Conflicts of interest : corporate governance and financial markets / edited by Luc Thévenoz and Rashid Bahar.
2007
K1327 .C66 2007 (Map It)
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Details
Title
Conflicts of interest : corporate governance and financial markets / edited by Luc Thévenoz and Rashid Bahar.
Published
Alphen an den Rijn : Kluwer Law International, [2007]
Distributed
Frederick, MD : Sold and distributed in North, Centra and South America by Aspen Publishers
Copyright
©2007
Call Number
K1327 .C66 2007
ISBN
9783725553327
3725553327
9041125787
9789041125781
3725553327
9041125787
9789041125781
Description
xxiv, 394 pages ; 25 cm.
System Control No.
OCoLC)84716949
(OCoLC)84716949
(OCoLC)84716949
Bibliography, etc. Note
Includes bibliographical references.
Record Appears in
Added Author
Added Corporate Author
Table of Contents
List of Contributors
Preface
Foreword
Chapter 1
Conflicts of Interest: Disclosure, Incentives, and the Market / Rashid Bahar Luc Thevenoz
1
I
What are Conflicts of Interest?
2
A
The Traditional Approach: Fiduciaries and the Duty of Loyalty
2
B
The Ever-Broadening Scope of Conflicts of Interest
4
C
Erosion and Waivers of the Duty of Loyalty
7
II
Compensation
8
A
Compensation as a Source of Conflicts of Interest
8
B
Compensation as a Solution to Conflicts of Interest
10
C
Intrinsic Motivation and Non-Monetary Incentives
11
III
Remedies: Disclosure and Organizational Measures
12
A
Can the Market Solve the Problem?
12
B
Prohibition
14
C
Organizational Measures
16
D
Disclosure
18
IV
Enforcement
21
A
Private Law Remedies of the Principal
21
B
Class Actions and Derivative Suits
22
C
Criminal Law
23
D
Regulatory Enforcement
24
V
Conclusion
25
Chapter 2
Structure of Executive Compensation and Conflicts of Interests - Legal Constraints and Practical Recommendations under Swiss Law / Rolf Watter Karim Maizar
31
I
Introduction
31
II
The Role of Executive Compensation from an Economic Point of View
32
A
The Agency Problem
32
B
Overview of Remedies Against the Agency Problem
34
C
Incentives and Performance-based Compensation in Particular
36
D
Conflicts of Interests in Executive Compensation
39
III
Conflicts of Interests and the Design of Executive Compensation Arrangements under Swiss Law
42
A
Objectives of Executive Compensation Arrangements
42
B
Key Factors
43
1
Overall Target Level of Compensation and Key Contract Terms
44
2
The Relationship between Fixed and Variable Compensation
45
a
In General
45
b
Choice of Performance Measure
47
3
Form of Compensation
48
C
Legal Restrictions and Practical Recommendations Regarding Executive Compensation Elements
49
1
The Use of Shares and Share Options
49
a
General
49
b
Legal Restrictions
50
c
Recommendations
52
2
The Use of Bonus Plans
56
a
General
56
b
Legal Restrictions
56
c
Recommendations
57
3
The Use of Severance Payments
58
a
General
58
b
Legal Restrictions
59
c
Recommendations
60
4
The Use of Executive Loans
61
a
General
61
b
Legal Restrictions
61
c
Recommendations
62
5
The Use of other Forms of Compensation
62
a
General
62
b
Legal Restrictions
63
c
Recommendations
63
D
Our own Recommended Package
64
IV
Competences and Conflicts of Interests in Executive Compensation
64
A
(Executive) Directors' Compensation
65
1
Overlapping Competences of the Board of Directors and the Shareholders Meeting
65
2
Is Directors' Compensation a Non-transferable Duty of the Board of Directors?
66
3
Dealing with Conflicts of Interests
68
a
Duty to Abstain from Voting
68
b
No Self-Dealing
69
c
The Role of Compensation Committees and Independent/Non-Executive Directors
70
d
The Role of Shareholders
71
B
Management Compensation
73
1
Competence of the Board of Directors
73
2
Is Management Compensation a Non-Transferable Duty of the Board of Directors?
