Kick-back Fraud in M+A transactions

News that German authorities investigate up to 30 employees of Bayerische Landesbank in connection with the takeover of Hypo Alpe Adria raises an important but often neglected point with regard to Merger and Takeover transactions. We do not even want to delve into the fact that many are value-destroying at least half the time. This has been proven in many academic studies and any experienced investor will have watched in disbelief when supposedly smart managements engage in deals that make no sense for one of the two involved parties. While better corporate governance will help to alleviate many weaknesses of the merger process little attention has been paid to a darker side of this process. As the abuse is incredibly difficult to prove not many instances of outright fraud have come to light over the years. Of course, situations where incumbent management of the takeover target or one of the merged companies is promised attractive new terms in the combined business do not pass the smell test. The practice that option and share awards to management are 'crystallised' and can be cashed in before their nominal due date can also be considered to be a questionable inducement to go ahead with a business combination. Passing on explicit bribes such as hard cash is even more difficult to detect but can never be excluded as long as decisions about major transactions are often made by a small circle behind closed doors. Only the restriction of all decision making to the full body of shareholders - and even then in a process subject to strict regulation - will prevent Merger and Takeover deals from being influenced by corrupt practices.

'Rip Off' referendum in Switzerland shows danger of inaction

The long-delayed Swiss referendum about limiting the pay of senior managers in listed companies demonstrates the danger that politicians and politics take over the debate about senior executive compensation. The public's fiduciaries in the fund management business in most countries would be well advised to heed this warning and speed up discussions about how to effectively curb excessive pay that a small group of executives awards to its members year in year out with not change in trend in sight despite growing public opposition and anger.

Merger Rules - Do not leave initiative to Politicians and Courts!

A decision by a Delaware Court appears to entrench a company's board to issue 'poison pills' when faced with a takeover bid. Pro-Governance argues for a long time that reforms of the corporate governance system in the US - and most other countries - cannot be left to politicians and courts.  We have repeatedly proposed that the rules regulating any takeover or merger proposal should be made subject to changed regulations. The top 100 fund managers in the world effectively control all listed companies as their combined holdings are the largest bloc of ownership. Unfortunately their managements are neglecting their fiduciary duties to the real owners of the shares, the individuals who are ultimately the true owners of all assets managed by banks, fund managers, insurance companies and pension funds. These owners are left without any voice in shaping corporate governance policies which leaves fund managers in a situation where they are only paying lip service to the demands for change in their behavior.

Executive Pay - consultative vote not enough

There is disappointment among corporate governance activists in Switzerland who hoped that (purely 'consultative') shareholder votes about (top) executive pay would lead managements to moderate their greed. Novartis Chairman and CEO shows no shame when accepting a 'compensation' package calculated to be worth Sfr 25.3 million in 2010. Apart from the fact that combining the two top offices is already a dubious corporate practice the fact that he gets 'compensated' for accepting a no-compete clause is another slap in the face for shareholders - but also for other employees who generally do not get separate compensation if they have to submit to a no-compete clause in their employment. One should think that someone who certainly has a high degree of intelligence like Vasella would be perfectly able to make a decision whether or not to accept such a clause when accepting his basic pay package. That he gets substantial pay for 'retirement benefits' that are not necessarily aligned with the pension benefits of ordinary  employees is another contravention to fair play. Summing up we can say that these 'consultative' votes are a waste of time. We call for binding votes on top executive compensation and demand that all perks (health, pension, share options etc) are made available to all employees on a pro-rata basis related to basic salary. Even better, if top management is prevented from receiving discretionary bonus awards the whole discussion about annual votes on compensation would become superfluous.

Ban Narrow Profit-Share Plans

Some corporate governance activists may applaud the decision by Citigroup to set up a profit-sharing plan for a few dozen top executives, giving them a small share of the company's profits over the next two years. (Wall Street Journal). But Pro-Gov opposes this sort of narrow plan that is set up by top executives for the benefit of their own members. It is highly arbitrary and smells of the urge to enrich themselves under the guise of creating 'shareholder value' while discriminating against the overwhelming part of the workforce whose contribution is as critical as the contribution made by top management. In simple words: where would a company be without its workforce? When clever management gurus and their intellectual relatives in the business schools argue that the CEO and a few close associates are the main factor behind the success or failure of a business they may make a valid point. But it is only ONE of several factors and to assume that the remaining employees are just automatons - replaceable at will and as relevant as peasants during feudal times - is not only wrong in fact, it is also a sign of moral bankruptcy. Shareholders - and in particular their fiduciaries in the fund management industry - are called upon to stop these crass and inequitable schemes of enrichment.

Lobbies, Socially Responsible Investing and Democracy

News that the Swiss insurance group Zurich Financial Services spent Sfr 35 million on political lobbying during the past decade raises a few important points: where should the limit on such lobbying be? Are the shareholders able (and willing) to control such interference with the democratic process? In an age where socially responsible investing has become a significant factor influencing investment decisions this kind of activity must certainly receive priority attention from  investors - many if not the majority are only fiduciaries for the real investors, i.e. private savers in mutual funds, insurance companies, pension funds and the fund management units looking after investment portfolios in private banking departments.

