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	<title>IGOPPAmerican governance &#8211; IGOPP</title>
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		<title>Boards Are Touting International Directors Amid Global Upheaval</title>
		<link>https://igopp.org/en/boards-are-touting-international-directors-amid-global-upheaval/</link>
		<comments>https://igopp.org/en/boards-are-touting-international-directors-amid-global-upheaval/#respond</comments>
		<pubDate>Tue, 10 Sep 2024 01:22:51 +0000</pubDate>
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				<category><![CDATA[IGOPP in the Medias]]></category>
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		<category><![CDATA[American governance]]></category>
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		<description><![CDATA[For the first time since at least 2018, more than half of S&#38;P 500 boards say they have members with international experience, according to data from ESGauge. As companies face geopolitical crises, increased globalization and foreign competition, boards are recruiting directors — or at least touting the ones they already have — who can help oversee these [&#8230;]]]></description>
		<content><![CDATA[For the first time since at least 2018, more than half of S&#38;P 500 boards say they have members with international experience, according to data from ESGauge. As companies face geopolitical crises [1], increased globalization and foreign competition, boards are recruiting directors — or at least touting the ones they already have — who can help oversee these risks, sources said.

These directors can also offer a boost to the bottom line, new research shows. Board members who are from or have worked abroad for a period of time and work cohesively with their fellow directors help companies' financial performance, according to a study [2] out of Binghamton University.

[...]

International experience is valuable as companies are facing a host of global risks and opportunities, sources said. Indeed, geopolitical instability was ranked the top issue that CEOs expect to influence or disrupt business strategy within the next year, according to 60% of 80 CEOs surveyed by [3] Deloitte this summer. And 67% of 100 CEOs surveyed by [4] KPMG earlier this year said they are undergoing "significant" strategic changes in response to geopolitical uncertainty, including wars, conflicts and elections happening around the world.

"When you talk about global experience ... you need to trust somebody with a broader view that understands not only the international business perspective but would understand the political tension of the region and more broadly the political environment there," said Guylaine Saucier, board chair at the Institute for Governance of Private and Public Organizations and a director on several private and public boards in Canada and France.

[...]

Meanwhile, roughly one-third of S&#38;P 500 directors are non-U.S. nationals, down slightly from 35.3% last year, according to ESGauge. Companies should not take their eyes off directors from international backgrounds, Saucier said.

"You have to have somebody who understands intimately the culture of the country in which you are working," Saucier said. "It's essential because that's where you'll have really the best input, the most value from this board member."

After recruiting such directors, it's important to "take the time to ensure that even if [a director is] coming from a different culture, they will be able to work collegially with your board," Saucier said. This may mean explaining cultural nuances or traditions here in the U.S and being respectful of theirs, sources said.

Read more [5]

[1] https://www.agendaweek.com/c/4536584/596334?referrer_module=article&#38;highlight=geopolitical&#38;referring_content_id=4618024&#38;referring_issue_id=611094
[2] https://www.binghamton.edu/news/story/5057/new-business-research-binghamton-leadership-international-experience-improve-company-performance
[3] https://www2.deloitte.com/content/dam/Deloitte/us/Documents/2024-Fortune-Deloitte-CEO-Survey.pdf
[4] https://kpmg.com/kpmg-us/content/dam/kpmg/pdf/2024/kpmg-2024-us-ceo-outlook-pulse-survey.pdf
[5] https://www.agendaweek.com/c/4618024/611094]]></content>
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		<item>
		<title>Corporate Purpose, ESG, stakeholders: what’s the deal?</title>
		<link>https://igopp.org/en/corporate-purpose-esg-stakeholders-whats-the-deal/</link>
		<comments>https://igopp.org/en/corporate-purpose-esg-stakeholders-whats-the-deal/#respond</comments>
		<pubDate>Tue, 17 Nov 2020 15:15:16 +0000</pubDate>
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				<category><![CDATA[Commentary]]></category>
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		<category><![CDATA[American governance]]></category>
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		<category><![CDATA[Proxy Advisors]]></category>
		<category><![CDATA[Shareholders]]></category>
		<category><![CDATA[Stakeholders]]></category>

		<guid isPermaLink="false">https://igopp.org/raison-detre-esg-parties-prenantes-a-quoi-cela-rime-t-il/</guid>
		<description><![CDATA[Since the publication in 1932 of Berle and Means’ The Modern Corporation and Private Property, “capitalist” societies have been engaged in a forlorn quest for an appropriate definition of the role, justification and “raison d’être” of large corporations. Except for the legal fiction of shareholders as owners, corporations of the 1950’s, 60’s and 70’s, were [&#8230;]]]></description>
		<content><![CDATA[Since the publication in 1932 of Berle and Means’ The Modern Corporation and Private Property, “capitalist” societies have been engaged in a forlorn quest for an appropriate definition of the role, justification and “raison d’être” of large corporations.

Except for the legal fiction of shareholders as owners, corporations of the 1950’s, 60’s and 70’s, were not really “owned” by anyone but controlled by management. In this context, the manager had to be a man (or a woman) of many constituencies, a nimble balancer of conflicting interests, an impartial purveyor of amenities to one and all, a human synthesizer of the rights and interests of all parties which might directly or indirectly be affected by the actions of the corporation. Whether managers actually internalized these norms of conduct is a moot point. That concept of the corporation gave rise to formidable, dominant companies, such as IBM, Johnson and Johnson, GM, GE.

However for the last 40 years or so, with the rise of “financial capitalism” and the clever linking of executive compensation to share price, “creating shareholder value” became the driver of management, the rallying cry of the executive corps. That worked well for the managerial class. No matter that all large corporations proudly brandish statements about their Vision, Mission, Values and Ethics, recriminations and discontent simmered and eventually crystallized around a bundle of expectations now assembled under the ESG banner. [Environment, Social and Governance]

Institutional funds, pension funds, asset managers of various stripes and index funds particularly have joined, indeed led the bandwagon, relentlessly pushing corporations to include ESG issues in their management. Most corporations have given in to the pressure with various degrees of enthusiasm.