74
3
Dealing with Conflicts of Interests
74
a
The Role of the Board of Directors, Compensation Committees, and Non-Executive and Independent Directors
74
b
The Role of Shareholders
76
C
Shareholders' Approval for Directors' and/or Management Compensation?
76
1
Recent Developments
76
2
Pros and Cons of Shareholders' Approval
78
V
Conclusion
81
A
The Design of Executive Compensation Arrangements
82
B
Competences in Executive Compensation
83
Chapter 3
Executive Compensation: Is Disclosure Enough? / Rashid Bahar
85
I
Purpose of Executive Compensation
86
A
Three Perspectives on Executive Compensation
86
1
Fairness
86
2
Agency
87
3
Intrinsic Motivation
88
B
Executive Compensation as a Source of Agency Conflicts
89
C
Risk Aversion and Non-Diversification of Managers
89
D
The Difficulty of Designing an Appropriate Compensation Scheme
90
II
Governance of Executive Compensation
91
A
The Bargaining Paradigm and its Shortcomings
91
1
Limited Decision-Making Power of Shareholders
91
2
Decision-Making Power of the Board of Directors
93
3
Shortcomings of the Bargaining Paradigm
94
a
Conflicts of Interest at Board Level
94
b
Influence of Management at Board Level
95
c
Lack of Emotional Independence
96
B
Corporate Governance Solutions
97
1
Improvements at Board Level
97
2
Control by Shareholders
99
a
Lack of Control by Vote
99
b
Control by Exit
101
c
Control by Courts
101
C
Conclusion
103
III
Disclosure and Executive Compensation
103
A
Is Disclosure a Solution to the Conflict of Interest?
103
1
The Swiss Regulatory Framework
104
2
The Substantive Shortcomings of the Swiss Regulatory Framework
107
a
Insufficient Disclosure of Deferred Compensation
107
b
Insufficient Disclosure of Stock Option Plans
108
c
No Disclosure of the Unwinding of Incentive Schemes
108
d
No Discussion or Analysis of Compensation Policy
109
3
Formal Shortcomings of the Regulatory Framework
110
B
Efficacy of Disclosure: The 'Spot the Compensation' Game
112
1
Transparency as a Source of Shareholder Empowerment
112
2
Transparency as a Cause of Inefficient Remuneration
113
a
In General
113
b
Perks
113
c
Options
114
d
Pension Funds
115
C
Transparency as a Problem
116
1
Political Costs of Transparency
116
2
The Lake Wobegon Effect: All Managers are above Average
118
3
Transparency as a Norm-Setting Mechanism
119
a
Economic Function of Social Norms
119
b
Transparency as a Norm-Creating Device
120
c
The Expressive Function of Codes of Best Practice
121
D
Conclusion
123
IV
Revising the Governance of Executive Compensation
123
A
Current Governance of Executive Compensation: Managers and Politicians
123
B
The Solution: Empower Shareholders
125
1
Put Shareholders at the Centre of the Debate
125
2
Shareholder Votes on Executive Compensation
126
V
Conclusion
128
Chapter 4
Executive Compensation and Analyst Guidance: The Link between CEO Pay and Expectations Management / Guido Bolliger Manuel Kast
137
I
Introduction
137
II
Review of the Literature
140
III
Hypotheses on Expectations Management and Executive Compensation
141
IV
Sample and Methodology
144
A
Sample Selection
144
B
Sample Selection
145
C
Measuring CEO Compensation Components and Ownership Variables
148
D
Control Variables
151
E
Measuring the Impact of CEO Compensation on Expectations Management
155
V
Results
155
A
CEO Compensation and Expectations Management
155
B
Sensitivity Tests
157
C
Does the Market Figure it Out?
