Jay Clayton, the newly nominated chairman of the Securities and Exchange Commission, is slated to appear before the Senate Banking Committee on March 23 to begin his confirmation process. He should resist the rising clamor to stop quarterly reporting by U.S. companies, despite the efforts by some politicians and investment professionals.
Critics of quarterly reporting argue that it unduly focuses corporate executives on maximizing profits over the short term — usually defined as the next three months. Instead, these critics argue that shifting to semi-annual reporting would lead corporate executives to make longer-term business investments — usually defined as three to five years.
These arguments are not supported by our empirical study of the most relevant “natural experiment” — when, in 2007, the U.K. requirement moved to quarterly from semi-annual reports. Our study found that shifting the frequency of reporting by U.K. companies did not have any statistically significant impact on their business investments.
Read the rest at marketwatch.com…
On Friday, February 3, President Trump issued an executive order directing the Secretary of Treasury to report, within 120 days, on whether governmental rules and policies promote or inhibit the order’s Core Principles for Financial Regulation. These generally stated Principles stress investor choice, economic growth and international competition as well as the more traditional goals of financial regulation such as preventing bailouts, analyzing risk and increasing accountability.
Although the executive order did not mention Dodd-Frank by name, President Trump made clear: “We expect to be cutting a lot of Dodd-Frank, because frankly, I have so many people, friends of mine that had nice businesses, they can’t borrow money.” By contrast, the Federal Reserve data show that total loans and leases by banks grew by almost 7% per year during the last three years.
Next month, Bengt Holmstrom, a professor at MIT, is slated to accept a Nobel Prize in Economics for his pathbreaking contributions to contract theory. Congressmen and corporate boards might want to take note: Mr. Holmstrom’s innovative proposal for indexed stock options, which aren’t yet widely used, could be one solution in the running political debate over whether CEOs are fairly paid for performance.
Almost all stock options today have a fixed exercise price: The holder buys the company’s stock at the market price on the day the options were granted. The idea is to align the interests of CEOs and their shareholders. If the stock rises, the executive buys at the old price and makes a profit. On the other hand, if the company’s stock is flat or down, the options become worthless.
Unfortunately, as Mr. Holmstrom pointed out in 1979, fixed-price options can easily reward poorly performing executives during times of rising markets. Suppose a drug company grants 50,000 options to its CEO with an exercise price of $100 a share. If in three years the stock rises by 30%—to $130 a share—the CEO exercising his options would make a profit of $1.5 million.
Sure, sometimes this profit might reflect the outstanding work of this CEO. But suppose the stock prices of comparable drug companies rose by 60% on average during the same three years. Suddenly the CEO’s options look like a windfall instead of a reward for his superior managerial skills.
Read the rest at brookings.edu…
The resignation under duress of the CEO of Wells Fargo, after being pummeled in a Congressional hearing, raises a fundamental question: how can corporate boards hold management accountable for performance problems? One trendy answer from several governance mavens — limit the terms of independent directors so they do not become unduly deferential to the CEO.
The most typical limit on independent directors is mandatory retirement at age 72. This is the tenure limit for the Wells Fargo board. It is a significant limit because most directors do not join large company boards until age 60.
The tenure limit for independent directors is even stricter in UK. After serving for 9 years, a director of a UK public company will not be considered independent unless the company makes a special disclosure justifying longer service for that director
However, I believe that these uniform limits on director tenure are counter-productive. By relying on these automatic rules, boards may get stuck with a relatively young director who is not making a significant contribution to managerial oversight. Meanwhile, these many directors with valuable expertise and real independence are forced to leave boards at age 72 or after 9 years.
Read the rest at realclearmarkets.com…
Executives, fund managers and even politicians have criticised publicly traded companies’ undue focus on generating profits in the next quarter instead of making investments with good five-year prospects.
To encourage these companies to take a longer-term perspective, several regulators have shifted corporate reporting requirements from quarterly to semi-annually.
Most prominently, in 2013 the European Commission amended its Transparency Directive to abolish the requirement for quarterly reports by publicly traded companies in favour of semi-annual reports.
After an impact assessment, the commission concluded that “quarterly financial information is not necessary for investor protection”.
But a recent study severely undermines the commission’s conclusions.
Read the rest at brookings.edu…
Whether Microsoft’s $26.2 billion purchase of LinkedIn makes sense might depend on where you look. Glancing at LinkedIn’s press release for the full year 2015, you will see a prominent projection for “adjusted” earnings this year of $950 million.
Yet if you closely read the press release and its appendix, you can figure out that the company’s projected 2016 earnings under GAAP, the generally accepted accounting principles required in securities filings, are minus $240 million.
What accounts for that enormous difference? Like many companies, LinkedIn reports one set of figures to the Securities and Exchange Commission but touts adjusted figures elsewhere. LinkedIn’s adjusted projection excludes large expenses: $630 million for stock awards to executives and $560 million for depreciation and amortization.
Read the rest at wsj.com…
Senator Hatch, chairman of the Senate Finance Committee, is focusing on an important aspect of the agenda for corporate tax reform—allowing U.S. corporations to receive a deduction for dividends paid to their shareholders. That deduction would eliminate double taxation of corporate profits distributed as dividends; instead, these profits would be taxed only to shareholders, not at both the shareholder and corporate levels.
Although Senator Hatch has not disclosed the details of his proposal, a corporate deduction for dividends paid has several advantages. But such a proposal would raise financial and political challenges that would have to be addressed.
Read the rest at brookings.edu…
In the 2015 proxy season, shareholders submitted more than 60 proposals asking US public companies to appoint an independent director as a board chairman, as opposed to one person serving as both chief executive and chairman.
In 2012, 45 per cent of the S&P 500 companies split the chief executive and board chairman roles, almost doubling from 23 per cent a decade ago. However, of the 45 per cent, roughly half of the separate board chairs were held by former chief executives.
By contrast, most public companies in Europe have a truly independent director as board chairman. Some commentators have suggested that the US adopt the European model.
While US companies typically oppose this suggestion, they should ask three practical questions:
Would an independent chairman improve the financial performance of the company substantially? Could the internal governance functions of a company be satisfied by other measures? And would an independent board chairman significantly reduce the time spent by a chief executive engaging with shareholders?
After reviewing empirical studies, David Larcker, professor of accounting at Stanford University, concluded that there was no systematic evidence for or against an independent chairman. Similarly, a further study found there is “no statistical relationship between independence and firm performance”.
However, a 2012 study by GMI Ratings, the research provider, showed that, over the past five years, large US companies with a separate board chairman had higher stock increases than companies with a combined chief executive and chairman. Yet another study found that separating the role of chairman from that of chief executive improved financial performance only when the company had been doing poorly.
Read the rest at ft.com…