Chris Mallin is Professor of Corporate Governance and Finance & Director of the Centre for Corporate Governance Research at the University of Birmingham. She is the author of Corporate Governance and she blogs with fellow OUP author Bob Tricker at Corporate Governance. The below post is an adapted version of one found on that blog, and is about whether companies should split the roles of Chair and CEO. Her previous OUP posts can be found here, here and here.

It is widely recognised that corporate scandals and collapses often occur when there is a single powerful individual in control of a company. This is exacerbated when there is a lack of independent non-executive directors on the board. Therefore it seems axiomatic that powerful individuals can be constrained, and the temptations they may face conquered, by having in place a sound corporate governance structure achieved through dividing the roles of Chair and CEO.

UK Context

Back in 1992, the much lauded Report of the Committee on the Financial Aspects of Corporate Governance, often referred to as the Cadbury Report after the Chair of the Committee, Sir Adrian Cadbury, identified the potential danger of combining the roles of Chair and CEO in one person. The Cadbury report recommended ‘there should be a clearly accepted division of responsibilities at the head of a company, which will ensure a balance of power and authority, such that no one individual has unfettered powers of decision’. This principle was embodied in corporate governance best practice in the UK, with the Combined Code on Corporate Governance (2008) stating ‘there should be a clear division of responsibilities at the head of the company between the running of the board and the executive responsibility for the running of the company’s business. No one individual should have unfettered powers of decision’, and furthermore the Combined Code explicitly states ‘the roles of chairman and chief executive should not be exercised by the same individual.’

Whilst combining the roles of Chair and CEO is rare in the UK’s largest companies, Marks and Spencer PLC is a notable exception. In May 2004 Sir Stuart Rose was appointed to the position of Chief Executive and subsequently in 2008 he became both chairman and CEO until July 2011. This combination of roles goes against the Combined Code’s recommendations of best practice. As a result in 2008 some 22 per cent of the shareholders did not support the appointment of Sir Stuart Rose as chairman. Nonetheless he remains in the combined role although there is still considerable shareholder unrest and 2009 has seen more dissent by shareholders on this issue.

US Context

In the US, the roles of Chair and CEO have often been combined but now more and more companies are appointing separate individuals to the two roles. A recent example of a US company which has decided to appoint an independent chairman is Sara Lee, the famous producer of gateaux, beverages and body care products. Sara Lee has decided to make this change as a response to investor pressure and also the growing trend in the US to split the two roles. Kate Burgess in her article ‘Sara Lee to separate executive roles’ explores this case in more detail.

Institutional Investor Pressure

In the UK there has long been pressure brought to bear by institutional investors on companies which have tried to combine these roles. This pressure, together with the long history in UK corporate governance codes against the combination of roles, means that few large companies seek to combine the roles (although as noted above, Marks and Spencer plc is an exception).

Recently Norges Bank Investment Management (NBIM), a separate part of the Norwegian central bank (Norges Bank) and responsible for investing the international assets of the Norwegian Government Pension Fund, has started a campaign to convince US companies to split the roles of Chair and CEO and appoint independent chairmen. Kate Burgess  in her article ‘Norwegian fund steps up campaign’ highlights how NBIM has submitted resolutions to four US companies calling on them to appoint independent chairmen. The four companies are Harris Corporation, Parker Hannifin, Cardinal Health Inc, and Clorox. In addition NBIM has also voted against combined Chair/CEOs at some 700 US companies. Interestingly Sara Lee had also been the focus of action by NBIM before agreeing to appoint separate individuals to the roles in future. Also in Kate Burgess’ article, Nell Minow of The Corporate Library states ‘NBIM can leverage a lot of shareholder frustration and a widespread sense that this is a sensible, meaningful but not disruptive initiative’.

It seems to be only a matter of time before the vast majority of companies will split the roles of Chair and CEO. Of course the individuals appointed to those roles must be both capable of fulfilling the tasks expected of them, and of ensuring that ultimately the two roles, carried out by separate individuals, unite the company under a common leadership approach. That may prove more difficult than many imagine and so the appointments process must consider fully the many traits needed to ensure success.

Chris Mallin is Professor of Corporate Governance and Finance & Director of the Centre for Corporate Governance Research at the University of Birmingham. She is the author of Corporate Governance and she blogs with fellow OUP author Bob Tricker at Corporate Governance. The below post is an adapted version of one found on that blog, and is about the important of votes in corporate governance. Her previous OUP posts can be found here and here.

Voting ones’ shares is seen as one of the main tools of corporate governance. In recent times, votes have been cast against adoption of the annual report and accounts, against the appointment, or re-appointment, of certain directors, and against certain proposed strategies. Votes can also be used via the ‘say on pay’ to signal displeasure at executive remuneration packages. Although the ‘say on pay’ is an advisory vote, it may nonetheless be quite effective at making boards think twice about the proposed pay packages for executive directors.