The proxy advisory firms (ISS in particular), their noses firmly in the wind, have sniffed the trend and now intend to include ESG factors in their assessment of corporate governance.

That’s the context which led some 181 CEOs of large (mainly American) corporations, under the aegis of the Business Roundtable, to sign a solemn undertaking, a year ago or so. They committed to adopt and impose on themselves a “Purpose” of care for, and nurturing of, their stakeholders. Henceforth, corporate decisions will factor in the interests of various parties, including the civic society and Mother Earth.

Professor Colin Mayer, one of the promoters of the ‘corporate purpose”, puts it this way: “the purpose of business is to solve the problems of people and planet profitably, and not profit from causing problems”. Hum, all leaders of large corporations will subscribe to this broad and vague agenda.

Business circumstances, at least for the oligopolistic leviathans, are changing; the greatest threat to these corporations’ survival often comes from the social and political environment, not mainly or solely from the economic and competitive environment. Large companies with slack resources can cope with the piling up of new demands and expectations in matters of environment, social responsibility, diversity and so on. But three points need to be emphasized here:

1. In this quest for a stakeholder oriented corporation and the multiplication of new ESG mandates, what’s the role of the entrepreneurial spirit, the drive to create and build a business in a world of sharp competition and evolving technologies? The vibrancy of an economy rests on entrepreneurial activity. Let’s be careful, lest we collectively stifle the entrepreneurial drive.

2. As the demands and legal requirements imposed on business corporations largely single out stock-market listed corporations, the current drought of new businesses listing on a stock exchange may worsen as entrepreneurs weigh the costs and benefits of “going public” and private sources of funding mushroom.

3. In Canada, two rulings by the Supreme Court clarified the meaning of acting in “the interest of the corporation” as stipulated in the Canadian Business Corporation Act. Boards of directors in their decisions must give equal consideration to stakeholders and shareholders; boards should not favor any particular group in its decision-making. Basically, we have in Canada a stakeholder model of governance. The U.S. jurisprudence is not that clear on this issue; several legal scholars still argue that maximizing shareholder wealth should be the prime objective of boards of directors. For instance, Professor Bainbridge writes “The law of corporate purpose remains that directors have an obligation to put shareholder interests ahead of those of other stakeholders and maximize profits for those shareholders”.

That is the context for the BRT’s “Purpose” initiative: an unclear American legal framework combined with investor and societal/political pressures on management to adopt a sort of stakeholder model.

But In Canada, this whole agitation about “Corporate Purpose” is moot as stakeholder governance is the law! Canadian boards of directors should be governed accordingly although there is yet little empirical evidence as to how that legal fact has impacted governance in Canada.

When all is said and done, managing for the long term, factoring in the multiple interests of the broader society, desirable goals indeed, will only happen when the games of some financial types are checked and executive compensation is re-arranged to support these objectives. Otherwise, all this agitation is perfunctory, pro-forma, “sound and fury signifying nothing”.

&#160;

Opinions expressed in this article are strictly those of the authors.
]]></content>
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		<item>
		<title>SEC Rule Amendments and Dual-class returns</title>
		<link>https://igopp.org/en/sec-rule-amendments-and-dual-class-returns-commentary/</link>
		<comments>https://igopp.org/en/sec-rule-amendments-and-dual-class-returns-commentary/#respond</comments>
		<pubDate>Thu, 20 Aug 2020 18:38:47 +0000</pubDate>
		<dc:creator><![CDATA[IGOPP Site web]]></dc:creator>
				<category><![CDATA[Commentary]]></category>
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		<guid isPermaLink="false">https://igopp.org/?p=12824/</guid>
		<description><![CDATA[1. ISS is finally leashed: SEC Amends Rules for Proxy Advisors On July 22, 2020, the Securities and Exchange Commission (SEC) adopted amendments to better regulate the activities of proxy advisors, such as ISS and Glass Lewis, and to ensure that clients of proxy voting advice businesses have reasonable and timely access to more transparent, [&#8230;]]]></description>
		<content><![CDATA[1. ISS is finally leashed: SEC Amends Rules for Proxy Advisors

On July 22, 2020, the Securities and Exchange Commission (SEC) adopted amendments to better regulate the activities of proxy advisors, such as ISS and Glass Lewis, and to ensure that clients of proxy voting advice businesses have reasonable and timely access to more transparent, accurate and complete information on which to make voting decisions.
In essence, proxy advisors have always benefited from an exemption from the information, legal risks and filing requirements of proxy solicitation. The SEC has now stipulated that this exemption will apply in the future only if proxy advisors abide by the following conditions:

 	They must provide specified conflicts of interest disclosure in their proxy voting advice or in an electronic medium used to deliver the proxy voting advice;
 	They must have adopted and publicly disclosed written policies and procedures reasonably designed to ensure that corporations that are the subject of proxy voting advice have such advice made available to them at or prior to the time when such advice is disseminated by the proxy advisors to their clients;
 	They ensure their clients will receive, in a timely manner, any statement, explanation and contestation issued by the corporations that are the object of the voting recommendation.

The SEC is thus responding to oft-stated concerns of many issuers about these heretofore lightly regulated but influential market participants.

Proxy advisory firms are not required to comply with the amended regulations until December 1, 2021.

Of course, ISS has already announced its intention to challenge in court this SEC ruling.

IGOPP is particularly pleased with the SEC’s amended regulations as it called for such actions in a 2013 Policy Paper [1], The Troubling Case of Proxy Advisors: Some policy recommendations.

The complete press release of the SEC, and the links to retrieve pertinent materials, can be accessed here [2].

