This paper develops a new understanding of equity-based compensation schemes, such as employee st... more This paper develops a new understanding of equity-based compensation schemes, such as employee stock option plans. Current literature views such schemes as a measure aimed at motivating the recipient employees to work harder for the firm. Under such a view, this remuneration method either complements or substitutes other measures used to monitor the performance of the recipient employees. In contrast, this paper proposes that the recipient employee be viewed as the potential monitor of other employees and that stock options (or similar types of compensation) motivate her to fulfill this task. This view has many applications and can shed light on persistent puzzles, including why there is sweeping use of stock ownership plans by many new economy firms. No junior employee at Microsoft or Intel can improve the value of her heavyweight employer to such a degree that it will make it worthwhile for her to work harder once stock options are offered. Nevertheless, given the sensitivity of the "knowledge industry" to leakage of its intellectual property, all employees can add much to the company's value by standing on guard against such leakage. If technology is both a vulnerable and critical asset for the organization, option recipients will be alert in protecting against infringement. Since not much effort needs to be exerted to monitor their peers and supervisors to prevent this significant harm, incentive compensations can easily motivate employees to perform their monitoring task. Many other applications of this new view that cannot be explained by the current literature are discussed in the paper.
United States during the 1990s, moving from a cash-based system to an equity-based system. More i... more United States during the 1990s, moving from a cash-based system to an equity-based system. More importantly, this shift was not accompanied by any compensating change in corporate governance to control the predictably perverse incentives that reliance on stock options can create. 1 Hannes.FINAL.doc (Do Not Delete) 6/29/2010 12:41 AM 2010] THE CASE FOR GATEKEEPER INCENTIVE PAY 387 15. See 174-79 (2004) (explaining the common practices of executive stock-option grants, vesting, and exercise). 16. Michael C. Jensen, Agency Costs of Overvalued Equity, 34 5, 14 (2005). 17. The current financial crisis does not seem to stem from fraud alone, but securities fraud allegations have been raised in some of the most salient corporate failures of this crisis. See,
This paper develops a theory that sheds light on recent evidence according to which high quality ... more This paper develops a theory that sheds light on recent evidence according to which high quality issuers are the ones that adopt defenses in the IPO, and keys this behavior to the existing literature on private benefits of control. The paper analyzes the decision of the pre IPO owners concerning takeover defenses. This decision is shown to be influenced by the quality of the venture that goes public. High quality in firms that go public often means an abundance of growth and business opportunities, rather than sizeable existing assets. In such ventures managers are unlikely to consume much harmful control benefits, but they nevertheless derive a great deal of non-monetary control benefits from their stint in the promising entity. Consequently, takeover defenses help the pre-IPO owners to preserve their non-monetary control benefits without causing too much harm to the value of the enterprise. The argument of this paper is consistent with recent empirical evidence, which indicates that takeover defenses appear in the IPO in instances where defenses are highly beneficial for managers by shielding their positions in risky environments and that better underwriters serves the issuers that adopt defenses. The paper also shows that even if the conventional assumption that takeover defenses are harmful to shareholders is taken as given, then the inimical influence of takeover defenses is hard to trace, since the issuers that adopt them are those which shareholders should prefer in the first place. Finding a matching sample for the adopting issuers may therefore be an impossible task. The discussion also considers possible extensions that result from complications of asymmetric information, and finally concludes with the perils of federal intervention.
This article develops a demand-and-supply framework to analyze the adoption of antitakeover defen... more This article develops a demand-and-supply framework to analyze the adoption of antitakeover defenses and constructs a demand-side theory of antitakeover provisions ("ATPs"). The article views the decision to go public without ATPs as a decision to produce an unshielded target and shows that the classic literature focused on the costs of producing such a target but barely accounted for demand-side considerations. The article argues that the more firms there are producing unshielded targets (and, therefore, the fewer the firms adopting ATPs), the lower the price the market is willing to pay for the unshielded product. The reason for this is that not only do ATPs prevent takeovers , they also divert takeover activity to unshielded targets. The combination of existing supply-side explanations with the novel demand-side theory works to explain the findings of recent empirical studies of ATPs at IPO stage firms that have puzzled the corporate finance and corporate law literature.
