiate any particular theory about the complex dynamics of the Court. Rather, this statistical compilation and the preliminary observations articulated here are intended only as a starting point- a modest effort to showcase trends that deserve closer attention and to jumpstart more robust analyses of how the Court, despite its apparent stability, has evolved over the past decade

Corporate Governance and Executive Compensation: Evidence from Japan

Lawmakers around the world are now urging corporations to adopt governance and executive pay standards drawn largely from the American corporate law context. Yet little is known about how corporate governance actually influences executive compensation decisions outside of the United States-and whether adoption of these standards is likely to be desirable for investors abroad. In this Article, we take advantage of a recent change in Japanese law to provide the first direct empirical evidence on executive pay in Japan. The evidence provides striking detail on the amount and structure of Japanese executive compensation. The data point to a previously unappreciated link between corporate governance and executive pay in Japan and indicate that several trends familiar to the U.S. compensation landscape have begun to take hold in Japanese firms. Our findings suggest that lawmakers and firms should take careful account of the relationship between governance and pay before importing governance standards from abroad

Activist Directors and Agency Costs: What Happens When an Activist Director Goes on the Board?

We develop and apply a new and more rigorous methodology by which to measure and understand both insider trading and the agency costs of hedge fund activism. We use quantitative data to show a systematic relationship between the appointment of a hedge fund nominated director to a corporate board and an increase in informed trading in that corporation’s stock (with the relationship being most pronounced when the fund’s slate of directors includes a hedge fund employee). This finding is important from two different perspectives. First, from a governance perspective, activist hedge funds represent a new and potent force in corporate governance. A robust debate continues as to whether activist funds reduce the agency costs of corporate governance, but this is the first attempt to investigate whether the activist hedge fund also imposes new agency costs through widened bid/ask spreads and informed trading. Second, although insider trading is almost universally condemned, it has only been studied in individual cases. Using instead a quantitative approach, we develop a tool that enables regulators (civil and criminal) to identify suspicious trading patterns: Both to demonstrate such a pattern and to map these new agency costs, we assembled a data set of 475 settlement agreements, between target companies and activists funds relating to the appointment of fund nominated directors, from 2000 and 2015, in order to focus on what happens once such a fund-nominated director goes on the board. Among our principal findings are: Prevalence of Hedge Fund Employees on Slate. Approximately 70% of fund-nominated director slates include a hedge fund employee. Increase in Information Leakage. Once a fund-nominated director goes on the board, an abrupt increase in “information leakage” follows, with the result that the target corporation’s stock price begins to anticipate future public disclosures. Specifically, we examine some 635,450 Form 8-K’s filed by 7,799 public traded companies over the period of January 1, 2000 to September 30, 2016, and we construct a control group for each of the corporations subject to an activist intervention. We find that firms appointing an activist nominee or nominees experience a difference-in-differences increase in leakage of 25-27 percentage points. Hedge Funds versus Other Activists. We next consider whether post-appointment increases in leakage depend on the identity of the activist investors (i.e., hedge fund versus other activist investors). We find that the leakage effect is clearly driven by hedge fund activists (and no other type of activist). Leakage and Hedge Fund Employees. We investigate whether leakage increases depend on the identity of the director appointed to target firm’s board, distinguishing between hedge fund employees and non-hedge fund employees. We find that the increase in leakage is driven by the appointment of activist fund employees to the corporate board (and not by the appointment of other persons, such as industry professionals). Leakage and Confidentiality Provisions. We consider whether post-settlement increases in leakage are associated with confidentiality provisions restricting information sharing in the settlement agreements. The majority of settlement agreements have no confidentiality provisions, and information leakage is concentrated in these cases. Market Response to Settlement Agreements. We next examine whether the stock market’s response to settlement agreements depends on (a) whether a hedge fund employee is on the director slate, and (b) whether the settlement agreement contains or refers to a confidentiality provision. We find that the 5-day CAR is more than twice as high (4.2% vs. 1.97%) for settlements with only non-employee directors and also significantly higher (2.02% vs. 0.42%) for settlements with an explicit restriction on information sharing. Effect on Bid-Ask Spread. Bid-ask spreads increase by statistically meaningful amounts in our treatment group after an activist director gains access to the boardroom. Bid-ask spreads do not widen for the control groups. Further, we find that the increase in bid-ask spreads is concentrated in those cases in which (i) a hedge fund employee is appointed to the board, or (ii) no confidentiality provision is referenced in the settlement agreement. Options Trading. We find that options trading increases significantly after the appointment of an activist director and in a manner consistent with informed trading. Consistent with earlier research on informed trading, we find that options traders exploit unscheduled Form 8-K filings. Implications. The foregoing pattern is most plausibly explained as the product of informed trading. Material, non-public information appears to travel on a conduit from the hedge fund’s employee-director to others, whose trades move the market price prior to public disclosure. We reach no conclusions about who is trading or its legality in any individual case. Yet, the widened bid-ask spread strongly suggests that the market expects such trading, and the much more positive market response to director slates without a hedge fund employee (or with a confidentiality provision) suggests that the market suspects that informed trading is closely associated with the appointment of a hedge fund employee to the board. Hypothesis. Our data suggests that the ability to engage in informed trading is a significant subsidy that may inflate the rate of hedge fund activism (producing more engagements than if stronger controls on information sharing were imposed) and may encourage activists to pursue inefficient engagements. Further, information sharing may be the cement that holds together a “wolf-pack” of activists that would otherwise logically be unstable. Reforms. We consider and evaluate a variety of possible reforms that are consistent with an energetic role for hedge fund activism, but that remove (to various degrees) the subsidy of informed trading