2. New study on relative performance of US dual-class companies

In a novel approach to the subject, researchers have “constructed” an index of dual class shares for the period 2009-2019. The intention here is to assess the performance of a hypothetical fund that would be made up of all dual class shares in proportion to their stock market capitalization. The performance of the fund may then be compared to other index funds, such as, in this case, the CRSP US Total Market Index. The results for dual class voting structures speak for themselves, as shown in the Table below.



Clearly, the volatility-adjusted return ratio of the Dual Index (a close variant of the Sharpe ratio where the higher the ratio the better) is clearly superior to the ratio of the Market Index.

The Index includes all dual-class companies with ordinary common shares listed on NYSE, NASDAQ, or AMEX and total market capitalization in excess of $100 million. A reconstitution process of the Dual Index is carried out semiannually, at the end of June and December. In case of a delisting or collapse of the dual-class structure, the researchers reinvested the proceeds in the portfolio until the next Dual Index reconstitution.

As of December of 2019, the Dual Index included 178 dual-class companies valued at $3.4 trillion. The Index accounts for 89% of the market capitalization of all dual-class companies listed across major U.S. stock exchanges.

The next figure shows the cumulative growth of a one-dollar investment in the Dual Index (green line) relative to the cumulative growth of a one-dollar investment in the market index (blue line). The performance of the Dual Index is especially strong in the second half of the decade .



The complete study by authors Byung Hyun Ahn, Jill E. Fisch, Panos N. Patatoukas &#38; Steven Davidoff Solomon, released as Research Paper on July 28, 2020, is available here [3].

[1] https://igopp.org/wp-content/uploads/2014/04/pp_troublingcaseproxyadvisors-pp7_short_3_.pdf
[2] https://www.sec.gov/news/press-release/2020-161
[3] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3645312]]></content>
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		<item>
		<title>The Angels of Market Efficiency</title>
		<link>https://igopp.org/en/the-angels-of-market-efficiency/</link>
		<comments>https://igopp.org/en/the-angels-of-market-efficiency/#respond</comments>
		<pubDate>Fri, 10 Jan 2020 15:02:22 +0000</pubDate>
		<dc:creator><![CDATA[IGOPP Site web]]></dc:creator>
				<category><![CDATA[News Articles]]></category>
		<category><![CDATA[Activism]]></category>
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		<guid isPermaLink="false">https://igopp.org/the-angels-of-market-efficiency/</guid>
		<description><![CDATA[Mr. Ben Axler, Chief Investment Officer and founder of Spruce Point Capital responds (Financial Post, December 17th, 2019) to my article on short sellers of his kind (Financial Post, December 13th, 2019). He trots out the worn-out argument that short sellers only reveal the sordid truths hidden in the bosom of corporations. In short, “professional” [&#8230;]]]></description>
		<content><![CDATA[Mr. Ben Axler, Chief Investment Officer and founder of Spruce Point Capital responds [1] (Financial Post, December 17th, 2019) to my article [2] on short sellers of his kind (Financial Post, December 13th, 2019). He trots out the worn-out argument that short sellers only reveal the sordid truths hidden in the bosom of corporations.

In short, “professional” short sellers are sort of the guardian angels of market efficiency acting as a countervailing force to the fawning, relentlessly positive and often corrupted recommendations of sell-side analysts! Indeed, sell-side analysts tend to see glasses as half-full; for short sellers, glasses are always empty and… dirty.

The consequences of short-sellers’ actions may be dramatic. The near collapse of the financial system in 2008 owed a good deal to the savage, incendiary role of short selling (particularly of the “naked” sort). The book “On the Brink”, written by Hank Paulson, U.S. Treasury Secretary at the time of the financial crisis, makes clear the noxious role played by short sellers during that frightening period. That’s what angels of market efficiency do!

Mr. Asler invites me to share with him what I find wrong in their report on Canadian Tire. Much, too much for a short article but an overarching theme would be the relative ignorance of the Canadian retail market that pervades their report. Spruce Point Capital assumes the competitive and buying behavior of Canadians are identical to Americans. That assumption has proven costly in a number of instances (Think Target, Kmart, Sam’s Club, Best Buy, Sears). Similarly, Canadian retailers which crossed over to the US market were often taught a painful lesson about the differences between the two markets.

So, Spruce Point Capital’s report on Canadian Tire (CT) is insensitive to the particular nature of the Canadian retail and financial markets. It keeps comparing CT unfavourably to Amazon and Walmart as the be-all, end-all of retailing. That myopic American perspective may explain the case of Dollarama.

Barely a year ago in October 2018, Spruce Point Capital launched a virulent campaign against Dollarama producing a long negative report to buttress its claim that the stock price of Dollarama should or would drop from $46 to $28; the stock price actually leveled off briefly at $31 in December 2018 from which level it soared back to above $45.

I made two basic points in my earlier piece, which bear repeating.

1. Canada is a benign place to practice financial/casino capitalism as our regulators never adopted either of the two following measures put in place in the USA. As a consequence of the financial crisis, the SEC has clamped down on “naked” short selling, the practice of selling shares but delaying the delivery of the shares for as long as possible in the hope of buying back the shares at a much lower price without incurring the cost of borrowing shares from other holders. Also, in 2010, the SEC introduced a measure whereby if the price of a security falls by more than 10 per cent, transactions in the stock are stopped for the remainder of the day and all of the following day.

2. Large institutional investors with a significant position in a company have, or should have, the analytical wherewithal to assess public claims made by short sellers against this company. If they find those claims to be illfounded or even false, they should state so publicly instead of, as is the case now, letting the company fend off the attack by itself. And these large institutional funds should not lend their shares to short sellers of the Spruce Point Capital ilk.

Should Canada let American short sellers roam free and wreak havoc in our financial markets? To ask the question is to answer it.

&#160;

The author is solely responsible for the opinions expressed in this article.

