Corporate governance is the collective set of processes, practices, and rules that corporations follow
Without good corporate practices, shareholders are less likely to receive a positive return on their investments. This is particularly harmful to those who rely on pension funds.
Here is a closer look at why good corporate governance is essential for maintaining shareholders’ trust.
How Does Corporate Governance Influence Pension Fund Returns?
Corporate governance impacts shareholders’ trust and their potential returns. Corporations should act in the interests of their shareholders.
Unfortunately, corporate insiders occasionally act in their own interests.
Without proper checks and balances, corporate insiders may neglect their duties and find ways to benefit themselves while hurting the organization. Examples include excessive compensation, insider trading, and the transfer of assets to insiders. These acts tend to hurt stock returns and erode shareholders’ trust.
The public often hears about headline-grabbing cases involving insider trading at large, well-known companies. However, bad corporate practices can occur in organizations of all sizes.
At Levi & Korsinsky, we have successfully recovered billions on behalf of corporations and shareholders. We have a dedicated team that researches and identifies bad corporate governance. When we uncover problems, we help shareholders explore their legal rights, which may include derivative litigation.
What Is Derivative Litigation?
Derivative litigation occurs when a shareholder files a lawsuit on behalf of a corporation. The defendant is typically an insider of the corporation, such as a director or executive officer. These lawsuits aim to address the failures of management to properly govern the corporation.
Derivative litigation offers a way to ensure that the interests of the executive officers and directors align with the shareholders. It allows us to hold executives and board members accountable for their actions.
In many cases, a successful derivative action suit results in the recovery of money. Bringing bad corporate practices to light also helps achieve positive changes in corporate practices. Identifying and litigating bad actions helps prevent future misdeeds that may negatively impact stock returns.
Without proper checks and balances, corporate insiders may neglect their duties and find ways to benefit themselves while hurting the organization.
Excessive Compensation of Executives
Excessive compensation is a common problem in the corporate world. It involves unfairly awarding insiders and executives. It is a prime example of corporate actions that benefit the few and hurt many. Excessive compensation also demonstrates a misalignment between shareholders and executives.
Unfairly compensating CEOs and directors does not help the company obtain positive returns.
When executives receive significantly more compensation compared to other officers, the company often experiences:
- Decreased morale
- Lower profits
- Limited returns
Our firm has extensive experience with derivative suits. We have repeatedly challenged cases involving excessive compensation and helped recapture assets. In one example, we recovered almost $30 million in equity awards.
The case involved the Police & Fire Retirement Systems in the City of Detroit. Shareholders challenged excessive equity awards given to two top officers and the CEO of Skechers. After litigating the case, the courts ordered the return of the equity awards to the organization.
The lawsuit also resulted in changes to corporate practices. The directors of the company agreed that future compensation processes would require independent review from a third-party consultant. This change helps decrease the chance of similar issues occurring in the future.
Wasting Assets for the Benefit of Insiders
Entering into agreements that benefit insiders and hurt shareholders is another common example of bad corporate governance. Some decision-makers agree to contracts that waste the company’s assets while benefiting themselves.
For example, in 2016, Levi & Korsinsky represented a plaintiff challenging the fairness of several services agreements (EZCORP Inc. Consulting Agreement Derivative Litigation). A consulting agency provided services to EZCORP for a multi-million-dollar fee. The consulting agency was affiliated with a controlling stockholder of EZCORP.
The courts ruled that the agreements breached fiduciary duty and wasted corporate assets for the benefit of the defendants. Our firm obtained a $6.5 million settlement that was repaid to the company. The courts also discontinued the consulting agreements that totaled almost $20 million.
Insider Trading and Improper Behavior
Insider trading involves using nonpublic information for stock trades. Corporate insiders use their inside knowledge to sell or buy stocks at just the right time. This is another practice that hurts pension funds by devaluing the stock of the company.
In Pfeiffer v Tool, our firm helped prove a pattern of corporate insider trading and secured a settlement of $16.25 million. Insider trading and other improper behavior can occur at corporations of all sizes, including well-known entities such as Google.
In Google Inc Class C Shareholder Litigation (CA No. 7469-CS), our firm challenged a specific stock recapitalization transaction. The transaction would have diverted more control of the company from the shareholders to the insiders. The litigation resulted in a $522 million payout and benefits of more than $3 billion.
Identifying bad corporate governance is not easy, which is why these improper practices continue to hurt shareholders and pension funds. At Levi & Korsinsky, we have years of experience with derivative litigation and have successfully defended shareholders’ rights.
Our firm identifies and challenges acts of managerial abuse and insider trading in the pursuit of better corporate governance. Contact Levi & Korsinsky today to explore your options.