This paper develops a market-based approach to takeover defenses. In this framework, a firm's dec... more This paper develops a market-based approach to takeover defenses. In this framework, a firm's decision to go public without defenses is considered a decision to produce an unshielded target. The paper shows that the voluminous classical literature on takeover defenses, which argues either that takeover defenses are good for all firms or that they are bad for all firms, actually ignores both supply and demand considerations. Recent empirical findings that revealed that IPO-stage firms diverge in antitakeover practices led to the rapid development of a new branch in the literature. This branch emphasizes that firms diverge in defense-adopting costs due to the heterogeneous characteristics of the "producers," meaning that the literature now acknowledges supply-side considerations. The literature still overlooks, however, demand-side considerations, which are highlighted in this paper. The paper argues that bidder propensity to pay is related to the number of firms that go public without defenses. As a result of takeover diversion from shielded targets to unshielded targets, the fewer the number of firms that produce unshielded targets, the higher the price that the market will pay for unshielded firms. Finally, the existing supply-side explanations merge with the novel demand-side argument to form a full picture of the market for takeover defenses, which serves to explain the findings of recent empirical studies that have been so puzzling to corporate scholarship up until now.
For decades, corporate law played a pivotal role in regulating corporations across the United Sta... more For decades, corporate law played a pivotal role in regulating corporations across the United States. Consequently, Delaware, the leading state of incorporation, and its courts came to occupy a central and influential position in corporate law and governance. This, however, is no longer the case: The compositional shift in equity markets from retail to institutional ownership has relocated regulatory power over corporations from courts to markets. Corporate law has, as a result, and as illustrated by the declined role of the Delaware courts, lost its pride of place and is now eclipsed by shareholder activism. What explains the connection between the rise of institutional ownership and the death of corporate law? We answer this question by unpacking the relationship between market dynamics and the role of corporate law. Our analysis uncovers a critical, yet hitherto unnoticed, insight: The more competent shareholders become, the less important corporate law will be. Increases in shareholder competence reduce management agency costs, intensify market actors’ preference for private ordering outside of courts, and, ultimately, drive corporate law into the shadow.
... Avi Bell, Ilan Benshalom, Assaf Hamdani, Ehud Kamar, Gideon Parchomovsky, Ariel Porat, Ken Ro... more ... Avi Bell, Ilan Benshalom, Assaf Hamdani, Ehud Kamar, Gideon Parchomovsky, Ariel Porat, Ken Rosen, Max Shanzenbach, Avi Tabbach, Omri Yadlin, and [to ... IMEN FAKHFAKH, IMPACT OF SOX ON CEO COMPENSATION AND EARNINGS MANAGEMENT (2009), available at ...