[1] https://business.financialpost.com/opinion/counterpoint-short-sellers-like-us-create-real-value-for-public-markets-by-telling-canadian-investors-the-truth
[2] https://igopp.org/limiting-the-damage-of-short-sellers/]]></content>
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		</item>
		<item>
		<title>Limiting the damage of short-sellers</title>
		<link>https://igopp.org/en/limiting-the-damage-of-short-sellers/</link>
		<comments>https://igopp.org/en/limiting-the-damage-of-short-sellers/#respond</comments>
		<pubDate>Fri, 13 Dec 2019 15:56:40 +0000</pubDate>
		<dc:creator><![CDATA[IGOPP Site web]]></dc:creator>
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		<guid isPermaLink="false">https://igopp.org/?p=12198/</guid>
		<description><![CDATA[When any individual investor or fund comes to the conclusion after careful analysis that a company is over-valued, it may very well sell short the shares of that company. Fair enough. If the analysis proves right, facts on the ground will confirm it eventually and the stock price will drop. But that’s not the game plan [&#8230;]]]></description>
		<content><![CDATA[When any individual investor or fund comes to the conclusion after careful analysis that a company is over-valued, it may very well sell short the shares of that company. Fair enough. If the analysis proves right, facts on the ground will confirm it eventually and the stock price will drop.

But that’s not the game plan of “professional” short-sellers. These funds produce a wholly negative report about a targeted company, which they broadcast widely to media, analysts, and investors in the hope of producing a stampede of shareholders exiting the  company’s stock. The result usually is a sharp drop in price as a kind of self-fulling prophecy. The short seller then buys the stock back at this much lower price and sails into the sunset with a bundle of cash.

Several countries (Japan, France, Germany, Italy) are considering ways and means to curtail the ability of activist funds to inflict damage to their industrial structure. Japan’s huge Government Pension Fund has suspended all loans of shares to short-sellers; if all Canadian institutional funds were to adopt such a policy, it would drive way up the price of borrowing shares to short-sell and make it more difficult to carry such operations profitably.

France is proposing to lower the threshold for reporting holdings of shares in a company from 5% to 3%. (Canada is a laggard and an outlier in this respect with a threshold of 10%; USA=5%; UK=3%). Furthermore, in the UK, short sellers must make their position public when it reaches 0.5% of outstanding shares and must include all derivatives in the computation of that ratio.

In the U.S., the SEC has clamped down on “naked” short selling, the practice of selling shares but delaying the delivery of the shares for as long as possible in the hope of buying back the shares at a much lower price without incurring the cost of borrowing shares from other holders. The SEC has instituted a “Hard T+3 Close-Out Requirement” imposing a three-day limit on stock delivery after a sale. No such restriction has been put in place in Canada.

Also, short selling could not be carried out if the last transaction had not been executed at a price higher than the previous transaction (the “uptick” rule). This rule was dropped in the U.S. in 2007 and in Canada in 2012. However, in 2010, the SEC introduced a modified tick test that is triggered for the remainder of the day and all of the following day if the price of a security falls by more than 10 per cent. This modified tick test was never adopted in Canada. (Activist short-sellers are increasingly targeting Canadian companies — is Canada ready? Financial Post, Barbara Shecter, October 6th 2017

Canada is thus a benign place to practice financial/casino capitalism. The features of this sort of capitalism are in full display at Spruce Point Capital, the American hedge fund and serial aggressor of Canadian companies. This fund practices the dark art of short selling. Barely a year ago in October 2018, Spruce Point Capital launched a virulent campaign against Dollarama. It produced a report to buttress its claim that the stock price of Dollarama should or would drop from $46 to $28; the stock price actually leveled off at $31 in December 2018 from which level it soared back to above $45.

It is fair to assume that Spruce Point Capital bought back shares it had short-sold at $46, making a hefty profit of some $15 per share in a period of some 2-3 months! But what about those shareholders who believed Spruce Point’s “demonstration” and sold their shares on the way down only to find that they had been helping  unwittingly) a financial scheme, losing a large amount of money in the process. Should they not have a claim, a basis for a class action, against Spruce Point Capital? Why are activist hedge funds permitted to publicly and with impunity disparage any company, to spread innuendoes (“possibly misleading accounting”, “potential shenanigans”), and to carry “ad hominem” attacks on officers or
board members?

The same process, the same modus operandi, is on display at the most recent Canadian target of Spruce Point Capital: Canadian Tire is “An Antiquated And Structurally Non- Competitive Brick And Mortar Retailer With No Clear Focus And No Competitive Advantage” claims Spruce Point in a report of 108 unreadable pages made public on the morning of December 5th (“Kicking the tire down the road”).

Although there may be kernels of truth in their analysis, the report throws everything but the kitchen sink at the reader and in the process throws mud at an Executive Vice-President and the Chairwoman of Canadian Tire.

What one will never find in these hack jobs is any concern for the environment and the society at large or for stakeholders other than shareholders. Yet, almost all institutional investors have now adopted strategies that put a high priority on Environment and Society, on long-term investment horizon and due consideration for all stakeholders of a company. Given this solemn commitment, why would these institutional investors support and abet the shenanigans of activist hedge funds whose sole focus is on short-term profit?

Large institutional investors with a significant position in a company have, or should have, the analytical wherewithal to assess public claims made by short sellers against this company. If they find those claims to be ill-founded or even false, they should state so publicly instead of, as is the case now, letting the company fend off the attack by itself. And these large institutional funds should not lend their shares to short sellers of the Spruce Point Capital ilk.

Canadian securities authorities and institutional fund managers should adopt some ways and means to limit the nefarious activities of activist funds, particularly the short-selling kind: more transparency, better regulations, enhanced constraints, self-discipline by institutional investors.

