Bank Failure,Mark‐to‐market and the Financial Crisis

This paper is concerned with the allegation that fair value accounting rules have contributed significantly to the recent financial crisis. It focuses on one particular channel for that contribution: the impact of fair value on the actual or potential failure of banks. The paper compares four criteria for failure: one economic, two legal and one regulatory. It is clear from this comparison that balance sheet valuations of assets are, in two cases, crucial in these definitions, and so the choice between ‘fair value’ or other valuations can be decisive in whether a bank fails; but in two cases fair value is irrelevant. Bank failures might arise despite capital adequacy and balance sheet solvency due to sudden shocks to liquidity positions. Two of the most prominent bank failures cannot, at first sight, be attributed to fair value accounting: we show that Northern Rock was balance sheet solvent, even on a fair value basis, as was Lehman Brothers. The case study evidence is augmented by econometric tests that suggest that mark‐to‐market accounting has had only a very limited influence on the perceived failure risk of banks.     

The Case for Activist Directors: A Conversation with Ira M. Millstein

In this conversation held at the 2016 Millstein Governance Forum at Columbia Law School, Ira Millstein, a leading authority on corporate governance and founding chair of the Millstein Center for Global Markets and Corporate Ownership, discusses his new book, The Activist Director, with Geoff Colvin of Fortune Magazine. In explaining why he wrote the book, Millstein said that it is important for boards of directors to understand the key role they must play to secure the future of our corporations, and for shareholders to recognize, encourage, and support this role. The role of directors has changed significantly over the years. Yet corporate performance, broadly speaking, has not lived up to expectations, and Millstein attributes this in part to the failure of directors to adapt and evolve quickly and decisively enough—which in turn has helped to fuel the rise of activist investors. Much of the problem stems from the tendency of boards to view themselves as oversight organizations that review and “challenge” management at arm's length, as opposed to truly engaging with management to make better decisions. To address this problem, Millstein makes the case for “activist” directors who will partner with management, think deliberately and critically about the company's strategy, and work for the longterm interest of the corporation. And to provide financial incentives for directors to reinforce their commitment to the corporations they serve, Millstein favors an increase in compensation for directors that is tied to long‐term performance. As an early example of what became an activist board, Millstein describes his own experience with the board of General Motors in the late 1980s and early 1990s when it confronted managerial failure and ended up replacing the CEO. In the current environment of activist investors, activist boards must give serious consideration to shareholder proposals for change, without succumbing to pressure for shortsighted cutbacks in value‐adding investment and while ensuring that management is focused on long‐term growth and innovation. Directors must have the courage and commitment to carry out the course of action they deem to be in the best longterm interests of the corporation.