Corporate Political Speech: Who Decides

The Supreme Court spoke clearly this Term on the issue of corporate political speech, concluding in Citizens United v. FEC\u27 that the First Amendment protects corporations\u27 freedom to spend corporate funds on indirect support of political candidates. 2 Constitutional law scholars will long debate the wisdom of that holding, as do the authors of the two other Comments in this issue.3 In contrast, this Comment accepts as given that corporations may not be limited from spending money on politics should they decide to speak. We focus instead on an important question left unanswered by Citizens United: who should have the power to decide whether a corporation will engage in political speech? Under existing law, a corporation\u27s decision to engage in political speech is governed by the same rules as ordinary business decisions, which give directors and executives virtually plenary authority. In this Comment, we argue that such rules are inappropriate for corporate political speech decisions. Instead, lawmakers should develop special rules to govern who may make political speech decisions on behalf of corporations. We analyze the types of rules that lawmakers should consider. We also offer a set of proposals, and policymaking considerations, for designing such rules

Toward a Constitutional Review of the Poison Pill Essay

We argue that the state-law rules governing poison pills are vulnerable to challenges based on preemption by the Williams Act. Such challenges, we show, could well have a major impact on the corporate law landscape. The Williams Act established a federal regime regulating unsolicited tender offers, but states subsequently developed a body of state antitakeover laws that impose additional impediments to such offers. In a series of well-known cases during the 1970s and 1980s, the federal courts, including the Supreme Court, held some of these state antitakeover laws preempted by the Williams Act. To date, however, federal courts and commentators have paid little attention to the possibility that the state-law rules authorizing the use of poison pills-the most powerful impediment to outside buyers of shares-are also preempted. Our study examines this subject and concludes that there is a substantial basis for questioning the continued validity of current state-law rules authorizing the use of poison pills. The Essay shows that these rules now impose tighter restrictions on unsolicited offers than those once imposed by state antitakeover regulations that the federal courts invalidated on preemption grounds. Preemption challenges to these poison-pill rules could well result in their invalidation by the federal courts. Finally, we discuss how state lawmakers could revise poison-pill rules to make them more likely to survive a federal preemption challenge. This could be done, we show, by imposing substantial limits on the length of time during which a poison pill can be used to block tender offers. Whether preemption challenges lead to invalidation of existing poison-pill state rules or to their substantial modification, such challenges could well reshape the market for corporate control