The author is solely responsible for the opinions expressed in this article.
]]></content>
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		<title>Carried Interest Warning From Court May Be Trouble for Treasury</title>
		<link>https://igopp.org/en/carried-interest-warning-from-court-may-be-trouble-for-treasury/</link>
		<comments>https://igopp.org/en/carried-interest-warning-from-court-may-be-trouble-for-treasury/#respond</comments>
		<pubDate>Thu, 07 Nov 2019 14:43:38 +0000</pubDate>
		<dc:creator><![CDATA[IGOPP Site web]]></dc:creator>
				<category><![CDATA[IGOPP in the Medias]]></category>
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		<guid isPermaLink="false">https://igopp.org/?p=12033/</guid>
		<description><![CDATA[A recent court case meant to clarify the definition of a corporation intensifies questions about the tax treatment of carried interest, a prized perk for private equity and hedge fund managers. The IRS argued for a broad definition of the term “corporation” in the case. But the legal issue that could come up in the [&#8230;]]]></description>
		<content><![CDATA[A recent court case meant to clarify the definition of a corporation intensifies questions about the tax treatment of carried interest, a prized perk for private equity and hedge fund managers.

The IRS argued for a broad definition of the term “corporation” in the case. But the legal issue that could come up in the future is whether it’s reasonable for Treasury regulations to interpret the term more narrowly in the carried interest context, affecting who can qualify for the treatment.

That question is even more relevant because Treasury is planning guidance that could close what some see as an error created in the 2017 tax law’s treatment of carried interest. The carried interest perk lets fund managers have much of their income taxed at 23.8% rather than at the top tax rate of 37%.

The tax law exempted corporations from having to hold assets for a longer time period before qualifying for the preferential tax rate. Treasury’s forthcoming rules are expected [1] to shut down the possibility that an S corporation could qualify for the exception. (An S corporation is an entity that isn’t taxed at the corporate level, instead passing income through to shareholders for tax purposes.)

But the U.S. Court of Appeals for the Federal Circuit suggested it isn’t so simple: it said the IRS may struggle to defend the rules in future legal fights.

“I don’t think the IRS is going to win on this one,” said Steve Rosenthal, a senior fellow in the Urban-Brookings Tax Policy Center.

If future regulations are challenged and invalidated by a court, it could leave open the potential for some private equity and hedge fund managers to take on S corporation status and get the preferential tax rate after just one year. To block that strategy, Congress would have to rewrite the provision in the tax law.

[ ... ]

Looking Ahead

The exact impact of future carried interest regulations getting struck down in court is tricky to pinpoint, because of the nature of private equity and hedge funds.

Private equity funds typically hold assets for between four and seven years, although that can vary, according to Jason Mulvihill, COO and general counsel at the American Investment Council, a private equity advocacy group.

Hedge funds have traditionally had much shorter investment holding periods. One exception is activist hedge funds, which acquire stakes in companies and push for change.

Activist hedge funds that targeted companies in 2010 and 2011, for example, had a median holding period of 458 days, according to an article [2] published in the International Journal of Disclosure and Governance.

Even some activist funds that hold assets for shorter periods may end up altering investment behavior to lock in tax benefits, said Yvan Allaire, one of the article’s authors and executive chair of the Board of Directors for the Institute for Governance of Private and Public Organizations.

If future regulations are struck down in court, those hedge funds may decide to put carried interest into an LLC, which could elect S corporation status.

But being an S corporation comes with a lot of requirements.

“S corporations are just sort of a pain generally,” said Scott Dolson, who heads the Private Equity Industry Team at Frost Brown Todd LLC. “I think you’d probably want to just set it up so that you would not have to convert everything.”

Read more [3]

[1] https://src.bna.com/Mkp
[2] https://igopp.org/wp-content/uploads/2016/01/jdg201518a.pdf
[3] https://igopp.org/wp-content/uploads/2019/11/Bloomberg-Tax_Carried-Interest-Warning-From-Court-May-Be-Trouble-for-Treasury_Novembre-2019.pdf]]></content>
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		<title>Mergers and acquisitions: Feds, activists disrupt US economic growth</title>
		<link>https://igopp.org/en/mergers-and-acquisitions-feds-activists-disrupt-us-economic-growth/</link>
		<comments>https://igopp.org/en/mergers-and-acquisitions-feds-activists-disrupt-us-economic-growth/#respond</comments>
		<pubDate>Wed, 06 Nov 2019 14:55:02 +0000</pubDate>
		<dc:creator><![CDATA[IGOPP Site web]]></dc:creator>
				<category><![CDATA[IGOPP in the Medias]]></category>
		<category><![CDATA[IGOPP in the medias]]></category>
		<category><![CDATA[Activism]]></category>
		<category><![CDATA[American governance]]></category>
		<category><![CDATA[Value-creating governance]]></category>

		<guid isPermaLink="false">https://igopp.org/?p=12043/</guid>
		<description><![CDATA[By all indications mergers and acquisitions (M&#38;A) activity is on the rise. In the first five months of 2019, companies announced over $1 trillion in mergers and acquisitions, a 14% increase from the same period in 2018. This is generally good for the economy, the consumer and the shareholders alike. In fact, all Americans benefit [&#8230;]]]></description>
		<content><![CDATA[By all indications mergers and acquisitions (M&#38;A) activity is on the rise. In the first five months of 2019, companies announced over $1 trillion in mergers and acquisitions, a 14% increase from the same period in 2018. This is generally good for the economy, the consumer and the shareholders alike. In fact, all Americans benefit from the economies of scale, increased innovation, lower prices and stronger stock market returns that generally accompany bursts of mergers and acquisitions activity.

As we approach the upcoming national election cycle, economists find it difficult to pinpoint one specific reason for the current flurry of corporate M&#38;A activities in America. Recent developments, including the president’s tax reform bill, large corporate cash reserves and strong equity and debt markets may all contribute to this. That would likely include this morning’s announcement that Xerox (trading symbol: XRX) wants to acquire HP, the printer business spun off a few years ago from onetime Dow Jones Industrials component Hewlett-Packard.

