CORPORATE GOVERNANCE Table of Contents

Transcription

1 CORPORATE GOVERNANCE Table of Contents I. Introduction... 1 A. Dual structure... 1 B. Contact info... 1 C. Take-home Exam... 1 D. Things to do... 1 II. Definitions; The Basic Structure of Governance Within the Corporate Entity; Roles and Responsibilities of Gatekeepers... 1 A. Definitions Corporation Regulators Gatekeepers Evaluators Public Statements and Documents Corporate Governance Litigation... 2 B. BusinessWeek, Who Can You Trust?... 2 C. The Role of the Board... 2 III. Corporate Scandals and the Sarbanes-Oxley Riptide Financial Frauds and Audit Failures; Oversight of Auditing Firms; Composition and Central Role of the Audit Committee... 3 A. History... 3 B. Sarbanes Oxley Act of IV. Sarbanes-Oxley and Reform of the Disclosure Regime CEO/CFO Certifications; SOX 404 and Internal Controls; Public Company; Disclosure Reform; Sharp Increase in Criminal Penalties and the New Enforcement Climate... 4 A. Restrictions on Abuses by Insiders... 4 B. CEO/CFO Certifications... 4 C. Internal Controls... 4 D. AS E. AS F. Further Disclosure Reforms... 4 G. Form 8-K... 4 H. Securities Analysts... 4 I. Criminal and Related Provisions... 4 V. Reform by the NYSE and Nasdaq of Listed Company Boards and Committees... 5 A. Controlled companies... 5 B. Independence... 5 VI. Trial of a Corporate Governance Case... 5 A. Finding the Best Case Scenario: Kodak v. Sun Microsystems Methodology Kodak v. Sun... 5 B. Winning a Corporate Trial Corporations and Corporate Governance How to win Lincoln Savings Opening Statement... 6 [i]

2 4. Overview of Suits... 6 VII. Teachings from Recent Litigation, Regulatory Sanctions and Government Investigations I: Disclosure Fraud at Enron and Waste Management... 6 A. Waste Management... 6 B. In re Enron... 7 VIII. Shareholder Control over the Corporate Enterprise The Rise of Activism and Attempts to Assert Greater Control over the Board; Shareholder Proxy Access; Majority Vote Movement; Elimination of Broker Discretionary Votes in Director Elections; Insurgent Campaigns, Incl. Short Slates; Mandatory Bylaw Amendments... 7 A. History of Shareholder Control and Recent Developments (Tectonic Shift Article)... 7 B. Shareholder Insurgencies... 9 IX. The SEC... 9 A. Background History Purpose Remedies B. Law Act of 1934 (The Anti-Fraud Act) Rule 10b-5 (promulgated by the SEC): illegal to: C. In re Readings A. Thoughts about the Khuzami Speech and the Financial system B. Waste Management and Greenberg Consent Decrees C. Molchatsky v. United States X. Teachings from Recent Litigation, Regulatory Sanctions and Government Investigations II: Subprime Mortgages, Derivatives and the Systemic Credit Crisis of A. Background Derivatives Derivatives Regulation B. Incentives XI. The Role of Attorneys A. Inside Counsel (General Counsel) vs. Outside Counsel B. Attorney Roles Gatekeeper Conscience Detective Partner C. Materiality Qualitatively material Quantitatively material D. Disclosures Affirmative disclosure Non-disclosure Who is disclosing Intent E. Confidentiality Reporting Up [ii]

3 2. Reporting Out F. Compliance Compliance Regimes in Different Jurisdictions Roles of Values G. E.g., Waste Management XII. Teachings from Recent Litigation, Regulatory Sanctions and Government Investigations III: Option Backdating A. Basics: Stock Options Backdating B. Brocade C. Broadcom D. Ryan v. Gifford (derivative suit) XIII. Executive Compensation, Corporate Governance, and the Increasing Federalization of Corporate Law A. Problems in executive compensation moral hazard B. Possible Solutions C. Financial Regulatory reform D. Current Executive Compensation Controls E. Federalism concerns XIV. Review [iii]