160
VI
Conclusion
161
Chapter 5
Investment Research: How to Solve Conflicts of Interest More Efficiently / Sandro Abegglen
171
I
How Serious are Conflicts of Interests - or: Why Did No One Cry 'Foul' Until as Recently as 1999?
172
A
General
172
B
Did Sin Really Come So Late?
173
C
Why Attention Now and Not Then?
174
II
The Applicable Swiss Rules as an Example of How Financial Analyst Conflicts of Interest Can be Addressed
175
A
Preliminary Remark: Conflicts of Interest in Connection with Financial Research are Only One Example of the Numerous Conflicts of Interests Within Banks
175
B
Basic Principles for Solving Conflicts of Interest in Swiss Law
176
1
Statutory Basis: Art. 11 (1) Stock Exchange Act
176
2
Assurance of Proper Business Conduct (Gewahrspflicht): An Important Principle in the Management of Conflicts of Interest
177
C
Implementation of These Principles
178
1
Code of Conduct for Securities Dealers
178
2
Directives on the Independence of Financial Research
179
III
Regulators' Typical Approach to Solving Conflicts of Interest
180
A
Overview
180
B
Instruments Most Often Used to Regulate Research Analysts' Conflicts of Interest
180
C
Conclusion: Three-pillar Approach
181
IV
Policy Thoughts and Proposals
182
A
High Costs of Current Regulation
182
B
Four Policy Proposals
183
1
First Proposal: Replace Excessive Rule-based Separation Requirements by Escalating Measures
183
2
Second Proposal: Differentiate Between Institutional (Sophisticated) and Retail Investors
184
3
Third Proposal: Allow Reputation Cost to Work
184
4
Fourth Proposal: Reward Analysts for High Quality Work
185
Chapter 6
Do Conflicts of Interest Affect Analysts' Forecasts and Recommendations? A Survey / Michel Dubois Pascal Dumontier
187
I
The Nature and Magnitude of Conflicts of Interest in the Securities Analysis Industry
188
A
Who are Financial Analysts and What Do They Do?
188
B
How Do Conflicts of Interest Arise?
189
C
Can Economic Incentives Mitigate Conflicts of Interest?
190
II
Analyst Forecasts and Recommendations Surrounding Stock Issues
191
A
Studies on Short-term Earnings Forecasts
192
B
Studies Focusing on Investment Recommendations
193
C
Studies Focusing on Long-term Earnings Growth Forecasts
196
III
The Magnitude of the Optimism Bias in Investment Bank Forecasts and Recommendations
196
A
Who Produces Investment Research?
197
B
Studies Focusing on Short-term Earnings Forecasts
197
C
Studies Focusing on Investment Recommendations
198
IV
Additional Results Relating to Analyst Conflicts of Interest
200
A
Do Analysts Issue Biased Research in Order to Generate Trades?
200
B
Is the Market for Financial Research Segmented?
201
C
Do Upward Biased Forecasts Generate Business for Investment Banks?
203
V
Does Analyst Regulation Help Mitigate Conflicts of Interest?
204
A
The Main Features of the New Regulation
204
B
The Empirical Evidence Relating to the New Regulations
205
VI
Conclusion
206
Chapter 7
Regulation of Financial Analysts: An Illustration of the Current Trends in Financial Market Law / Jean-Baptiste Zufferey
211
I
Abstract
213
II
Formal Elements
214
A
'Regulatory Shower'
214
B
Reactive Regulation
216
C
Over-Regulation?
218
D
Self-Regulation
220
III
Material Elements
221
A
Inter-Regulation
221
B
Threefold Objective
222
C
Function Versus Institution
224
D
Disclosure
225
Chapter 8
Conflicts of Interest in Research: Independence of Financial Analysts - The Costs and Benefits of Regulation / Leo Th. Schrutt Stefan Wieler
227
I
Introduction
228
A
History
228
B
Why is There Still Research?