Another increasingly critical development leading to the mergers and acquisitions trend: The need to maintain America’s technological edge in the face of growing global competition.

The United States losing its research and development (R&#38;D) edge

On key metric of continuing economic success is the steady development of new technologies. In 1960, the United States accounted for over two-thirds of all R&#38;D activity worldwide. Since that time, the total U.S. share of R&#38;D fell to 28% of the total. Even worse, America risks a further R&#38;D as foreign competitors put a strong emphasis on developing new technologies. Or, at times, stealing ours.

Over the past two decades, China has emerged as a global science and technology leader. Since 2000s China’s share of global R&#38;D more than quintupled from 4.9% to 25.1%. At this pace of growth, they could well soon overtake American innovation.

Government deficit soars. Here’s how President Trump will fix it
Along with tighter export controls and patent enforcement by the US government, corporate M&#38;A activities can significantly aid in reversing this trend.

The pooling of corporate resources that corporate mergers generaly provides offers economies of scale to the newly combined entity. This increases capabilities and helps advance technologies while eliminating unnecessary back office overhead. By eliminating the redundancies involved with fixed overhead costs, merged companies can also pass corporate savings can down to consumers in the form of lower prices. The new entity can also leverage some of the savings to fund fast-tracked research and development.

[ ... ]

US tech companies must compete with foreign developments. Likewise America’s defense industry.

In recent years, US defense-related R&#38;D fell from 36% of global R&#38;D to 4% today. That number likely has further to fall, as defense budgets come under additional pressure in future years. To ensure America maintains its edge against foreign adversaries, the Federal government must rely more heavily on contractors and commercial companies to leverage their integrated capabilities for cost-effective innovation.

Naysayers, ranging from the Feds to left-wing anti-capitalists to activist hedge funds increasingly raise anti-trust concerns about big corporate mergers. Federal and socialist M&#38;A opponents argue that by joining together the two companies involved, the new entity removes competition, increasing pricing power and hurting consumers. Hedge funds and other corporate “activists” claim to “seek value” for both their and other stockholders’ portfolios. But their real reason is to scoop large amounts of money from mergers and spinoff activities, enriching themselves while often saddling current or combined entities with crippling debt loads.

But in the current controversy over the RTN and UTX M&#38;A agreement, defense only accounts for 25% of United Technologies’ business. And a mere 1% of the two companies’ sales overlap.

Activist M&#38;A opposition is often detrimental to US economic health

This modus operandi of America’s varied anti-M&#38;A activists often proves devastating to private research and development. One study by the Institute for Governance of Private and Public Organizations (IGOPP), for example, found that after activists held the shares of the companies involved in M&#38;A for a median period of 423 days, funding for R&#38;D was cut by more than half. Another study found that companies, under pressure from activist investors, are defensively making cuts to R&#38;D. This harms long term technological innovation in the economy.

Commonsense mergers acquisitions transactions are essential to corporate dynamism and, as a consequence, to American competitiveness. Every big merger requires appropriate government scrutiny to allay relevant anti-trust concerns. And not all proposed M&#38;A agreements can pass the sniff test.

Deals like the Raytheon-United Technologies merger ensure that America maintains its technological edge. And that remains true in both the commercial and defense sectors.

Read more [1]

[1] https://www.commdiginews.com/business-2/mergers-and-acquisitions-feds-activists-disrupt-us-economic-growth-124436/]]></content>
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		<title>The Business Roundtable on “The Purpose of a Corporation” Back to the future!</title>
		<link>https://igopp.org/en/the-business-roundtable-on-the-purpose-of-a-corporation-back-to-the-future/</link>
		<comments>https://igopp.org/en/the-business-roundtable-on-the-purpose-of-a-corporation-back-to-the-future/#respond</comments>
		<pubDate>Fri, 20 Sep 2019 18:01:39 +0000</pubDate>
		<dc:creator><![CDATA[IGOPP Site web]]></dc:creator>
				<category><![CDATA[News Articles]]></category>
		<category><![CDATA[American governance]]></category>
		<category><![CDATA[Hedge funds]]></category>
		<category><![CDATA[Institutional investors]]></category>
		<category><![CDATA[Shareholders]]></category>
		<category><![CDATA[Stakeholders]]></category>
		<category><![CDATA[Value-creating governance]]></category>

		<guid isPermaLink="false">https://igopp.org/?p=11879/</guid>
		<description><![CDATA[In September 2019, CEOs of large U.S. corporations have embraced with suspect enthusiasm the notion that a corporation’s purpose is broader than merely “creating shareholder value”. Why now after 30 years of obedience to the dogma of shareholder primacy and servile (but highly paid) attendance to the whims and wants of investment funds? Simply put, [&#8230;]]]></description>
		<content><![CDATA[In September 2019, CEOs of large U.S. corporations have embraced with suspect enthusiasm the notion that a corporation’s purpose is broader than merely “creating shareholder value”. Why now after 30 years of obedience to the dogma of shareholder primacy and servile (but highly paid) attendance to the whims and wants of investment funds?

Simply put, the answer rests with the recent conversion of these very funds, in particular index funds, to the church of ecological sanctity and social responsibility. This conversion was long acoming but inevitable as the threat to the whole system became more pressing and proximate.

The indictment of the “capitalist” system for the wealth inequality it produced and the environmental havoc it wreaked had to be taken seriously as it crept into the political agenda in the U.S. Fair or not, there is a widespread belief that the root cause of this dystopia lies in the exclusive focus of corporations on maximizing shareholder value. That had to be addressed in the least damaging way to the
whole system.

Thus, at the urging of traditional investment funds, CEOs of large corporations, assembled under the banner of the Business Roundtable, signed a ringing statement about sharing “a fundamental commitment to all of our stakeholders”.