תקציר בעברית: חוק החברות קובע כי חברה רשאית לפטור, מראש, נושא משרה בה מאחריותו בשל נזק עקב הפרת ח... more תקציר בעברית: חוק החברות קובע כי חברה רשאית לפטור, מראש, נושא משרה בה מאחריותו בשל נזק עקב הפרת חובת הזהירות כלפיה, אם נקבעה לכך הוראה בתקנון החברה. בשנים הראשונות לאחר חקיקת חוק החברות לא נעשה שימוש רב בכלי הפטור. אולם, רשימה זו מצביעה על שינוי דרמטי בעמדת בעלי המניות בישראל, אשר הביא בשנים האחרונות לאימוץ נרחב של הגנת הפטור בידי חברות ציבוריות. עיגון הפטור בתקנון החברה מבטא את עמדת בעלי המניות לפיה בתי המשפט אינם זירה נאותה להתמודדות עם כשלים ניהוליים ואת העדפתם שלא לשאת בעלויות ביטוח אחריות נושאי המשרה בגין כשלים אלו. אולם, הניסיון שנצבר בהפעלת הגנת הפטור בדין הישראלי מעלה ספקות ביכולתה של הגנה זו להגשים את התכלית העומדת ביסודה. ברשימה זו נצביע על קשיים אלו ועל הדרך לפתרונם. במישור הדין המהותי, אנו טוענים שיש לפרש בצמצום את חריג "הפזיזות" לפטור, כך שיחול רק כאשר יש אשם סובייקטיבי של נושאי המשרה. בהעדר אשם שכזה, הגנת הפטור חלה גם על כשלים תהליכיים חמורים שנפלו בקבלת ההחלטות בידי נושאי משרה, והיא מגנה על נושאי משרה גם במקרים של כשל בפיקוח על ציות החברה לחוק. במישור הדיוני, הגשמת רצונם של בעלי המניות מחייבת סילוק מוקדם של תביעות נגד נושאי משרה להם עומדת הגנת הפטור ונקיטת גישה זהירה באישור פשרות בחברות שבהן יש פטור מאחריות לנושאי משרה. בכל הנוגע לשינוי חקיקה, אנו מציעים לבטל את הזיקה הישירה שבין הסייגים לפטור לבין ביטוח האחריות של נושאי המשרה, לפשט את הליך הענקת הפטור, ולהבהיר כי הפטור חל בכל מקרה שאינו כולל הפרה מודעת של חובות נושאי המשרה. English Abstract: The Israeli Companies Law allows companies to exculpate directors and officers from monetary liability for breaching the duty of care. In the years after the enactment of the Companies Law, shareholders in Israel did not support companies’ attempts to adopt exculpatory charter provisions. In this article, however, we document a dramatic change that has recently led to widespread adoption of exculpatory charter provisions. This development, we argue, may be explained by the rise in derivative lawsuits following the establishment of an expert corporate law court. We explore the obstacles that might prevent exculpatory charter provisions from achieving their goal, including the link created by statute between non-exculpated claims and mandatory limitations on D&O insurance and the for tools that would allow courts to quickly dismiss exculpated claims.
United States during the 1990s, moving from a cash-based system to an equity-based system. More i... more United States during the 1990s, moving from a cash-based system to an equity-based system. More importantly, this shift was not accompanied by any compensating change in corporate governance to control the predictably perverse incentives that reliance on stock options can create.' INTRODUCTION Financial markets are in crisis again and almost certainly are on the way to another layer of regulation. While the current crisis is complex and mostly related to excessive risk taking, the historical record shows that market crashes 2 also invariably coincide with epidemics of securities fraud. In turn, the
Activist hedge funds do not hold a sufficiently large number of shares to win proxy battles, and ... more Activist hedge funds do not hold a sufficiently large number of shares to win proxy battles, and their success in driving corporate change relies on the willingness of institutional investors to support their cause. Against this background, this Article advances three claims about the interaction of activist hedge funds and institutional investors' stewardship. First, this Article argues that the rise of activist hedge funds and their dramatic impact cannot be reconciled with the claim that institutional investors have systemic conflicts of interest that lead them to favor management. One cannot celebrate the achievements of activist hedge funds and at the same time argue that institutional investors systemically desire to appease managers. Second, this Article explains that the rise of money managers' power is changing the nature of shareholder activism. Large money managers' size and influence mean that they need not resort to aggressive tactics to influence companies' management. In today's marketplace, management initiates contact with large institutional investors to learn about any concerns that could trigger activist attacks. Finally, this Article argues that even well-incentivized institutional investors are unlikely to pursue some activist interventions-specifically, those that require the appointment of activist directors to implement complex business changes. This Article analyzes the role activist directors play and show that it might require changes too dramatic to money managers' business model and regulatory landscape. Institutional investors are therefore unlikely to displace activist hedge funds.