However companies do not always take as much notice of the votes cast as one would like. For example, the recent annual general meeting of Marks and Spencer is a case in point as regards the use of voting as a (vociferous) voice. Andrea Felsted and Samantha Pearson in their article ‘M&S chief defiant amid revolt by investors’ highlight that nearly 38% of votes cast backed a resolution seeking the appointment of an independent chairman within the next year. Sir Stuart Rose, who has been the centre of much criticism since taking on the roles of both chairman and chief executive, did not seem overly bothered by the investors’ views on this matter. There was also much shareholder dissent over the re-election of the chairman of the remuneration committee and over the adoption of the remuneration committee report.

Withheld votes
Whilst the importance of the vote is universally accepted, let us consider what happens in the UK when a vote is withheld. A withheld vote may signal that an investor has reservations about a resolution, or it may be a stronger expression that an investor is unhappy about a resolution, whilst falling short of actually voting against the resolution. However when the ‘vote withheld box’ is ticked on proxy forms in the UK, the withheld votes are not counted as part of the votes cast. For example, after its annual general meeting in May 2009, Shell published the voting results on its website. On Resolution 1 : Adoption of Annual Report & Accounts, there were: ‘votes for’ 3,301,631,965, ‘ votes against’ 3,394,595, and ‘votes withheld’ 16,026,721. However when indicating the percentage split of the votes, ‘votes for’ are shown as 99.90% and ‘votes against’ as 0.10%. The votes withheld were nearly 5 times that of the votes against but nowhere are they reflected in the percentage totals of votes cast. Similarly, on Resolution 4 : Re-appointment of Lord Kerr of Kinlochard as a Director of the Company, there were ‘votes for’ 3,161,974,849, ‘votes against’ 77,443,311, and ‘votes withheld’ 77,876,289. The percentage allocation indicated 97.61% ‘votes for’ and 2.39% ‘votes against’. The ‘votes withheld’ which again exceeded the ‘votes against’ were not reflected at all in the percentage totals. It should be said that Shell does clearly state that “a ‘vote withheld’ is not a vote under English Law and is not counted in the calculation of the proportion of the votes ‘for’ and ‘against’ a resolution.”

The Combined Code on Corporate Governance (2008) under Code provision D.2.1, states that ‘For each resolution, proxy appointment forms should provide shareholders with the option to direct their proxy to vote either for or against the resolution or to withhold their vote. The proxy form and any announcement of the results of a vote should make it clear that a ’vote withheld’ is not a vote in law and will not be counted in the calculation of the proportion of the votes for and against the resolution. However it’s interesting to note that a decade ago, the Report of the Committee of Inquiry into UK Vote Execution (1999), published by the National Association of Pension Funds, stated that whilst it was initially attracted to the idea of adding a third box (being an ‘abstention’ or ‘vote withheld’ box), it then decided that there were several arguments against the inclusion of such a third box. Firstly it might provide investors with an ‘easy option’ so that rather than voting against, they withheld their votes; and secondly since withheld votes are not counted, and have no legal effect, then it could drive down the level of recorded votes.

However as we have seen, the Combined Code does advocate the inclusion of a ‘vote withheld’ box on the proxy form. Therefore, it could be that in practice the addition of a third box which allows a withheld vote but which is not counted, may lead to the understatement of the level of dissatisfaction with some resolutions. Given that institutional investors are coming under more and more pressure to be seen to be active owners of shares, it may be that a ‘vote withheld’ will increasingly become seen as sitting on the fence, rather than taking a decision to vote against. In the US, it would seem that abstentions do have a legal effect under a majority voting system. For example, in a director election if there were more votes withheld than were voted for the candidate, then the candidate would not be elected, hence the abstentions (votes withheld) would have a legal effect.

Broker votes
Turning to US issues, the SEC has recently made some important changes to proxy voting. Weil, Gotshal and Manges (2009) report that ‘the SEC approved a change to NYSE Rule 452, eliminating broker discretionary voting of uninstructed shares in uncontested director elections, which will have the effect of reducing the number of votes cast in favor of the board’s nominees in the election of directors and strengthen the influence of institutional investors and activist shareholders.’

Blank votes
However James McRitchie has brought to our attention the problem of blank proxy votes which go to management. He highlights that fact that the broker vote issue that the SEC took care of is ‘where retail shareowners don’t submit a proxy (or voter information form) at all. When that happens, the broker or bank can vote within 10 days of the meeting. The “blank vote” issue arises when the shareowner votes at least one item on their proxy but leaves some other items blank……..[the voting] platform for institutional investors doesn’t allow submission of blank votes, [but the] platform for retail holders does and the SEC allows them to fill in the blanks as instructed by brokers and banks (always with management)’. Furthermore he states that ‘As shareowners who believe in democracy, we have filed suggested amendments to take away that discretionary authority to change blank votes, or non-votes, as they might be termed. We believe that when voting fields are left blank on the proxy by the shareowner, they should be counted as abstentions.’

