CLS Hosts Conference in Israel on Corporate Governance
CLS Hosts Conference in Israel on Corporate Governance
LAW SCHOOL TEAMS UP WITH ANTI-DEFAMATION LEAGUE TO HOST SYMPOSIUM ON FREE SPEECH AND CORPORATE GOVERNANCE
James O’Neill 212-854-1584 Cell: 646-596-2935
June 24, 2008 (NEW YORK) – Columbia Law School and the Anti-Defamation League teamed up to produce an academic conference in Tel Aviv, Israel at the end of May which attracted 22 American academics, including eight Columbia Law School faculty, to discuss issues related to freedom of speech and corporate governance.
The conference, “From Ivy To Olives Academic Symposium in Israel,” was held at Ono Academic College May 27 and 28. Professors from Columbia, Harvard, UC Berkeley, Stanford, Yale, USC and New York University attended, as well as former Justice Eliezer Rivlin of the Israel Supreme Court, Yarom Ariav, director general of Israel’s Ministry of Finance, and Justice Jack Jacobs of the Delaware Supreme Court. Columbia Law School Dean David Schizer gave a welcoming address in Hebrew.
The event was funded through The Finkelstein Foundation and the Leslie and Roslyn Goldstein Foundation.
Those attending included Israeli lawyers; students from Ono Academic College, Tel Aviv University and Hebrew University; and members of the Israel Securities Authority, which serves a role similar to that of the Securities and Exchange Commission in the United States.
The first day focused on freedom of speech issues. Columbia Law Professors George Fletcher and Kent Greenawalt participated in a panel titled “Liability for Speech?” which included Justice Rivlin and was chaired by Joshua Segev of Netanya Academic College.
The second day focused on corporate governance, and opened with a keynote address by Director General Ariav. He was followed by a panel on “Governance and Enforcement” which included Columbia Law professors John C. Coffee and Harvey Goldschmid, and Columbia Law School Senior Research Scholar and Lecturer-in-Law Meyer Eisenberg.
Meyer Eisenberg discussed the ethics provisions of the Sarbanes-Oxley Act, particularly Section 307, which outlines the obligations of lawyers who work for corporations. The old rules required lawyers who suspected that fraud was being perpetrated within a client company to report it to the CEO. The newer rules say that if the CEO takes no action, the lawyer is obligated to take the further step of reporting to the corporation’s board of directors or its audit committee, which consists of independent directors.
Eisenberg worked with Goldschmid at the SEC to write those rules. Eisenberg was deputy general counsel of the SEC from 1998 to 2006 and acting director of the SEC’s Division of Investment Management during 2005. Goldschmid was the SEC’s general counsel in 1998 and 1999, and was a commissioner of the SEC from 2002 to 2005. The Sarbanes-Oxley Act was passed in 2002.
“In America we usually learn lessons as a result of scandals, such as Enron and WorldCom. That’s when you get reform in the U.S.,” Eisenberg said. “The conference was a way to say, ‘You don’t have to do what we do. You don’t have to go through the same kind of trauma we did. Take the pieces of reform we implemented that you think fit into your market.’”
Opening this panel, John Coffee summarized his recent article, “Law and the Market: The Impact of Enforcement,” which appeared in the December 2007 issue of the University of Pennsylvania Law Review.
In the piece, Coffee (at left) investigates the growing likelihood that the legal and regulatory environment of a country affects its cost of capital. The United States, he finds, is characterized by a regulatory intensity, measured in terms of enforcement actions brought and penalties assessed, that vastly exceeds that of other countries.
The impact of this higher enforcement intensity, he suggests, is two-fold: it dissuades some foreign issuers from entering the U.S., and it contributes to a lower cost of equity capital in the U.S. that benefits the U.S. economy and also attracts those foreign issuers interested in raising capital.
When foreign issuers do cross-list in the U.S., the empirical evidence shows that they receive a lower cost of capital and a valuation premium. Conversely, foreign issuers who cross list in London appear to receive neither.
Why then do foreign issuers often choose London? Coffee suggests that their controlling shareholders prefer the venue in which they can continue to receive the highest private benefits of control. He concludes that proposals to soften regulatory intensity within the U.S. may attract some foreign issuers, but correspondingly raise the cost of capital in the U.S.
“Corporate Governance and Sovereign Wealth Funds” was the topic of the next panel, which included Columbia Law Professors Curtis Milhaupt and Katharina Pistor. Milhaupt presented on his Stanford Law Review article, co-authored with Columbia Law Professor Ronald Gilson, “Sovereign Wealth Funds and Corporate Governance: A Minimalist Response to the New Mercantilism.”