Proxy advisory firms such as ISS or Glass Lewis play an important role in our capital markets. Th... more Proxy advisory firms such as ISS or Glass Lewis play an important role in our capital markets. They advise institutional investors how to vote in shareholders’ meetings and often have a dramatic influence on the outcome. Such immense power, however, has sparked concern and calls for regulation, given that proxy advisors have no “skin in the game". In this Article we propose a novel framework for an incentive pay scheme for proxy advisors within the highly important context of Mergers and Acquisitions, that would align their incentives properly. In short, instead of their current flat fee arrangements, part of the advisors’ fees would be used to create the following incentive framework: if proxy advisors recommend their clients to vote against an acquisition, and shareholders accept their recommendation, proxy advisors should be placed in a "long" position on the stock of the target. The advisor would gain if share prices eventually pass the acquisition price and lose if they do not. However, if proxy advisors recommend shareholders to accept an acquisition and shareholders nevertheless reject the takeover bid and advice, the proxy advisor should be placed in a ״short" position on the stock. They will lose if share prices eventually pass the acquisition price and gain if they do not. In the Article we discuss how to implement and promote this proposal.
A massive wave of corporate fraud at the beginning of the twenty first century exposed the failur... more A massive wave of corporate fraud at the beginning of the twenty first century exposed the failure of corporate gatekeepers. The Sarbanes-Oxley legislation accordingly targeted gatekeepers, primarily auditors, by imposing strict regulation and enhanced independence guidelines. This legislative remedy is of disputable benefit while its costs have been huge. This paper maintains that a certain type of auditor incentive compensation could work better than regulation. Under such an alternative scheme, auditors would defer a portion of the payment they receive from the client firm, which would be used to purchase shares in the client after their tenure as auditor has ended. Instead of making them simply independent, this compensation structure would cause auditors to fend against inflated share prices. This type of auditor compensation could, therefore, serve to counterbalance recent trends in executive compensation that cause managers to overstate earnings. Modern accounting standards that augment management's scope of discretion make the suggested type of auditor compensation even more beneficial. Thus, the paper advocates calls for the Securities and Exchange Commission to promulgate a safe harbor that would facilitate such
This paper develops a new understanding of equity-based compensation schemes, such as employee st... more This paper develops a new understanding of equity-based compensation schemes, such as employee stock option plans. Current literature views such schemes as a measure aimed at motivating the recipient employees to work harder for the firm. Under such a view, this remuneration method either complements or substitutes other measures used to monitor the performance of the recipient employees. In contrast, this paper proposes that the recipient employee be viewed as the potential monitor of other employees and that stock options (or similar types of compensation) motivate her to fulfill this task. This view has many applications and can shed light on persistent puzzles, including why there is sweeping use of stock ownership plans by many new economy firms. No junior employee at Microsoft or Intel can improve the value of her heavyweight employer to such a degree that it will make it worthwhile for her to work harder once stock options are offered. Nevertheless, given the sensitivity of the "knowledge industry" to leakage of its intellectual property, all employees can add much to the company's value by standing on guard against such leakage. If technology is both a vulnerable and critical asset for the organization, option recipients will be alert in protecting against infringement. Since not much effort needs to be exerted to monitor their peers and supervisors to prevent this significant harm, incentive compensations can easily motivate employees to perform their monitoring task. Many other applications of this new view that cannot be explained by the current literature are discussed in the paper.