Clearly the area of voting is a complex one and changes are being brought in over time to remove barriers to voting and to help ensure that votes are cast in a way which fairly reflects the owners’ intentions. A decade ago it would have seemed highly unlikely that many institutional shareholders would publish their voting levels in individual companies and on individual resolutions but many institutional shareholders now do this. In the US a number of institutional shareholders have gone a stage further and disclose their voting intentions prior to a company’s AGM. Hopefully institutional shareholders in other countries will adopt this approach in future.

Yesterday saw the announcement of the latest UK Budget by Chancellor Alistair Darling. It has, of course, been all over the news for days here in Britain, so I thought it was the perfect time to bring you a selection of entries from The Oxford Dictionary of Political Quotations, compiled by Antony Jay. My favourite ten quotations concerning budgets, recession, and money are below.

“Balancing the budget is like going to heaven. Everybody wants to do it, but nobody wants to do what you have to do to get there!”
Phil Gramm (American Republican politician), in a television interview, 16 September 1990

“In this country we have got to look upon Budget promises as made of the same stuff as lovers’ oaths.”
Lord Salisbury (British Prime Minister 1855-6, 1886-92, 1895-1902)

“Recession is when you have to tighten the belt. Depression is when there is no belt to tighten. We are probably in the next degree of collapse when there are no trousers as such.”
Boris Pankin (Russian diplomat), speaking about Russia in The Independent, 25 July 1992

“It’s a recession when your neighbour loses his job; it’s a depression when you lose yours.”
Harry S. Truman (US President 1945-53), in Observer, 13 April 1958

“You cannot now, if you ever could, spend your way out of a recession.”
James Callaghan (British Prime Minister, 1976-9), at a Labour Party Conference, 28 September 1976

“Nothing is easier than spending the public money. It does not appear to belong to anybody. The temptation is overwhelming to bestow it on somebody.”
Calvin Coolidge (US President 1923-9), attributed

“The state is or can be master of money, but in a free society it is master of very little else.”
William Henry Beveridge (British economist), Voluntary Action, 1948

“That most delicious of all privileges – spending other people’s money.”
John Randolph (American politician), quoted in John Randolph of Roanoake, 1923

“No one in this world, so far as I know – and I have searched the records for years, and employed agents to help me – has ever lost money by underestimating the intelligence of the great masses of plain people.”
H.L. Mencken (American journalist), in Chicago Tribune, 19 September 1926

“There is no art which one government sooner learns than of draining money from the pockets of the people.”
Adam Smith (Scottish philosopher and economist), Wealth of Nations, 1776

Elvin Lim is Assistant Professor of Government at Wesleyan University and author of The Anti-intellectual Presidency, which draws on interviews with more than 40 presidential speechwriters to investigate this relentless qualitative decline, over the course of 200 years, in our presidents’ ability to communicate with the public. He also blogs at www.elvinlim.com. In the article below he looks at President Obama’s trip to the G-20 Summit. Read his previous OUPblogs here.

If there was one message President Obama wanted to send to allies in his trip to the G-20 Summit in Europe, it was to say that he is not George Bush, and the era of arrogant American unilateralism is over. In Strasbourg, France, the President said, “We exercise our leadership best when we are listening … when we show some element of humility.”

Does humility engender respect or does it evidence weakness? This week in Europe, President Obama was applauded and cheered, but this soft power didn’t seem to translate to much. The score is 0-1 in Round One of Liberalism versus Realism. I think the President knows this, and is merely waiting to cash in the store of goodwill he banked this week. As the major decisions of the presidency are made quietly behind the desk at the Oval Office, not in international summits, we should not mistake Obama’s courtesies as the prologue of things to come.

The President could not have missed the setbacks he encountered in this trip. Sure, he successfully mediated the disagreement between Chinese President Hu Jintao and French President Nicolas Sarkozy so that the G-20 would “take note” rather than fully endorse a list of rogue offshore tax havens. But the American president’s new found respect for the world did not engender newfound cooperation or an increased willingness to take America’s lead. (And we should not have expected otherwise, for courtesies are exchanged only up to the point when conflicting interests are at stake.) Europe was not malleable to the president’s call for a larger global stimulus package, and far from enthusiastic at his call to welcome Turkey into the European Union.  NATO allies only agreed to sending 5,000 more non-combat troops to aid the US war effort in Afghanistan. And of course, the President stood before a crowd of 20,000 people in Prague painting a Utopian portrait of a nuclear-free world just hours after the North Korea successfully tested a long-range missile launch.