Milhaupt (at left) and Gilson describe the growing alarm over increased investment by sovereign wealth funds, which are state-owned investment funds. Conflict arises as emerging countries such as China with large surpluses start to switch their investing strategy from conservative holdings of government bonds to higher risk and potentially higher return investments in equities or corporate acquisitions.
The United States and some European countries have expressed concern about the potential national security risk in such investments, raised by the fear of a foreign entity’s opportunity to influence a company’s actions as a significant shareholder especially if the company is viewed as vital to national security. In addition, the U.S. and others raise the specter of industrial espionage – investing as a way to obtain technology and expertise to benefit the investing nation, not just to gain access to new markets and products.
On the other hand, Milhaupt and Gilson note, the recent capital infusions provided to U.S. financial institutions by sovereign wealth funds “softened the effects of the subprime mortgage crisis.”
The two say the investments can be viewed more harmlessly as a new source of equity, lowering the cost of equity for corporations, “just as foreign government investment in U.S. debt instruments has reduced long-term U.S. interest rates.”
Instead of a harsh regulatory reaction to the growth of such investments, Milhaupt and Gilson argue for “a simple corporate governance fix,” in which ‘the equity of a U.S. firm acquired by a foreign government-controlled entity would lose its voting rights, but would regain them when transferred to non-state ownership.
“The result,” they write, “is to separate control from investment value; the expected returns to a foreign-sovereign equity investor remain identical to those of other shareholders, yet the foreign government entities lose direct influence over management through voting.”
Professor Pistor (at left) expanded on the causes of the growth in sovereign wealth fund investments in recent years as she presented her paper, “Global Network Finance: Reassessing Linkages Between Sovereign Wealth Funds and Western Banks.” Noting that these funds (SWFs) have invested billions of dollars into Western financial institutions, Pistor emphasizes that several transactions preceded the onset of the subprime mortgage crisis. Therefore, she argues, “the causes for forming these relations run deeper than the crisis itself.”
These deeper causes are related to the re-direction of global capital flows with China and several countries from the Middle East having become important exporters of capital and the rich North a net importer of capital.
This, in conjunction with the absence of a well-established governance regime for global financial markets, has led market participants to build their own governance regime in the form of network relations.
The emergent network relations consist of minority stakes (equity or convertible debt securities), lock-in provisions that prevent the investing party from selling their stake at will, and additional commitments related to future collaboration and business opportunities.
Pistor points out that network relations are not uncommon in financial markets where they can play a host of different functions. The context in which these transactions have taken place, however, suggests that a major motivation for the parties to these arrangements is to guard against the uncertainties of a governance vacuum in global finance.
She argues that key players in the international financial marketplace seek out partners in a move called “institutional hedging.” “By entering into network relations Western banks on the one hand, and SWFs on the other, are positioning themselves to build their own institutional capacity as well as to help shape the emergence governance structure of multi-polar global finance.
“The emerging global financial networks could therefore perform a critical role as midwives for institutional innovation,” Pistor writes, “and by implication, for market making.”
The day’s third panel, “Business Groups and Corporate Governance Standards,” was chaired by Columbia Law Professor Zohar Goshen, who is also chairman of the Israel Securities Authority. Goshen, who is also on the faculty at Ono Academic College, initiated the conference.
Eisenberg said the Israelis were interested in learning more about a new mutual recognition agreement between the SEC with Australia, which the SEC is actively considering, because Israel would like to develop a similar agreement. Under the plan, Australian companies that register to have their securities traded in U.S. exchanges would be able to use prospectuses they had already produced for the Australian market without making the kinds of changes that would otherwise be required to meet SEC regulations.
In a similar vein, the U.S. is engaged in serious efforts to achieve the reconciliation of accounting regulations with the European Union.
These kinds of mutual recognition issues were discussed at a Columbia forum last December which included presentations by SEC Chairman Christopher Cox and other SEC officials, by a number of Columbia faculty, and by representatives of investment banks, stock exchanges and market participants. To read more about that forum, click here.
At the final panel of the day, dealing with “Recent Developments,” Professor Goldschmid (at left) presented a paper on “Corporate Governance Reforms in the United States During the First Years of the 21st Century.” He explained that the Sarbanes-Oxley Act, and the SEC’s efforts to implement and build on SOX, had dramatically improved United States law in terms of disclosure, corporate governance (e.g., with respect to audit committees and certifications by senior corporate executives), SEC enforcement, the role of gatekeepers (most notably, accountants and lawyers), and the accounting profession itself.
After discussing each of these areas in some detail, Goldschmid concluded that SOX and the SEC’s actions while he served as a commissioner “had helped to restore public trust and confidence in the corporate governance system of the United States.”
For a full list of speakers and panelists at the Israel conference, click here.
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