:LPE:

Gosh but these things sneak in under the radar. Last week, no the week before, the CSA/OSC announced that its disclosure rules adopted to reflect SOX in the US, known affectionately as SOX-Lite, will be delayed a year. Link.

I’m not totally sure why. Delaying issuers’ requirement to comply (basically, to design an internal process that ensures that disclosure and accounting standards are up to snuff) only prolongs the time they may not be up to snuff, and those who won’t comply, will they change their minds in the next 12 months? I wonder. I wonder too if issuers even know this rule exists, which may be more the case. Imagine if they actually enforced it and suddenly a third of issuers in Canada could not comply? Then we’d have some real fodder for the private litigators.

And let’s not forget that this place has hosted some of the biggest frauds on the market (Bre X) and most notorious of serial re-staters of public disclosure (Nortel). Why wait?

The leader of the U.K. Trade Union Congress - perhaps the most powerful labour leader in the UK - has openly advocated trustees not participate in private equity deals, largely citing the lessons of the LBO era in the U.S., and questioning the short-termism of the PE folks. Link. Recent studies in the US (Bratton, 2005; Partnoy et al, 2006) have concluded that private equity and hedges have, to date, been rather long-term in their thinking, and not stripped companies, raided pension funds or restructured them into insolvency. That was 2000-2005 data, and we have not seen a real test of the debt/leverage in these buyouts yet, though, although pretty much everyone thinks a correction is coming.

I should have posted about this last fall, but as reported in the FT, the former head of the TUC — by all accounts a sober commentator and advocate of industrial relations, not revolution — more or less warned that labour peace was no longer an option for workers in the UK, and that although it is rarely reported with any sort of depth, the current industrial relations conditions will only serve to engender labour activism, which is far less certain a commodity from the point of view of managers. It was an interesting warning from a man not normally prone to exaggeration.

The Governor of NY has recently argued — as have others — that economic downturns, and capital market downturns in particular, tend to be the period in which securities litigation increases. Maybe so, maybe no. A recent paper of the SSRN suggests that fraudulent behaviour is actually just as likelyto occur during bullish capital markets or periods of positive economic growth in general. From the abstract:

Firms sometimes commit fraud by altering publicly reported information to be more favorable, and investors can monitor firms to obtain more accurate information. We study equilibrium fraud and monitoring decisions. Fraud is most likely to occur in relatively good times, and the link between fraud and good times becomes stronger as monitoring costs decrease. Nevertheless, improving business conditions may sometimes diminish fraud. We provide an explanation for why fraud peaks towards the end of a boom and is then revealed in the ensuing bust. We also show that fraud can increase if firms make more information available to the public.

“Booms, Busts, and Fraud”, Review of Financial Studies, Forthcoming, PAUL POVEL, RAJDEEP SINGH
ANDREW WINTON: Full Text: http://ssrn.com/abstract=956209.

StatsCan today released a report on young pensionsers (age 50+), and of particular interest is the amount of employment they perform while receiving pension benefits. Link. This is interesting because one of the current policy questions is around ending mandatory retirement, labour shortages, and “phased retirement”, a proposal out there now suggesting that pension and tax laws be reformed to facilitate earning wages (and thereby contributing to pension funds) at the same time as receiving pension benefits. Phased retirement became an objective of UK pension law reform a couple of years ago, and some stakeholders argue that it is an important ‘flexiblty’ to build into the pension system, especially when pensions are inadequate to retirement. Some folks say we ought to get rid of early retirement benefits and push things in the opposite direction.

The study suggests that young pensioners do not prefer to work or participate in any significant way in “phased retirement”. This confirms to what we know from other studies’ polling of employee preferences — they tend to prefer to take early retirement when it is available, and, it seems, prefer not to engage in signficiant post-retirement employment.

It seems like a no-brainer, but apparently this innocuous statement required the input of 1500 leaders in the pension industry to formulate. Link.

There is a darker side to the report, of course, which notes that DB plans (they say 50%) are closed to new entrants, and provision of pensions is a “drag on competitiveness”. The former is true, and it represents in effect a transfer of income from employees and retirees to sponsors of “schemes”, to use the UK parlance. Pension benefits are perhaps 15% or 20% of the total compensation earned, and so eliminating these benefits or reducing them should be seen as a wage reduction. In an era of record corporate profits, I’m not sure why wage reductions should be high on the agenda.

The claim about competitiveness is also a little wierd. Pensions are liabilities, they have some special characteristics and employer plans are most secure when they are pre-funded, but the economy and competitiveness thrived for 50 years while providing employer plan pensions, so it is not clear to me that they are suddenly responsible for a lack of “competitiveness”. It is likely that they weigh on balance sheets more heavily in certain industries — mature manufacturing for example — but the low profit margins in those industries are not necessarily caused by the pension schemes. Some context for those issues would be very helpful.