President Obama’s European trip was a very well orchestrated and executed photo-op.  There is no doubt that Europe is feeling the love, but it is unclear if she is returning it in real ways that matter. The dance of diplomatic and royal protocols may have thrilled the public and the media, but on things that matter, the president squarely confronted the limits of symbolism and gesture.

After all, the president did let slip in the same speech in which he was extolling humility that “when we recognize we may not always have the best answer but we can always encourage the best answer.” In the end, (even ) the Liberal Way  is still the American Way. And I expect, as Theodore Roosevelt once counseled, the president’s soft voice will soon be amplified by a big stick.

By Edward Zelinsky

Many important decisions are embedded in the federal budget proposed by President Obama. Among these are the President’s embrace of the defined contribution paradigm. That paradigm promotes retirement savings through individual accounts such as IRAs and 401(k) accounts.

The Internal Revenue Code currently provides a savers’ income tax credit for lower income individuals who contribute to IRAs and 401(k) accounts. The Obama budget proposes to expand this credit and make it refundable. In addition, the Obama budget proposes to establish administrative infrastructure in the Department of Labor as the first step toward requiring employers without pension or profit sharing plans to enroll their employees in workplace IRAs.

Together, these two proposals commit the Obama Administration to the existing system of individual accounts as the prime means of encouraging private retirement savings.

Some observers had predicted a retreat from individual accounts in light of the Crash of 2008 and the consequent decline of most participants’ 401(k) and IRA balances. However, the Obama budget indicates that such a retreat is, so far at least, not occurring. Indeed, the Obama budget, if adopted as proposed, commits the federal government even more deeply to the individual accounts of the defined contribution paradigm.

Something similar happened after the fall of Enron. Enron’s demise devastated the 401(k) accounts of many Enron employees who held large quantities of Enron stock in such accounts. Some observers predicted that this debacle would force reconsideration of the individual accounts of the defined contribution paradigm. But, like Holmes’s dog that did not bark in the night, no such reconsideration occurred.

Similarly, the Obama budget signals that, in the wake of the Crash of 2008, the federal government remains committed to individual accounts for retirement savings. President Obama proposes to double our bet on IRAs and 401(k) accounts, both by enriching the tax-subsidy for low income persons who contribute to such accounts and by making such accounts universal in the workplace.

This decision puts President Obama in potential conflict with his allies in the union movement. Today, the last bastions of the traditional defined benefit plan are the unionized work forces of state and local governments. Taxpayers thus find themselves paying taxes for lucrative defined benefit plans for unionized state and local employees. And now the Obama budget makes clear to these taxpayers that their retirement savings future is financing their own 401(k) accounts — even as these taxpayers fund often rich defined benefit pensions for government employees.

President Obama has not embraced President Bush’s rhetoric about an “ownership society.” However, there is in substance great continuity in the retirement savings policies embodied in President Obama’s budget and the prescriptions of the Bush Administration. The Obama budget, by expanding the savers’ income tax credit and moving toward universal IRAs in the workplace, embraces the defined contribution paradigm.

Elvin Lim is Assistant Professor of Government at Wesleyan University and author of The Anti-intellectual Presidency, which draws on interviews with more than 40 presidential speechwriters to investigate this relentless qualitative decline, over the course of 200 years, in our presidents’ ability to communicate with the public. He also blogs at www.elvinlim.com. In the article below he looks at regulation. Read his previous OUPblogs here.

Government regulation of the market in American has always been either too invasive or too superficial, never just right. This tells us more about ourselves than the day-by-day report card of Obama’s fledgling administration.

The Obama adminstration’s firing of GM CEO Rick Wagoner seem to some to have been a power grab and an overkill; yet others feel that the administration’s plan to help to buy up some of the toxic assets owned by banks will be too easy on the banks.

We swing between the extremes of excessive regulation and unfettered laissez faire – indeed we have majority factions within both major parties staunchly defending both extremes – because our country has never properly worked out the tension between the two.

Consider the last time an economic crisis of even greater proportions rocked the country. The New Deal and in particular the National Industrial Recovery Act (NRA) represented an even greater power grab by the Roosevelt administration than the one Obama is being accused of today, including the right by the president to approve of a set of “codes of fair competition” for every industry regulating minimum wages and maximum weekly hours. The Supreme Court unanimously declared the NRA unconstitutional in 1936.

As a country born without the feudal baggage of the old world and one which has constructed the self-fulfilling myth of the American Dream, we have never had to fully confront the crisis of capitalism that industrialization provoked elsewhere. Even having experienced the Great Depression, we still have not found, and no politician has successfully articulated, a sustained national consensus about the relationship between the state and the economy. Our love-hate relationship with the federal government explains American exceptionalism, but it also the source of our current woes.

