Jill E. Fisch C URRENT D EVELOPMENTS I N U.S. S ECURITIES R EGULATION AND C ORPORATE G OVERNANCE Lecture at International School of Financial Law at East China University of Political Science and Law October 18 & 19, 2011

Sino-US Deans Summit – June 2011

Reverse Mergers & IPOs in US More than 400 Chinese companies have entered US public capital markets by using reverse mergers, 260 in 2010 alone Chinese companies accounted for 41 US IPOs in 2010, 1/3 of all US IPOs Cultural and legal differences are creating regulatory and accounting issues

Corporate Governance as Securities Regulation Was the Financial Crisis of 2008 a corporate governance failure? Dodd-Frank responded with corporate governance reforms Is shareholder empowerment the way to address these concerns? The effect of securities intermediation on corporate governance and investor protection

Dodd-Frank Proxy Access Say on Pay Independent compensation committees & claw-backs Disclosure-based governance provisions –Separation of Chair and CEO –Policy on incentive-based compensation –Golden parachutes –Pay parity

Say on Pay Statistics show shareholders voted no on 2% of pay packages this year despite overall increases in executive pay Methodology – how do we know if pay is excessive? Empowerment of ISS; concerns about its process and recommendations Litigation if issuer ignores no vote Costly process and unproven value Shareholders approved Citigroup’s pay package by a 92% vote

Proxy Access Tortured and highly politicized process (culmination of years of proposed rules) led to SEC adoption of Rule 14a-11 – the Proxy Access Rule Rule 14a-11 is a terrible rule –narrow –vague –full of internal contradictions –frustrates potential private ordering

Proxy Access The rule was challenged in court and struck down this past summer Ironically, the DC Circuit did not express any concerns about the substance of the rule But invalidated the rule anyway because of the SEC’s “flawed economic analysis” Potentially far-reaching effects of the court’s analysis on the SEC’s power to adopt future rules Activists are currently drafting issuer-specific proxy access proposals for upcoming proxy season

Dodd-Frank and Shareholder Empowerment Two key provisions don’t seem to be a success Are they conceptually flawed? –Not clear that corporate governance reforms were needed –Hard to predict the effect of rule changes on business performance –Difficult to evaluate the effect of increased shareholder power

Private Governance Initiatives Dodd-Frank is not the exclusive focus of shareholder activism Shareholder proposals –board declassification –elimination or reduction of supermajority voting requirements –majority voting in uncontested director elections –the right for shareholders to call a special meeting –the right for shareholders to act by written consent Shareholder focus on board composition –Diversity, experience, leadership

Intermediation in US Capital Markets Growing intermediation of the markets –Institutions own over 50% of public equity –Percentage is closer to 80% at the largest public companies Who are these shareholders that we are empowering? –Public pension funds and unions –Mutual Funds –Sovereign Wealth Funds –Hedge Funds

Effect of intermediation on investors Growing percentage of retail investors are “in the stock market” But US investors invest primarily through intermediaries – mostly mutual funds and pension funds These transactions raise novel agency and investor protection concerns Dodd-Frank required study of a possible broker-dealer fiduciary duty to investors More than half of all US households own stock, but most of them own it indirectly One third of US household assets are invested in retirement accounts Recent Morningstar study showed negative returns to investors over the last decade in many large mutual funds

Implications of intermediation for shareholder empowerment Do we trust institutions to enhance long term firm value? Do institutions reflect “special interests”? –Short-termism –Herding –Political or other agendas How do we limit the potential for abuse?

Effects of intermediated control Pension funds delegate to or follow the advice of proxy advisory firms ETFs use mirror voting Hedge funds vote according to their net economic interest Endowments vote according to the social policy positions of students and faculty Sovereign wealth funds

Intermediation and the goals of securities regulation Intermediaries may represent societal or government objectives rather than pure “shareholder” interests Dodd-Frank’s regulation of executive compensation as a solution to wealth and income disparities Is this investor protection or public law?

Thoughts on the Transplant of US Law Policy-makers have questioned whether it is desirable to transplant features of US corporate and securities law into China Extensive literature considers the viability of transplant issues Considering transplant must be approached with caution

Do Transplants make sense? Comparison of business and market structure –Who are the investors? Retail vs. institutional ownership –Are the markets efficient (well-informed)? –What structures exist for disseminating information? Comparison of regulatory objectives –Managerial agency costs vs. limits on controlling shareholders –The government as substantial owner –Goals – maximizing shareholder value, firm value or something else Comparison of legal (judicial) environment –Viability and desirability of private shareholder litigation