Stock Exchanges - do they still have a role to play in Corporate Governance?

Looking at the listings for several major stock exchanges on Allison Garrett's governance blog one has to ask whether stock exchanges do still have a role to play in creating and administering effective corporate governance safeguards. The big boys among them seem to have as their main aim in life the maximising of their profit (and the compensation of the select few at the top of the management pyramid). The rest is a motley collection of sleepy bureaucracies that are not even accountable to their shareholders, much less to the wider community of shareholders.

Merger deals must come out into the open

When a US judge harshly criticises a leading investment bank (or should it be commissioned merger broker?) saying the bank "secretly and selfishly manipulated the sale process" to boost its fees (Wall Street Journal) it sheds a rare light on the fact that these significant transactions are usually handled behind closed doors. As we have argued on previous occasions, in the interests of both the selling and the acquiring companies these transactions must be handled in a much more measured and transparent process. Advisory fees are significant - for both parties - and have to be paid whether a proposed transaction is eventually consumed or not. It can also be questioned why a company that is the object of (of often unwanted) attention by a 'suitor' or 'predator' should feel obliged to hire banking, legal and public relations advisers when it is the shareholders who should have the ultimate say over the deal in any case. Certainly it must be in the realm of the possible for management to explain the pros and cons of a merger proposal? One can only hope that this case is seen as a warning by all investment banks many of whom have used similar questionable practices in the past.

NYSE/Deutsche Boerse Merger: Backroom deals no longer acceptable

That the US suffers from an excess of litigation is well known. There is also a surplus of shareholders willing to take a chance and sue companies in the hope of getting some financial gain at the expense of the other shareholders. But when a shareholder announces (Bloomberg) that he is going to sue NYSE Euronext seeking to block its planned $9.53 billion sale to Deutsche Boerse AG we have sympathy for his motives.
Mergers always carry the risk that one of the two parties is profiting at the expense of the other. It may be the buyer or the seller but as value is not easy to ascertain it is likely that in the majority of the transactions there is a loosing party. All the more reason to prevent managements from taking hasty decisions. Pro-Gov is against all sorts of 'lock-ins' that make it costly for one of the two parties to abandon the deal if their respective shareholders reject the proposal. The voting system should also be adjusted to avoid a narrow group of shareholders to dominate the outcome of any vote. The quorum should be high enough to prevent the buyer from reaping the equivalent of the 'consumer surplus' - the situation where dispirited shareholders that would have held out for a higher-than-agreed buyout price throw in the towel in order to avoid being left with holdings as a (largely disenfranchised) minority shareholder.

Outcry, Rebellion pointless - only Shareholder action will do

It is reported that "many companies could face outcry over executive pay and board accountability during their annual shareholder meetings." (Wall Street Journal, 14 Feb 2011). But these emotional reactions will leave entrenched managements and their acolytes in the boards unmoved as they pocket their disproportionate 'Rewards'. Even worse, when shareholders (usually their lame fiduciaries among the institutional investor community) 'abstain' from voting through these 'compensation' awards they really fudge the issue rather than taking a (controversial) stand in defense of the interests of their clients and investors.

Government to review and demand sex quotas

While we are pleased to note that a government review is likely to reject calls for quotas to promote female representation on company boards we are worried that the 'review' will nevertheless 'demand' that FTSE100 companies set clear target and will also threaten more draconian measures if no action is taken. This news raises a number of interesting questions - about corporate governance but above all about democracy and due legal process. Who is in charge of such a 'review' in the first place? What democratic mandate does an appointee (inevitable a Lord suchandsuch) have? What prevents him to simply put his personal bias into a 'review'? How can it be right that a Government can simply 'demand' that its citizens behave in a certain way without having this 'demand' legitimised in democratic fashion? Why should special laws exist for FTSE100 companies and not for all the other thousands of listed or private companies (some of them are larger than their FTSE100 brethren)? And why is the group of citizens most affected by these politically-inspired machinations - all the investor-citizens who risk their capital in order to finance businesses - and their 'fiduciaries' (the major fund management and investment companies) so quiet when it comes to defend its interests? As long as the democratic system is dysfunctional it lends itself to abuse by narrow 'elites' and unaccountable lobbies. But until democratic reforms are achieved the least one would expect is that share owners and business put up a proper fight and stand up for their rights. The very minimum would be a judicial review as arbitrary and discriminatory quotas are an affront to the human rights so many activists are claiming to speak for at present.

EU to curb influence of major Accounting firms

Like the rating agencies the big four accounting firms so far have escaped any major regulatory reform. So we welcome the announcement that the European Union plans to present a draft law curbing major auditing firms. While we are no friend of regulation - especially from the EU - we have for a long time argued that the way that listed companies select their auditing firms needs closer scrutiny. The party that really should supervise their activities are the shareholders. Management should have the right to be presented with their findings but should rely on the internal audit departments for their own purposes. Shareholders also should have more influence in deciding which firm is appointed to carry out the regular outside audit. Audit firms should also be changed at regular intervals and not be allowed to carry out non-audit work for their clients.