An article in the NYT today on the performance of Yale’s endowment fund on the open markets: it beats the indices significantly, year over year. Link.

That sounds great, and the article suggests it is because of the accumen on the fellow in charge of investing the funds, Mr. Swensen. Apparently, he cannot be induced into more lucrative money management on the Street.

Other problem being, if it were a free and efficient capital market, it should be impossible for Swensen to consistently outperform it. We can have the occasional Buffet or Soros, but in the end, the Yale endowment results should not be possible. Harvard has the same problem. Professors in their business and law schools are typically going on about what makes an efficient market, while their endowments stick out as examples to the contrary. What might explain such a phenomenon? Why don’t all college endowment funds make the same returns? Why can’t highly paid and motivated money managers make the same margins? They had the same education, after all. Cynics suggest that there may be more information available to those running the endowments, flowing through those networks of graduates. Let’s hope not, because that would be improper, and contrary to the theory and practice of free and open markets.

I posted about this topic a few weeks ago. Some U.S. economists have determined that most people save adequately for their retirement objectives. This is newsworthy, it seems, because we are told (especially in RRSP season) that people don’t save enough. We know that the aggregate savings rate in North American households or families is at an all-time low, is negative in fact, as people consume more than they have for income, the balance being made up in debt (credti card spending, I imagine).

I have not done much more analysis, but the “enough/not enough” analysis also seems to miss other more important retirement income problems - lack of coverage of employer pension plans, individuals’ exposure to market moves in capital accumulation plans, sufficient savings to maintain 80% of a low income is still only 80% of a low income, is there any sense of the indebtedness of post 55 families, are more people moving into work longer (55-75) to make up for low retirement incomes, are health and welfare plans being cut at the expense of pension plans, and so-on.

A new paper posted on SSRN on the topic of perennial interest to academics: is there a correlation between research productivity and teaching? It appears not, or, put another way, you can be good a both at the same time. There are going to be problems with methodology in any kind of study like this in the social sciences, which feature such significant elements of discourse analysis in open systems, as opposed to, say, natural sciences and the use of experimental method (which, I haste to add, has its own set of biases and problems of proof to contend with). Citations and peer review publications can be a blunt tool, for example, measuring impact/quality of research. As any browse through the SSRN itself will tell you, lots of citations does not always correlate to lots of insight.

From the abstract:

This empirical study attempts to answer an age-old debate in legal academia: whether scholarly productivity helps or hurts teaching. The study is of an unprecedented size and scope. It covers every tenured or tenure-track faculty member at 19 American law schools, a total of 623 professors. The study gathers four years of teaching evaluation data (calendar years 2000-03) and creates an index for teaching effectiveness.

This index was then correlated against five different measures of research productivity. The first three measure each professor’s productivity for the years 2000-03. These productivity measures include a raw count of publications and two weighted counts. The scholarly productivity measure weights scholarly books and top-20 or peer reviewed law review articles above casebooks, treatises or other publications. By comparison, the practice-oriented productivity measure weights casebooks, treatises and practitioner articles at the top of the scale. There are also two measures of scholarly influence. One is a lifetime citation count, and the other is a count of citations per year.

These five measures of research productivity cover virtually any definition of research productivity. Combined with four years of teaching evaluation data the study provides a powerful measure of both sides of the teaching versus scholarship debate.

The study correlates each of these five different research measures against the teaching evaluation index for all 623 professors, and each individual law school. The results are counter-intuitive: there is no correlation between teaching effectiveness and any of the five measures of research productivity. Given the breadth of the study, this finding is quite robust. The study should prove invaluable to anyone interested in the priorities of American law schools, and anyone interested in the interaction between scholarship and teaching in higher education.

B. Barton, “Is There a Correlation between Scholarly Productivity, Scholarly Influence and Teaching Effectiveness in American Law Schools? An Empirical Study” University of Tennessee, Knoxville - College of Law July 1, 2006.

The Advocate to the ECJ has issued a comment on certain aspects of German corporate law that, it argues, tend to block M&A work while not meeting any public interest. Link.

The corporate law measures - limiting voting rights to large blocks of shares, and setting high voting thresholds for fundamental changes - tend to discourage of inhibit takeovers, says the Advocate, and are unjust restrictions on the movement of capital. I’ve yet to go through the commentary in detail.

This is an interetsing commentary in the EU context and the current wave of M&As, which have seen both massive movements private equity around the world, and fears raised of “foreign” ownership, in the EU and North America. Of particular interest will be the commentary on what appropriate “public interest” would be, and is not, in this case.

A new case from 2nd appeals circuit in the US makes some commentary on auditor liability, a recent theme in this space. Lattanzio v. Deloitte & Touche LLP, 2007 WL 259877 (2d Cir. Jan. 31, 2007). Briefly, the case states that mere reviews of financial statements by auditors (as opposed to audited statements prepared to meet statutory or other duties) do not give rise to a duty of care to third parties.