Because ours is a capitalist economy which concedes the value of government intervention and regulation, we must lived with mixed (and hence often botched) solutions to our current economic crisis. We can neither nationalize the banks – and hence control how they are run including how executive compensation is structured, nor can we leave the banks alone – no politician would dare risk a depression on the heels of his/her inaction. In trying to find a compromise between market liberalism and political control of the market, we often end up achieving neither. So the Obama administration will alternately be accused of sleeping with Wall Street or witch-hunting it; decades after we have weathered the current crisis, we will still be debating whether or not what Obama did helped or worsened the problem. This is America, where we have a right, nay, a duty, to earnestly debate – as our Founders did – the necessity of even having a federal government at all.

Andrew R. Murphy is Associate Professor of Political Science at Rutgers University, New Brunswick.  His most recent book, Prodigal Nation: Moral Decline and Divine Punishment From New England to 9/11 reveals how Americans’ powerful attachment to an idealized past continue to shape public life. America’s supposed moral decline from an imagined golden age, and the threat of divine punishment for straying from the path of righteousness, have been consistent themes in our political and religious rhetoric.  In the post below Murphy reveals how this theme is never far from forefront in America.

Viewers tuning in to “Larry King Live” on Monday night, March 23, witnessed an intriguing sight. There was Meghan McCain, daughter of last year’s Republican nominee for president, telling Larry King that, on cultural issues, there is “a very big generation gap between me and my father”:

I consider myself a progressive Republican. I am liberal on social issues. And I think that the party is at a place where social issues shouldn’t be the issues that define the party. And I have taken heat, but in fairness to me, I am a different generation than the people that are giving me heat. I’m 24 years old. I’m not in my 40s, I’m not in my 50s and older….We have a very big generation gap between me and my father….I believe in gay marriage. … I personally am pro-life, but I’m not going to judge someone that’s pro-choice. It is not my place to judge other people and what they do with their body.

The whole thrust of this appearance, on the face of it, would seem to reinforce a common piece of conventional wisdom in American politics: the 2008 presidential election illustrated that the nation was tired of the divisive cultural politics of the Christian Right, and wanted to move beyond arguing over the 1960s and come together to face our common economic challenges; the Christian Right is populated by dinosaurs (James Dobson, Pat Robertson, the late Jerry Falwell) who are increasingly out of touch with ordinary, younger Americans; the real issues of 2009 and beyond will be economic ones that don’t lend themselves easily to moralism or divisive culture wars.

Now this may be true. But just a day after Meghan McCain’s appearance with Larry King, when it seemed that all the nation’s news was economic news – with round-the-clock coverage of the AIG bonuses, “toxic assets,” ballooning deficits, and the shaky tenure of Treasury Secretary Geithner – the culture wars roared back into the headlines. A glance at the New York Times in the past several days reveals that the hot-button issues that drove the rise of the Christian Right during the 1970s and 1980s, and fueled conservative talk-radio during the 1990s – issues of culture, religion, and sexuality – remain with us, and are likely to do so for the foreseeable future.

The abortion issue showed up on the front page headline of the March 24, 2009, New York Times: “Morning-After Pill for Younger Women.” Federal judge Edward Korman – nominated to the bench by none other than Ronald Reagan! – ruled that the Food and Drug Administration had given in to political pressure in 2006, when it set the minimum age for women to receive the Plan B “morning after” birth control pill at 18. Korman ordered the FDA to make the pill available, without a prescription, to women as young as 17. Not surprisingly, the ruling was hailed by women’s rights groups, and condemned by social conservatives. Chris Gacek, Senior Fellow for Regulatory Affairs at the Family Research Council’s Senior Fellow for Regulatory Affairs, criticized the judge for having “accepted lock, stock, and barrel all of the claims of a political ideology promoting sexual license for teens.” (The Council’s mission statement states that “God is the author of life, liberty, and the family” and that the Council “promotes the Judeo-Christian worldview as the basis for a just, free, and stable society.”)

Then came news that – while the nation waits for the California Supreme Court’s ruling on that state’s recently-passed constitutional amendment banning gay marriage in the state – the Vermont State Senate had voted (and voted 26-4, at that) to legalize same-sex marriage. Vermont had already achieved a singular role in the history of gay rights in America, as in 2000 it was the first state to approve civil unions for gay and lesbian couples. That step, however, was taken in response to a court order; yesterday’s action represented the overwhelming vote of a democratically-elected branch of state government, and not the decree of the judicial branch. Passage in the Vermont House also seem likely, though the bill’s prospects with the state’s governor – who supports civil unions, but not gay marriage – are less certain. (According to CNN, if the bill becomes law, Vermont will become the first state to legalize same-sex marriage without being forced to do so by the courts.)

