NYSE Commission on Corporate Governance: On September 23, 2010, the NYSE Commission on Corporate Governance issued a report (here) following a two year review of governance issues and considerations. The Commission, chaired by Larry Sonsini of the Wilson Sonsini law firm, included more than two dozen members representing a broad range of constituencies, and its report presents an interesting and thoughtful review of the issues and statement of principles. The NYSE’s September 23, 2010 press release concerning the report can be found here.
The report’s centerpiece is its statement of ten principles of corporate governance, but in addition to distilling its analysis down to these ten principles, the report also helpfully reviews the history of events leading up to is report, including the recent history of corporate governance reform. In explaining its ten principles, the report states the Commission’s belief that "the respective roles of boards, management and shareholders needed greater understanding," and the principles primary focus is the respective roles of each of these three groups.
The board’s role, according to the report, is "to steer the corporation towards policies supporting long-term sustainable growth in shareholder value." While noting that other factors may affect long-term shareholder value, the report states (significantly in my view) that "shareholders have the right and responsibility to hold a board accountable for its performance in achieving long-term sustainable growth in shareholder value."
The report notes the critical role of management in establishing proper corporate governance, emphasizing that "successful governance depends heavily upon honest, competent, industrious managers." The report also noted that "constructive tension" between the board and management, if properly modulated, may be a characteristic of good corporate governance.
With respect to shareholders, the report takes a firm stand against short-termism. The report notes that investors have a responsibility to vote their shares in a "thoughtful manner." In a couple of different places, the report also expresses concern about the possibility of investors’ over-reliance on proxy advisory firms, noting that the decision to rely on advisory firms "does not relieve institutions from discharging their responsibility to vote constructively, thoughtfully and in alignment with the interests" of their clients.
The report is interesting, relatively brief and worth reading in its full length. Hat tip to the CorporateCounsel.net blog for the link to the report.
Norwegian Bank Files Individual Securities Suit Against Citibank: Citigroup may have settle the subprime-related enforcement action and even managed to get the court to accept the $75 million settlement (even if with certain provisos), but a separate subprime-related securities class action lawsuit on behalf of Citigroup investors remains pending. Despite the continuing existence of the class action, Norges Bank, which manages investments for the $450 billion Norwegian sovereign wealth fund, has now filed its own securities lawsuit, seeking separately to recover for the fund’s losses.
According to Victor Li’s September 24, 2010 Am Law Litigation Daily article (here), Norges filed a complaint in the Southern District of New York against Citigroup and 20 of its current and former directors and officers (including its current CEO, Vikram Pandit). The complaint alleges that because of the defendants’ misrepresentations about the company’s subprime exposure, Norges purchased Citi shares at inflated prices from January 2007 to January 2009. The bank claims it paid over $2 billion for the shares and claims to have lost over $835 million.
There are a number of interesting aspects to this case. The first is that the bank concluded that notwithstanding the existence of the shareholder class action lawsuit, its interests were better served by proceeding separately from the class. The other thing about the lawsuit is the sheer size of the claimed losses – its losses alone are far greater than the collective investor losses in most securities class action lawsuits.
The massive size of Norges’s claimed losses explains its desire to pursue litigation, but the initiation of a separate suit can only be explained either by Norges’s assumption that it will fare better separately than within the class, or perhaps that it will pay lower fees – or perhaps both.
The Norges lawsuit follows on the heals of the separate opt-out lawsuit filed against Merrill Lynch on behalf of the New York pension funds, about which I commented here. The phenomenon of large institutional investors electing to pursue their own claims was a characteristic of many of the lawsuits arising from the corporate scandals during the last decade. Though these kinds of cases had seemed to have died down for a while, the New York lawsuit against Merrill and the Norges suit suggest that the individual lawsuits may be back – and that large institutional investors may be considering them in preference to class actions.
The seeming rise of this phenomenon has been a matter of significant discussion and some concern, as the prospect of multiple individual lawsuits could overwhelm the putative procedural advantages and effectiveness of the class action process.
The magnitude of Norges Bank’s claimed losses may be sufficiently unusual to raise a question whether there may be other investors similarly motivate to pursue separate lawsuits – there simply are going to be few individual investors in few circumstance with losses of that magnitude. Of course, there is always the possibility of smaller investors with smaller losses getting into the act, which they might do if they too believe they will fare better separately rather than within the class.
The prospect for other investors to conclude that their interests are better served through an individual action is a prospect that could pose a host of challenges and represents a "worrisome trend," as I have previously discussed here.
My previous post discussing the Norwegian sovereign wealth fund can be found here.
More Credit Union Troubles: On September 24, 2010, the National Credit Union Administration announced a series of moves, including the seizure of three wholesale credit unions, as part of an overall effort to shore up the country’s credit union industry. The move also included the creation of a $30 billion guarantee to backstop the credit union industry in an effort to stave off further losses. The Wall Street Journal’s September 25, 2010 front page article about the NCUA’s actions can be found here.
Wholesale credit unions provide back office services to retail credit unions. Since March 2009, bad investments in mortgage-backed securities have resulting in the government takeover of five of the country’s 27 wholesale credit unions.
At least one of these wholesale credit union failures has resulted in a civil action by the NCUA against former directors and officers of the failed institution. As discussed here, on August 31, 2010, the NCUA initiated an action against former directors and officers of Western Corporate Federal Credit Union of San Dimas, California.
It is unclear from the NCUA’s latest announcement and actions whether the NCUA might pursue additional lawsuits against the directors and officers of other failed institutions. However, it is clear that the same kinds of difficulties that have beset the commercial banking sector are also troubling the credit union industry as well, and these troubles at a minimum additional may mean regulatory seizures and also present at least the possibility of further claims.
Finally, the NCUA’s moves are a reminder that two full years out from the most tumultuous moment of the credit crisis, the reverberations continue to vex the financial services industry.
Layoffs Mean More Job Bias and Disability Claims: According to Nathan Koppel’s September 24, 2010 Wall Street Journal article (here), layoffs arising from the economic downturn are resulting in a "rising number of claims" that companies "illegally fired workers on account of age, race, gender or medical condition." Among other things, the article cites EEOC statistics showing that for the six months ended April 30, 2010, more that 70,000 people had filed claims alleging job discrimination, which represents a 60% increase in bias claims compared to the same period a year earlier.
The article also notes that companies are also facing "a rising tide of disability claims," noting that more than 21,000 people filed disability claims last year, which represented a 10% increase over the prior year and a 20% increase over 2007. The article notes the difficulties financial troubled companies may face trying to accommodate disabled employees.