United States during the 1990s, moving from a cash-based system to an equity-based system. More i... more United States during the 1990s, moving from a cash-based system to an equity-based system. More importantly, this shift was not accompanied by any compensating change in corporate governance to control the predictably perverse incentives that reliance on stock options can create. 1 Hannes.FINAL.doc (Do Not Delete) 6/29/2010 12:41 AM 2010] THE CASE FOR GATEKEEPER INCENTIVE PAY 387 15. See 174-79 (2004) (explaining the common practices of executive stock-option grants, vesting, and exercise). 16. Michael C. Jensen, Agency Costs of Overvalued Equity, 34 5, 14 (2005). 17. The current financial crisis does not seem to stem from fraud alone, but securities fraud allegations have been raised in some of the most salient corporate failures of this crisis. See,
This paper develops a theory that sheds light on recent evidence according to which high quality ... more This paper develops a theory that sheds light on recent evidence according to which high quality issuers are the ones that adopt defenses in the IPO, and keys this behavior to the existing literature on private benefits of control. The paper analyzes the decision of the pre IPO owners concerning takeover defenses. This decision is shown to be influenced by the quality of the venture that goes public. High quality in firms that go public often means an abundance of growth and business opportunities, rather than sizeable existing assets. In such ventures managers are unlikely to consume much harmful control benefits, but they nevertheless derive a great deal of non-monetary control benefits from their stint in the promising entity. Consequently, takeover defenses help the pre-IPO owners to preserve their non-monetary control benefits without causing too much harm to the value of the enterprise. The argument of this paper is consistent with recent empirical evidence, which indicates that takeover defenses appear in the IPO in instances where defenses are highly beneficial for managers by shielding their positions in risky environments and that better underwriters serves the issuers that adopt defenses. The paper also shows that even if the conventional assumption that takeover defenses are harmful to shareholders is taken as given, then the inimical influence of takeover defenses is hard to trace, since the issuers that adopt them are those which shareholders should prefer in the first place. Finding a matching sample for the adopting issuers may therefore be an impossible task. The discussion also considers possible extensions that result from complications of asymmetric information, and finally concludes with the perils of federal intervention.
This article develops a demand-and-supply framework to analyze the adoption of antitakeover defen... more This article develops a demand-and-supply framework to analyze the adoption of antitakeover defenses and constructs a demand-side theory of antitakeover provisions ("ATPs"). The article views the decision to go public without ATPs as a decision to produce an unshielded target and shows that the classic literature focused on the costs of producing such a target but barely accounted for demand-side considerations. The article argues that the more firms there are producing unshielded targets (and, therefore, the fewer the firms adopting ATPs), the lower the price the market is willing to pay for the unshielded product. The reason for this is that not only do ATPs prevent takeovers , they also divert takeover activity to unshielded targets. The combination of existing supply-side explanations with the novel demand-side theory works to explain the findings of recent empirical studies of ATPs at IPO stage firms that have puzzled the corporate finance and corporate law literature.
This paper develops a market-based approach to takeover defenses. In this framework, a firm's dec... more This paper develops a market-based approach to takeover defenses. In this framework, a firm's decision to go public without defenses is considered a decision to produce an unshielded target. The paper shows that the voluminous classical literature on takeover defenses, which argues either that takeover defenses are good for all firms or that they are bad for all firms, actually ignores both supply and demand considerations. Recent empirical findings that revealed that IPO-stage firms diverge in antitakeover practices led to the rapid development of a new branch in the literature. This branch emphasizes that firms diverge in defense-adopting costs due to the heterogeneous characteristics of the "producers," meaning that the literature now acknowledges supply-side considerations. The literature still overlooks, however, demand-side considerations, which are highlighted in this paper. The paper argues that bidder propensity to pay is related to the number of firms that go public without defenses. As a result of takeover diversion from shielded targets to unshielded targets, the fewer the number of firms that produce unshielded targets, the higher the price that the market will pay for unshielded firms. Finally, the existing supply-side explanations merge with the novel demand-side argument to form a full picture of the market for takeover defenses, which serves to explain the findings of recent empirical studies that have been so puzzling to corporate scholarship up until now.
For decades, corporate law played a pivotal role in regulating corporations across the United Sta... more For decades, corporate law played a pivotal role in regulating corporations across the United States. Consequently, Delaware, the leading state of incorporation, and its courts came to occupy a central and influential position in corporate law and governance. This, however, is no longer the case: The compositional shift in equity markets from retail to institutional ownership has relocated regulatory power over corporations from courts to markets. Corporate law has, as a result, and as illustrated by the declined role of the Delaware courts, lost its pride of place and is now eclipsed by shareholder activism. What explains the connection between the rise of institutional ownership and the death of corporate law? We answer this question by unpacking the relationship between market dynamics and the role of corporate law. Our analysis uncovers a critical, yet hitherto unnoticed, insight: The more competent shareholders become, the less important corporate law will be. Increases in shareholder competence reduce management agency costs, intensify market actors’ preference for private ordering outside of courts, and, ultimately, drive corporate law into the shadow.