Although there was a specific historical context for the emergence of the Christian Right – it arose in reaction to the countercultural movements of the 1960s and 1970s – its political rhetoric and religious politics reflect far deeper and longstanding dynamics in American history. Both the lions of the Christian Right during its heyday in the 1980s (Robertson, Falwell, D. James Kennedy, Dobson) as well its more recent leaders (Gary Bauer, David Barton, Tony Perkins) look back to a pre-1960s cultural consensus, and tell a powerful political story about a prodigal nation, once richly blessed, that has squandered God’s blessing by embracing a national morality of secular humanism, sexual liberation and gay rights, radical individualism and feminism, and abortion on demand. This nostalgia for a time when (Christian) religion enjoyed a more dominant public role frames the Christian Right agenda even into the Obama years: restoring public school prayer, for example, or opposing same-sex marriage, or reimposing restrictions on abortion. Ralph Reed, who directed the Christian Coalition during much of the 1990s, once described the Coalition’s political vision of the American future as follows:

America would look much as it did for most of the first two centuries of its existence, before the social dislocation caused by Vietnam, the sexual revolution, Watergate, and the explosion of the welfare state. Our nation would once again be ascendant, self-confident, proud, and morally strong. Government would be strong, the citizenry virtuous, and mediating institutions such as churches and voluntary organizations would carry out many of the functions currently relegated to the bureaucracy.

Although the nation’s attention might seem fixed on the massive economic downturn right now, we should never underestimate the power nostalgic and moralizing laments for “the way things used to be.” Indeed, Americans have been lamenting their immoral society, and pining for a lost Golden Age, for as long as there have been Americans.

Elvin Lim is Assistant Professor of Government at Wesleyan University and author of The Anti-intellectual Presidency, which draws on interviews with more than 40 presidential speechwriters to investigate this relentless qualitative decline, over the course of 200 years, in our presidents’ ability to communicate with the public. He also blogs at www.elvinlim.com. In the article below he looks at the AIG fiasco. Read his previous OUPblogs here.

On the news that AIG paid out bonuses to its executives, our politicians in Washington were outraged. Nay, “stunned,” was our president on the Jay Leno Show. Shock, awe, disbelief are the attendant and contiguous emotions.

The only thing politicians prefer to do more than mutual congratulation is to register their outrage. Unbelievable they say, that AIG had the temerity to have done what they did. Goodness gracious, it was so outside the boundaries of civil decorum that we could not possibly have foreseen the loophole that permitted such behavior. Executives rewarding themselves – completely beyond comprehension, surely. The politicians doth protest too much.

Poor AIG chief Executive Edward Liddy – he shall get a whipping when he testifies before Congress on Wednesday. Worse still, he will have to sit through the public grandstanding of politicians who probably would have done the exact same thing had they been in his position. (Technically, they wrote a law that permitted him to do so.)

On trial would not only be Liddy, but the ugliness that Washington has become. Our elected representatives excel in mimicking the anger of their constituents, parodying this anger in hyperbolic proportions in order to cover up their complicity in the mess that is AIG. This is reverse psychology 101; we all tried our hand at it at one point or another when we were young and our parents caught us red-handed stealing the cookie from the cookie jar. Goodness gracious, I can’t believe you would think I would stand by and allow all of this, say aggrieved Senators and members of Congress. (For they know full well how quickly voters’ anger can spill over.) Except that they actually did.

Some Senators have suggested that if the AIG executives had any integrity, they would return the $165 million in bonus money. Well Senators, this is capitalism. Voluntary acts of benevolence and self-abnegation aren’t exactly the ingredients of the invisible hand.

The truth is our politicians are crying foul and not doing much more beyond crying because we have so thoroughly bought the virtues of capitalism that we do not have the resources to correct its slip-ups other than howl. The executives should have known better, Washington sighs. That is what Washington’s outrage amounts to – an impotent vent that belies a lack of will to do something to correct the situation.

Even though the American taxpayer now owns 80 percent of AIG, the truth is Washington cannot tell a private company what to do. That would be socialism, some say. Well then we cannot have our cake and eat it. Either we embrace capitalism and the predictable instinct for executives to look out for themselves, or we say, when 80 percent of a company is owned by the public, we should call things what they are and acknowledge that this company has become a public trust to whom an obligation and an accounting is owed to taxpayers for the manner in which the company is run. Mere outrage – an invitation for voluntary self-correction seldom gets us anywhere. Washington should either get its act together or stop bloviating.