Why are CEOs rarely fired? - Study of Board behavior

An interesting study looks at reasons why only 2% of American CEOs are dismissed in a year.

Banking Pay: US Watchdog had no bite

'The government's restrictions on pay at bailed-out banks had little lasting impact because officials soft-pedaled some issues and did much of their work out of the public's view, a congressional panel says. (Associated Press)

Are stock exchanges offering fair play?

A small order I placed in an ETF on the London Stock Exchange today showed that even for small orders the markets offer an uneven playing field for the unwary. The second my order had been entered there appeared an offer that was just placed 1 pence inside my limit order. Given that the spread in this 'liquid' ETF was a quite wide 1 per cent between bid and offer there was obviously room for the 'market maker' to offer an improved price compared to my order. While the behaviour of the dealer can certainly no be called front running it still leaves the question why he has not put the better price on the system in the first place. Having my order behind his offered price gives him the opportunity to cover any sale made at his new price by 'lifting' my offer. Given the proliferation of competing dealing platforms also makes it difficult - if not impossible - for the retail investor to be sure that no transaction takes place at the limit price (or above it) which should have included the limit order.

Conflicts of Interest at Proxy Advisory Firms

A number of large publicly-listed companies in the United States have started a campaign to counter the growing influence of large proxy advisers such as ISS or Glass Lewis. Pro-Governance has watched their activities also with concern as these outfits are profit-oriented businesses and their motives are not necessarily ruled by altruistic considerations. Pro-Governance misses the lack of any input from the REAL investors, that is the citizens who entrust their savings to fund management firms.These firms are the fiduciaries of the savers and should try to work in their best interests. This means not only to strive for the best possible investment performance but also exercising their duties as shareholders of the businesses they invest in. At present neither the fund managers nor the proxy agencies make any discernible effort to take account of the wishes of their investment clients. At best, Companies and Fund Managers bend to pressure from the media, politicians, the odd activist investor or NGO's. As a consequence it comes as no surprise when the proxy agencies find themselves under fire. Another aspect relating to their operation is the fact that their recommendations are often opaque cop-outs ('We recommend to abstain') or neglected by their clients (in that case it is not clear why they would pay any fees to the agencies as they are obviously a waste of investment clients' money). Proxy Agencies may have a role to play if they operate in a way that is somewhat similar to the operation of political parties. Fund Managers in that case would obtain a proxy from their clients and would receive binding instructions to follow the recommendations of the proxy agency selected by the client to represent his views. Alternatively, Fund Managers would solicit input from their clients directly. While this is impractical for the multitude of proxies that would be required if specific instructions on a company-by-company basis would have to be obtained, it would be perfectly possible to make more effort to obtain the clients preferences on questions of principle. Creating a link with their investor clients would also allow the fund management industry to exert more influence in discussions about corporate governance and regulatory affairs.

AOL buys Huffington Post - Shareholders need more say in M+A

The Huffington Post deal is another case that demonstrates that shareholder power must urgently be strengthened. When a company agrees to pay more than 10 times historic revenues (2010 basis) it should be clear to detached observers that it is high time for ALL mergers and significant transactions to require shareholder approval. This will protect the buyers from overpaying and the vendors from being short-changed.

Are all Private Investors Idiots?

That seems to be the assumption under which regulators in the EU and FSA publish a raft of consultation documents, guidance notes and draft new laws argues Matthew Vincent in the Financial Times. I would like to add that these diktats lack any democratic legitimacy as they are cooked out by unaccountable technocrats and bureaucrats that are not answerable to the citizens. More and more regulation means higher costs that are ultimately borne by the real investors - the ordinary man on the street who is the paymaster of all fund managers, securities firms and regulatory bureaucracies.

Should Interest be tax-deductible for Business?

One aspect in the debate (Dirk Schoenmaker, 'Removing tax advantages of debt is vital') about this question is the fact that by making it less attractive for companies to treat interest payments as an ordinary business expense legislators have create a bias against equity finance. (Listed) companies would have to substantially boost their equity issuance if they no longer could rely on favorable tax treatment of their borrowings. This would mean that the Shareowner culture would receive a substantial boost - especially if investors would at the same time get tax incentives to invest in shares. For example, savings products that are invested in bank deposits are in many countries included in incentive schemes that are intended to reward retail savers.

Facebook Share Issue: Where are global regulators?

One amazing aspect of the Facebook deal that is promoted by Goldman Sachs is the fact that global regulators seem to be completely absent - despite the fact that possible questions by the SEC in the United States stopped the placement to US domestic investors. Given the noise made by politicians in all civilised financial markets all over the world about the need for more protection of investors and savers this silence is really DEAFENING and shows how much regulators are behind the curve.