229
C
Effect of Increased Costs on Research
230
1
Analysis of Costs
230
2
Analysis of Potential Benefits
230
II
Our Survey on Conflicts of Interest in Research
231
A
The Questionnaire for Portfolio Managers
231
1
General Questions About the Interviewee and the Employer
231
2
Disclosure Requirements
232
3
Proprietary Trading by Financial Analysts
232
4
Independence of Research
233
5
Value of Research
233
6
General Questions
234
7
Additional Questions
235
B
The Questionnaire for Financial Analysts
235
1
General Questions About the Interviewee and the Employer
235
2
Additional Working Time and Effort Due to the Directives
236
3
Material, Non-Public Information
237
4
Proprietary Trading by Financial Analysts
237
5
Attractiveness of the Profession
238
6
Quality of Research from the Analysts' Viewpoint
238
7
General Questions
239
8
Additional Questions
239
C
Conclusion of the Questionnaire
239
III
Tables
240
Table 1
Questionnaire for Portfolio Managers
240
Table 2
Disclosure Requirements
243
Table 3
Proprietary Trading by Financial Analysts
244
Table 4
Independence of Research
245
Table 5
Value of Research
246
Table 6
General Questions
247
Table 7
Additional Question
248
Table 8
Questionnaire for Financial Analysts
249
Table 9
Additional Effort Due to the Directives
252
Table 10
Material, Non-public Information
253
Table 11
Proprietary Trading by Financial Analysts
254
Table 12
Attractiveness of the Profession
255
Table 13
Quality of Research from the Point of View of Analysts
256
Table 14
General Questions
257
Table 15
Additional Questions
258
Chapter 9
Conflicts of Interest, Especially in Asset Management / Eddy Wymeersch
261
I
Conflicts of Interest are Inevitable in Financial Services
261
II
Provisions in the EU Directives Dealing with Conflicts of Interest
262
III
Why Worry about Conflicts of Interest in Financial Services, Especially Asset Management?
266
IV
Structural Aspects of Conflicts of Interest in the Field of Asset Management
269
A
Regulation
269
B
Factual Developments
270
Chapter 10
Conflicts of Interest in Institutional Asset Management: Is the EU Regulatory Approach Adequate? / Marc Kruithof
277
I
Conflicts of Interest in General
278
A
Conflicts of Interest as a Legal Concept
278
B
Conflicts of Interest as an Economic Agency Problem
283
II
Conflicts of Interest in Asset Management
288
A
The Inevitability of Conflicts of Interest in Institutional Asset Management
288
B
Possible Conflicts of Interest for Portfolio Managers
290
1
Conflicts Because the Manager has Several Clients
290
2
Conflicts Because the Manager Also Offers Other Services
292
3
Conflicts Because the Manager has a Stake in the Consequences of Transactions
296
C
Resulting Agency Costs for Asset Management
296
1
Adverse Impact on the Interests of the (Small?) Investor
297
2
Undermining Capital Market Integrity
300
3
Suboptimal Asset Management Market Efficiency
302
III
Legal Approaches to Conflicts of Interest in Asset Management
303
A
Imposing Fiduciary Duties
303
B
Regulatory Conduct of Business Rules
307
1
A Regulatory General Standard of Loyalty
307
2
Imposing Specific Rules for Asset Management Services?
311
3
Specific Requirements of Suitability of Investment Decisions
314
4
Client Order Handling Rules
317
C
Specific Measures to Tackle Conflicts of Interest
319
1
Which Conflicts of Interest?
320
2
Structural and Organizational Measures
322
3
Disclosure Requirements
324
IV
Some Concluding Remarks
331
Chapter 11
Conflicts of Interest in the Distribution of Investment Funds / Luc Thevenoz
337
I
General Context
338
II
Remuneration of Fund Distributors - an Overview
341
III
Conflicts of Interest at Two Levels
343
A
Fund Providers
343
1
Duty of Loyalty
344
2
Retrocession Paid by Fund Providers on the Management Fee
345
3
Retrocession Paid by Fund Providers on Entry Fees
346