Chris Mallin is Professor of Corporate Governance and Finance & Director of the Centre for Corporate Governance Research at the University of Birmingham. She is the author of Corporate Governance and she was the editor of Corporate Governance: An International Review 2000-2007. She is a member of the International Corporate Governance Network (ICGN) and has been on two of the ICGN’s working parties established to draft guidelines on international corporate governance principles, and on global voting. She blogs with fellow OUP author Bob Tricker at Corporate Governance. The below post is an adapted version of a post from that blog, and highlights the volume of rights issues coming to the market and the corporate governance implications for investors, both institutional and private.

Rights issues have been a traditional way to raise funds from existing shareholders in the UK, Europe and Australasia. Existing shareholders are offered the chance to acquire new shares, at a discount, in proportion to their existing holding. In general the reasons for a rights issue fall into one of three categories: raising funds for an acquisition or expansion; (ii) internal working capital requirements; (iii) restructuring of the balance sheet. The latter often occurs in times of financial distress and it is for this reason that many of the companies seeking to raise money through rights issues are doing so now – they need to raise cash and asking existing shareholders is one of the few ways to do it.

Banks and property companies making most rights issues

It has been noticeable that many UK companies are making rights issues at present. Many of the companies seeking to raise funds in this way are in sectors particularly badly affected by the economic downturn: the banking sector and the property sector.

HSBC, in the largest rights issue in UK history, is seeking to raise more than £12 billion from its investors. Peter Thal Larsen, Neil Hume and Kate Burgess in their article ‘HSBC to seek £12bn in record offering’ state that HSBC ‘is the latest in a long line of global banks to seek to strengthen its capital reserves by issuing shares’.

Peter Thal Larsen in his article ‘HSBC’s search for capital gives market the shudders’ reports that ‘…the bank’s decision to raise £12.5bn in fresh capital from its investors and cut its dividend for the first time any of its executives can remember was bound to send a shudder through the markets’. However HSBC is still seen as being in a stronger position than many other banks, and Stuart Gulliver, HSBC Chief Executive of Global Banking and Markets, stated ‘The rights issue is designed to get us a bullet-proof balance sheet’.

In their article ‘Segro to seek discounted rights issue’, Daniel Thomas and Neil Hume highlight Segro is seeking to raise 3300 million and that other property sector companies including Land Securities, British Land, and Hammerson have already approached investors with rights issues to the tune of more than £2 billion in recent weeks.

In similar vein, David Fickling, Kate Burgess and Neil Hume in their article ‘Debt-laden Wolseley close to launching £1bn rights issue’ highlight the plight of Wolseley, the builders’ merchant whose ‘loss-making retail division [was] heavily exposed to the stagnant US housing market’.

Governance implications

There are governance implications for all shareholders, both private and institutional. It is not just a matter of concern to investors in the country in which rights issues are taking place, but a matter for all investors. Therefore US investors with cross-border shareholdings, for example in the UK, will be faced with these governance implications. Shareholders taking up the rights will retain the same proportion of the share capital overall as they had prior to the rights issue. However shareholders not taking up the rights issue shares will have a lower proportion of the company’s share capital than they did prior to the rights issue i.e. their stake will be diluted. To avoid any dilution that would occur when companies do not offer shares to their existing shareholders first, in some jurisdictions the concept of pre-emption rights (that is, new shares have to be offered to existing shareholders first) has long been enshrined in company law. However as Oliver Ralph points out in his article ‘The begging letters start to arrive’, noted ‘The institutions are getting uppity because they, too, have been left out on certain occasions. Witness the outrage that Barclays provoked when it raised money from Middle East investors last year. More recently, Rio Tinto has enraged its institutional shareholders by offering convertible bonds on favourable terms’.

There are clear governance implications where investors’ shareholdings are diluted and equally the investors are somewhat ‘over a barrel’ as if they wish to avoid dilution, they have to pour more money into companies for reasons, and at a time, when they may not wish to do so.

There were also some problems with rights issues last year, including low take-up rates, and claims of market abuse through short-selling, and as a result the Rights Issue Review Group was established and reported back late last year. The full report ‘A Report to the Chancellor of the Exchequer: by the Rights Issue Review Group’ is available here.

Following the Review, the Association of British Insurers (ABI), an influential body representing the collective interests of the UK insurance industry, altered its guidelines on rights issues so that companies will be able to issue new shares amounting to up to two-thirds of their existing issued share capital (previously one third) without obtaining shareholder approval. The purpose of the change is to facilitate rights issues.

Rights issue wave

It remains to be seen how many more companies will make rights issues but at the present time it seems a good option for companies, many of which are in dire need of a cash injection, although investors may be becoming wary and viewing rights issues as a case of good money after bad.