That commitment included:
1. Delivering value to our customers
2. Investing in our employees
3. Dealing fairly and ethically with our suppliers.
4. Supporting the communities in which we work.
5. Generating long-term value for shareholders, who provide the capital that allows companies to invest, grow and innovate.

It is remarkable (at least for the U.S.) that the commitment to shareholders now ranks in fifth place, a good indication of how much the key economic players have come to fear the goings-on in American politics. That statement of “corporate purpose” was a great public relations coup as it received wide media coverage and provides cover for large corporations and investment funds against attacks on their behavior and on their very existence.

In some way, that statement of corporate purpose merely retrieves what used to be the norm for large corporations. Take, for instance, IBM’s seven management principles which guided this company’s most successful run from the 1960’s to 1992:

Seven Management Principles at IBM 1960-1992
1. Respect for the individual
2. Service to the customer
3. Excellence must be way of life
4. Managers must lead effectively
5. Obligation to stockholders
6. Fair deal for the supplier
7. IBM should be a good corporate citizen

The similarity with the five “commitments” recently discovered at the Business Roundtable is striking. Of course, in IBM’s heydays, there were no rogue funds, no “activist” hedge funds or private equity funds to pressure corporate management into delivering maximum value creation for shareholders. How will these funds whose very existence depends on their success at fostering shareholder primacy cope with this “heretical nonsense” of equal treatment for all stakeholders?

As this statement of purpose is supported, was even ushered in, by large institutional investors, it may well shield corporations against attacks by hedge funds and other agitators. To be successful, these funds have to rely on the overt or tacit support of large investors. As these investors now endorse a stakeholder view of the corporation, how can they condone and back these financial players whose only goal is to push up the stock price often at the painful expense of other stakeholders?

This re-discovery in the US of a stakeholder model of the corporation should align it with Canada and the UK where a while back the stakeholder concept of the corporation was adopted in their legal framework.

Thus in Canada, two judgments of the Supreme Court are peremptory: the board must not grant any preferential treatment in its decision-making process to the interests of the shareholders or any other stakeholder, but must act exclusively in the interests of the corporation of which they are the directors.

In the UK, Section 172 of the Companies Act of 2006 states: “A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, among which the interests of the company's employees, the need to foster the company's business relationships with suppliers, customers and others, the impact of the company's operations on the community and the environment,…”

So, belatedly, U.S. corporations will, it seems, self-regulate and self-impose a sort of stakeholder model in their decision-making.

Alas, as in Canada and the UK, they will quickly find out that there is little or no guidance on how to manage the difficult trade-offs among the interests of various stakeholders, say between shareholders and workers when considering outsourcing operations to a low-cost country.

But that may be the appeal of this “purpose of the corporation”: it sounds enlightened but does not call for any tangible changes in the way corporations are managed.

The author is solely responsible for the views expressed herein.
]]></content>
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		<title>From Amazon to the Financial Times and Trudeau, the big push is underway to ‘reset’ capitalism</title>
		<link>https://igopp.org/en/from-amazon-to-the-financial-times-and-trudeau-the-big-push-is-underway-to-reset-capitalism/</link>
		<comments>https://igopp.org/en/from-amazon-to-the-financial-times-and-trudeau-the-big-push-is-underway-to-reset-capitalism/#respond</comments>
		<pubDate>Fri, 20 Sep 2019 15:29:56 +0000</pubDate>
		<dc:creator><![CDATA[IGOPP Site web]]></dc:creator>
				<category><![CDATA[IGOPP in the Medias]]></category>
		<category><![CDATA[IGOPP in the medias]]></category>
		<category><![CDATA[American governance]]></category>
		<category><![CDATA[Stakeholders]]></category>
		<category><![CDATA[Value-creating governance]]></category>

		<guid isPermaLink="false">https://igopp.org/from-amazon-to-the-financial-times-and-trudeau-the-big-push-is-underway-to-reset-capitalism/</guid>
		<description><![CDATA[The old pink lady of Fleet Street made history of sorts this week, donning a yellow front page that contained a five-word declaration that it was pursuing a New Agenda. Despite its reputation and self-declared role as a defender of free markets, the Financial Times of London has frequently flirted with assorted compromises. But nothing [&#8230;]]]></description>
		<content><![CDATA[The old pink lady of Fleet Street made history of sorts this week, donning a yellow front page that contained a five-word declaration that it was pursuing a New Agenda. Despite its reputation and self-declared role as a defender of free markets, the Financial Times of London has frequently flirted with assorted compromises. But nothing matches the big yellow ribbon of newsprint wrapped around the waistline of Wednesday’s edition with a blaring headline that declared:

CAPITALISM. TIME FOR A RESET

Beneath the big black bold type was a much smaller but no less meaningful sub-headline that read: “Business must make a profit but should serve a purpose too.”

The absurdity of that statement deserves comment.

First there’s the logical meaning of the words, which is that making a profit is not a purpose. Here we have one of the world’s leading financial and business papers implying that making a profit is some strange underlying attribute of business that just happens to exist but has no special relevance in the business of running a business.

Never mind that profits are the sole indicator of a healthy and sustainable business enterprise, that profits provide dividends to shareholders and the investment capital that business invests. Profits also set the market price for investment capital and allow business to produce all the products and services that modern corporations deliver to the world’s people.

That’s the other implication of the FT’s slogan about the need to “serve a purpose,” as if all the activities of business are not in themselves purposes, as if all production and services provided by corporations were incidental sidelines that have no purpose: food, clothing, transportation, technology, medical equipment, pharmaceuticals, energy, minerals, financial services, steel, construction materials, forest products, insurance products, retail services, computers, smartphones, media, films, real estate development. None of this comes from government.
In recent months, the plot to overthrow profit maximization and shareholder primacy became more deeply entrenched in the United States and Canada
These are the purposes of what has often been described as the Anglo-American corporate model, a dynamic production machine whose variations have constantly expanded the supply of goods and services to the world’s people, and turned a profit in the process. A good summary description of corporate capitalism’s achievements appeared on this page in Philip Cross’s review [1] of the book Big Business: A Love Letter to an American Anti-Hero.