... Avi Bell, Ilan Benshalom, Assaf Hamdani, Ehud Kamar, Gideon Parchomovsky, Ariel Porat, Ken Ro... more ... Avi Bell, Ilan Benshalom, Assaf Hamdani, Ehud Kamar, Gideon Parchomovsky, Ariel Porat, Ken Rosen, Max Shanzenbach, Avi Tabbach, Omri Yadlin, and [to ... IMEN FAKHFAKH, IMPACT OF SOX ON CEO COMPENSATION AND EARNINGS MANAGEMENT (2009), available at ...
תקציר בעברית: חוק החברות קובע כי חברה רשאית לפטור, מראש, נושא משרה בה מאחריותו בשל נזק עקב הפרת ח... more תקציר בעברית: חוק החברות קובע כי חברה רשאית לפטור, מראש, נושא משרה בה מאחריותו בשל נזק עקב הפרת חובת הזהירות כלפיה, אם נקבעה לכך הוראה בתקנון החברה. בשנים הראשונות לאחר חקיקת חוק החברות לא נעשה שימוש רב בכלי הפטור. אולם, רשימה זו מצביעה על שינוי דרמטי בעמדת בעלי המניות בישראל, אשר הביא בשנים האחרונות לאימוץ נרחב של הגנת הפטור בידי חברות ציבוריות. עיגון הפטור בתקנון החברה מבטא את עמדת בעלי המניות לפיה בתי המשפט אינם זירה נאותה להתמודדות עם כשלים ניהוליים ואת העדפתם שלא לשאת בעלויות ביטוח אחריות נושאי המשרה בגין כשלים אלו. אולם, הניסיון שנצבר בהפעלת הגנת הפטור בדין הישראלי מעלה ספקות ביכולתה של הגנה זו להגשים את התכלית העומדת ביסודה. ברשימה זו נצביע על קשיים אלו ועל הדרך לפתרונם. במישור הדין המהותי, אנו טוענים שיש לפרש בצמצום את חריג "הפזיזות" לפטור, כך שיחול רק כאשר יש אשם סובייקטיבי של נושאי המשרה. בהעדר אשם שכזה, הגנת הפטור חלה גם על כשלים תהליכיים חמורים שנפלו בקבלת ההחלטות בידי נושאי משרה, והיא מגנה על נושאי משרה גם במקרים של כשל בפיקוח על ציות החברה לחוק. במישור הדיוני, הגשמת רצונם של בעלי המניות מחייבת סילוק מוקדם של תביעות נגד נושאי משרה להם עומדת הגנת הפטור ונקיטת גישה זהירה באישור פשרות בחברות שבהן יש פטור מאחריות לנושאי משרה. בכל הנוגע לשינוי חקיקה, אנו מציעים לבטל את הזיקה הישירה שבין הסייגים לפטור לבין ביטוח האחריות של נושאי המשרה, לפשט את הליך הענקת הפטור, ולהבהיר כי הפטור חל בכל מקרה שאינו כולל הפרה מודעת של חובות נושאי המשרה. English Abstract: The Israeli Companies Law allows companies to exculpate directors and officers from monetary liability for breaching the duty of care. In the years after the enactment of the Companies Law, shareholders in Israel did not support companies’ attempts to adopt exculpatory charter provisions. In this article, however, we document a dramatic change that has recently led to widespread adoption of exculpatory charter provisions. This development, we argue, may be explained by the rise in derivative lawsuits following the establishment of an expert corporate law court. We explore the obstacles that might prevent exculpatory charter provisions from achieving their goal, including the link created by statute between non-exculpated claims and mandatory limitations on D&O insurance and the for tools that would allow courts to quickly dismiss exculpated claims.