David Bach is the best-selling author of the Finish Rich book series. In his latest work, The Finish Rich Dictionary, Bach provides definitions for over a thousand financial words and terms. Interspersed throughout the definitions are ten essays designed to help the reader navigate today’s financial environment, and avoid it’s many pitfalls and perils. In this excerpt, Bach gives seven rules to follow in planning for ones retirement.  To read other excerpts from this book click here.

Here are seven rules for planning for retirement:

1. Invest for growth. Even with the recent downturn in the stock market, it’s still critical that, when you invest in your retirement accounts, you invest for growth. Many people are now making the crucial mistake of thinking that the stock market will never go up again and, as a result, they are putting all of their money in guaranteed investments (like certificates of deposit). The problem with investing in something that is guaranteed is that the return may be less than inflation, which means you are actually losing money each year. The cost of living has been climbing steadily, at an average of slightly more than 3 percent a year. Playing it safe will not allow you to beat that rate. If your retirement account doesn’t grow faster than inflation, you’re not going to have enough money to live on when you retire, 20, 30, or 40 years from now.
While seeking growth requires you to invest some of your money in stocks (and that means more risk), over the long term, you should come out ahead and be able to build a bigger nest egg.

2. Take advantage of free money. One of the smartest things you can do when it comes to saving for the future is taking advantage of the free money your employer may give you. In many cases, employers will supplement your retirement plan contributions with contributions of their own. These matching contributions usually start at 20 percent of what you’ve put in and sometimes go as high as 100 percent. At the same time, you should still make the maximum allowable contribution, not just the percentage of your paycheck that your company will match. If your employer stops matching your contributions (as many companies have recently started doing), don’t make the critical mistake of stopping your contributions to your retirement account. With or without a match, you want to use your retirement account at work.

3. Don’t borrow from your retirement plan. Although your retirement plan may allow you to borrow money from your account without paying taxes or penalties, don’t do it. Why? For starters, imagine being laid off from work. At the worst possible time, your company tells you, “You have to pay back your 401 (k) loan.” Without a paycheck, you can’t pay back your loan, right? Your company then reports your loan as a distribution, and now you owe the IRS taxes on the loan, plus a 10 percent penalty fee. But wait, you’re not working. How will you pay the IRS? See the problem here? This is happening to thousands of Americans right now. Don’t let it happen to you. Leave your retirement money alone until you’re ready to retire.

4. Consolidate your accounts. Many people remember Grandma’s advice about not putting all your eggs in one basket, but they often misunderstand it. Not putting your eggs in one basket means diversifying your risk – putting your money into different kinds of assets, such as stocks, bonds, mutual funds, and other investment vehicles. It doesn’t mean opening an IRA at a different bank or brokerage firm every year.

There is simply no way you can do a good job managing your retirement accounts if they are spread all over the place. If that’s what you’ve done, consider consolidating them into one IRA custodial account. Not only can you completely diversify your investments withing a single IRA, but you’ll also find it much easier to keep track of everything.

5. Be careful who you list as the beneficiary of your retirement account. Many people follow their lawyer’s advice to create a living trust to protect their estate, put all their assets in their trust’s name. This is a big mistake. When you do this, your rollover, which allows, for example, a widow to take over her late husband’s IRA and put it in her name, without having to pay any taxes on it until she actually starts taking the money out. If the husband has transferred ownership of his IRA to a trust, the wife can’t take it over in the event of his death. Instead, the account goes to the trust, and the proceeds become taxable. For much the same reason, you shouldn’t make a trust the beneficiary of any of your IRAs or 401(k) plans. You should also make sure that, if you or your partner has been married before, your ex isn’t still listed as the beneficiary on any of your retirement accounts. Finally, if you’re newly married, make sure that your spouse has put you down as the beneficiary of his or her accounts. Many people when they marry have “Mom” down as a beneficiary. No offense to “Mom” or “Sis,” but you want your name on that beneficiary statement. Also, make sure you list your kids as contingent beneficiaries.

6. Always take your retirement money with you. When you leave a company where you’ve been contributing to a 401(k) plan, don’t leave your retirement money behind. Rather, immediately inform the benefits department that you want to do an IRA rollover. Your former employer will then transfer your retirement funds either to a new custodial IRA that you’ve set up for yourself at a bank or brokerage firm, or to the 401(k) plan at your new employer (assuming there is one and it accepts money from other plans). If you leave money in an old 401(k) plan, your beneficiary, upon your death, would have to go back to a company where you may not have worked in years to get your money. The process can take as long as a year, and the money could be subject to taxes before your beneficiary can collect it.

7. Don’t shortchange yourself. Whatever else you do in your financial life, take retirement planning seriously. There is nothing you can do that will have more impact on your future financial security than maximizing your contributions to a retirement account and making sure that money works really hard for you.