4 I. Introduction A. Dual structure 1. Corporate transactions 2. Litigation B. Contact info 1. (650) C. Take-home Exam D. Things to do 1. Watch MSNBC House of Cards 2. Watch Friends of Angela 3. Go through a company s 10K II. Definitions; The Basic Structure of Governance Within the Corporate Entity; Roles and Responsibilities of Gatekeepers A. Definitions 1. Corporation Conceptually: Legal fiction, Organism Officers fiduciary duty (must act in the interests of trustee over the interests of self) to shareholder o CEO, CFO, CIO, GC o Executive VPs, Senior VPs Employees Directors fiduciary duty to the shareholder o Committees o Ultimately responsible for oversight, strategic guidance Shareholders o Individuals o Institutions o Can write by-laws 2. Regulators E.g., SEC, FTC 3. Gatekeepers Accountants & Auditors Attorneys 4. Evaluators Investment bankers Securities Analysts Page 1 of 17

5 Ratings Agencies evaluates creditworthiness of a company s debt 5. Public Statements and Documents 10K filed by publicly traded company with SEC; annual report o Audited financial statements and compared to the previous year o Management Discussion & Analysis 10Q quarterly version of the 10K 8K Restatement required when prior financial reporting was inaccurate Press release way to dilute the impact of a negative stock event o Earnings estimates Prospectus Proxy seeks shareholder approval 6. Corporate Governance Litigation 1934 Act, 10b and Rule 10b-5 outlaws: o (1) public statements that are materially false or misleading, i.e., public statement liability o (2) scheme liability o (3) market manipulation liability Also claim of breach of fiduciary duty B. BusinessWeek, Who Can You Trust? Picture of a pre-sarbanes Oxley World o Key questions: Did SOX improve the state of nature? Could SOX have prevented the financial crisis of 2008? o Famous fraud cases Cendant Sunbeam Waste Management Enron ( ) Role of the Company o Accounting tricks In-process R&D Charges Pooling Restructuring Reserve Revenue Recognition Role of the Accountant Role of the Analyst/Investment Banker Role of the Investor C. The Role of the Board Qualifications of Enron Board members o Lapse of attention Primary issues and principles o Oversight o Independence Auditors were reporting to Management, and the Board was only passively observing Page 2 of 17

6 o Duties o o Under SOX, the Board controls employment of the auditors Asking questions v. In-depth inquiry Duty of care Duty of loyalty III. Corporate Scandals and the Sarbanes-Oxley Riptide Financial Frauds and Audit Failures; Oversight of Auditing Firms; Composition and Central Role of the Audit Committee A. History Early 18th century in England, then early 20th century Kansas Initially regulation was founded on trust and reputation Black Tuesday, October 29, 1929 o If there was a lack of transparency, the concern was how to enable investors to know about dependent relationship between companies o Disclosure regulation (as opposed to merit regulation, which existed on the state level), and then let the free market operate Securities Act of 1933 truth in disclosure if you sell stock Security Exchange Act of 1934 truth in disclosure on a periodic basis Investment Company Act of 1940 for mutual funds Advisor Act of 1940 regulation for financial advisors Trust Indenture Act of 1939 creating a trustee who coordinates among bondholders, and indenture that lays out rights of bondholders Glass-Steagall Act of 1933 separated investment banks from commercial banks o Enron, Worldcom, etc. o Sarbanes Oxley Act of 2002 Biggest development in securities law since the Great Depression Federalization of corporate law Reaches into corporate governance B. Sarbanes Oxley Act of 2002 Overview o Overall philosophy Making oversight stronger and breaking feedback loop between management and oversight o SOX 404 and internal controls internal accounting controls Public Company Accounting Oversight Board (PCAOB) o Created because CEO/CFO used to control the auditors Auditors became increasingly involved in non-audit services and earned substantial revenues created even more incentives for the auditors to keep their clients happy o 5 people, with no more than 2 accountants as board members o Auditors have to be independent from the company o Free Enter. Fund v. PCAOB Auditor Independence Audit Committees Page 3 of 17