United States during the 1990s, moving from a cash-based system to an equity-based system. More i... more United States during the 1990s, moving from a cash-based system to an equity-based system. More importantly, this shift was not accompanied by any compensating change in corporate governance to control the predictably perverse incentives that reliance on stock options can create.' INTRODUCTION Financial markets are in crisis again and almost certainly are on the way to another layer of regulation. While the current crisis is complex and mostly related to excessive risk taking, the historical record shows that market crashes 2 also invariably coincide with epidemics of securities fraud. In turn, the
Activist hedge funds do not hold a sufficiently large number of shares to win proxy battles, and ... more Activist hedge funds do not hold a sufficiently large number of shares to win proxy battles, and their success in driving corporate change relies on the willingness of institutional investors to support their cause. Against this background, this Article advances three claims about the interaction of activist hedge funds and institutional investors' stewardship. First, this Article argues that the rise of activist hedge funds and their dramatic impact cannot be reconciled with the claim that institutional investors have systemic conflicts of interest that lead them to favor management. One cannot celebrate the achievements of activist hedge funds and at the same time argue that institutional investors systemically desire to appease managers. Second, this Article explains that the rise of money managers' power is changing the nature of shareholder activism. Large money managers' size and influence mean that they need not resort to aggressive tactics to influence companies' management. In today's marketplace, management initiates contact with large institutional investors to learn about any concerns that could trigger activist attacks. Finally, this Article argues that even well-incentivized institutional investors are unlikely to pursue some activist interventions-specifically, those that require the appointment of activist directors to implement complex business changes. This Article analyzes the role activist directors play and show that it might require changes too dramatic to money managers' business model and regulatory landscape. Institutional investors are therefore unlikely to displace activist hedge funds.
Proxy advisory firms such as ISS or Glass Lewis play an important role in our capital markets. Th... more Proxy advisory firms such as ISS or Glass Lewis play an important role in our capital markets. They advise institutional investors how to vote in shareholders’ meetings and often have a dramatic influence on the outcome. Such immense power, however, has sparked concern and calls for regulation, given that proxy advisors have no “skin in the game". In this Article we propose a novel framework for an incentive pay scheme for proxy advisors within the highly important context of Mergers and Acquisitions, that would align their incentives properly. In short, instead of their current flat fee arrangements, part of the advisors’ fees would be used to create the following incentive framework: if proxy advisors recommend their clients to vote against an acquisition, and shareholders accept their recommendation, proxy advisors should be placed in a "long" position on the stock of the target. The advisor would gain if share prices eventually pass the acquisition price and lose if they do not. However, if proxy advisors recommend shareholders to accept an acquisition and shareholders nevertheless reject the takeover bid and advice, the proxy advisor should be placed in a ״short" position on the stock. They will lose if share prices eventually pass the acquisition price and gain if they do not. In the Article we discuss how to implement and promote this proposal.
A massive wave of corporate fraud at the beginning of the twenty first century exposed the failur... more A massive wave of corporate fraud at the beginning of the twenty first century exposed the failure of corporate gatekeepers. The Sarbanes-Oxley legislation accordingly targeted gatekeepers, primarily auditors, by imposing strict regulation and enhanced independence guidelines. This legislative remedy is of disputable benefit while its costs have been huge. This paper maintains that a certain type of auditor incentive compensation could work better than regulation. Under such an alternative scheme, auditors would defer a portion of the payment they receive from the client firm, which would be used to purchase shares in the client after their tenure as auditor has ended. Instead of making them simply independent, this compensation structure would cause auditors to fend against inflated share prices. This type of auditor compensation could, therefore, serve to counterbalance recent trends in executive compensation that cause managers to overstate earnings. Modern accounting standards that augment management's scope of discretion make the suggested type of auditor compensation even more beneficial. Thus, the paper advocates calls for the Securities and Exchange Commission to promulgate a safe harbor that would facilitate such
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Papers by Sharon Hannes