So what is the Financial Times trying to reset — aside, perhaps, from its own stodgy image as a dreary must-read for the world’s public-sector bureaucrats?

[ ... ]

The Anglo-American shareholder model is often associated with free-market Nobel winner Milton Friedman, who wrote a defining defence of profit maximization back in the 1970s. But Friedman did not invent the model, nor was he the only defender of the idea that shareholders should be paramount.

Two American academics, Henry Hansmann and Reinier Kraakman, wrote in 2001 that “The strongest and clearest claim we make is an ideological or normative claim. It says that there is increasing consensus among the relevant actors, around the globe, that what we term the ‘standard shareholder oriented model’ of the business corporation is the most attractive.”

Under the model, they said “ultimate control over the corporation should rest with the shareholder class” and managers should run the corporation “in the interest of its shareholders.”

Lipton, the New York corporate reform advocate, has been on this theme [2] for some time. He sees the corporate reset to a new paradigm as a sensible response to the extreme corporate makeover proposed by such U.S. Democratic leaders as Elizabeth Warren. The new paradigm may be a steep price to pay for warding off Warren’s radicalism.

Friedman’s contribution was to explain why the principle of shareholder control and profit-seeking should remain paramount. Changing the fundamental purpose of corporations would transform corporate managers [3] into a kind of “public employee or civil servant even though he remains in name an employee of a private enterprise.” Such changes effectively turn undemocratic CEOs and board directors into decision makers to achieve objectives that “cannot be achieved by democratic procedures.”

It may be, as Yvan Allaire argues elsewhere on this page [4], that the corporate governance revolution has little significance and that the new paradigm is benign. But that seems doubtful. The reformers, from the FT’s new yellow agenda to Lipton’s new paradigm, have much greater ambitions.

Read more [5]

[1] https://business.financialpost.com/opinion/philip-cross-capitalism-doesnt-just-make-economies-better-off-it-creates-more-virtuous-people
[2] https://corpgov.law.harvard.edu/2019/02/11/its-time-to-adopt-the-new-paradigm/
[3] https://business.financialpost.com/news/economy/milton-friedman-is-right-profit-is-a-companys-only-purpose
[4] https://business.financialpost.com/opinion/u-s-ceos-embrace-of-stakeholder-model-sounds-enlightened-but-doesnt-offer-any-real-changes
[5] https://business.financialpost.com/opinion/terence-corcoran-tie-a-yellow-ribbon-round-capitalism]]></content>
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		<item>
		<title>The Case for Dual-Class of Shares</title>
		<link>https://igopp.org/en/the-case-for-dual-class-of-shares-2/</link>
		<comments>https://igopp.org/en/the-case-for-dual-class-of-shares-2/#respond</comments>
		<pubDate>Wed, 19 Dec 2018 16:05:26 +0000</pubDate>
		<dc:creator><![CDATA[IGOPP Site web]]></dc:creator>
				<category><![CDATA[Policy Papers]]></category>
		<category><![CDATA[Activism]]></category>
		<category><![CDATA[American governance]]></category>
		<category><![CDATA[Dual-class shares]]></category>
		<category><![CDATA[Institutional investors]]></category>
		<category><![CDATA[Shareholders]]></category>

		<guid isPermaLink="false">https://igopp.org/?p=10579/</guid>
		<description><![CDATA[There are now 69 dual-class companies listed on the Toronto Stock Exchange, down from 100 in 2005. Only 23 Canadian companies went public since 2005 with a dual-class of shares while 16 of the 100 have since converted to a single-class and another 38 have disappeared since 2006 for other reasons (acquisitions, mergers, bankruptcies and [&#8230;]]]></description>
		<content><![CDATA[There are now 69 dual-class companies listed on the Toronto Stock Exchange, down from 100 in 2005. Only 23 Canadian companies went public since 2005 with a dual-class of shares while 16 of the 100 have since converted to a single-class and another 38 have disappeared since 2006 for other reasons (acquisitions, mergers, bankruptcies and so on).

The arguments pro and con these types of capital structures are numerous and in some ways compelling. Thus, on the one hand, the increased activism of funds (including the so-called “activist” hedge funds) pushing and shoving boards and management of companies to boost share price and/or sell prematurely the business has reinforced the determination of entrepreneurs to insulate themselves against such pressures by adopting a dual-class of shares at IPO time (more so in the USA than in Canada).

On the other hand, index funds and ETFs, now large and growing «investors»2 which are obliged to closely track the market value composition of a particular stock index, thus may not manifest their discontent about a corporation by simply selling its shares. They must wield influence on corporate management through their voting power (which is restricted in dual-class companies) and by loudly voicing their frustration and disagreement. Not surprisingly, these latter investors are ferociously hostile to dual-class of shares and have been strident lately in their opposition, urging, successfully, the index providers (i.e., Dow-Jones, etc.) to exclude from their indices in the future any company with unequal voting rights.

They are also lobbying, not yet successfully, the SEC to prohibit this type of capital structure. Their latest gambit, promoted by The Council of Institutional Investors, would impose a mandatory timebased sunset clause of seven years. Of course this term could be renewed by a majority vote of all classes of shareholders!

The issue of “sunset clauses” has thus gained salience as institutional shareholders and various agencies try to curtail, rein in, and put a time limit on the relative freedom that a dual-class of shares provides to entrepreneurs and family corporations.

As a consequence, in recent times, the simmering feud between the church of the “one share-onevote” and the heretic believers in shares with unequal voting rights has boiled over particularly in the USA.
]]></content>
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