Corporate Governance

From the Pages of The Pomerantz Monitor: Study Shows Institutional Investors Play Key Role In Securities Litigation

By Carolyn Moskowitz

As reported in the current issue of The Pomerantz Monitor, the Corporate Library, the research organization that has weighed in on executive pay, recently released another study, concluding that companies whose CEO compensation practices are poorly aligned with shareholder interests, according to Corporate Library criteria, were five times more likely to be the subject of a securities class action. This correlation suggests that CEOs with bloated incentives may have a greater temptation to cook the books in order to reap those rewards. This finding, which is consistent with findings for prior years, suggests that institutional investors' attacks on bloated pay practices are not just an effort to rein in wasteful spending, but also a way to prevent securities fraud.

The study also found that pension funds and other institutional investors have taken a growing role in securities litigation. For example, public pension funds were named lead plaintiff in 14 of 25 securities class action cases filed in 2007 where a lead plaintiff was appointed. This is understandable, given that institutional investors hold more than 60% of the traded stock in almost all the companies that were the subject of a securities class action in 2007. The study concludes that "public pension funds in particular have grown increasingly comfortable with the use of securities class-action litigation not only to recoup very real investment losses, but also to signal to their political constituencies a willingness to tackle head-on the specter of white-collar crime."

Full post as published by PomTalk on April 23, 2008 (boomark / email).