CEO Compensation Practices Leading Indicators Of Securities Class Action Suits

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The Corporate Library releases its latest study, Predicting Securities Litigation: 2007 Year-End Report.

Effective prediction is the only real defense against securities litigation, and that is the primary focus of the present report

For Immediate Release

Portland, Maine; January 28, 2008 -- CEO compensation practices that are poorly-aligned with shareholder interests remain a powerful indicator of potential securities litigation, according to The Corporate Library, as the firm reported in its latest securities class action (SCA) study, Predicting Securities Litigation: 2007 Year-End Report. In a year when new securities class actions filings rose 43%, claims in new areas rose to prominence, including subprime mortgage and related real estate and homebuilder cases, cases involving risk exposure outside the United States, and failed IPOs and mergers. The report points to another year of increased litigation in 2008 and the growing involvement of institutional investors.

The study examines the second-year effectiveness of The Corporate Library's SCA Risk Ratings to identify and predict the probability of companies being hit with securities class action suits. Findings include:

  • The most poorly-rated companies in mid-2006 were five times more likely to experience an SCA in 2007, matching the results from The Corporate Library's previous SCA studies.
  • CEO base pay and annual bonus levels were more predictive than long-term incentives.
  • More than 35% of companies in The Corporate Library's coverage universe that were unable to achieve compliance with Section 404 of Sarbanes-Oxley experienced at least one SCA in the past three years.
  • Institutional investors hold more than 60% of the traded stock at nearly all companies subject to SCAs.
  • Growing numbers of small- and mid-cap companies are being hit with suits.

"Effective prediction is the only real defense against securities litigation, and that is the primary focus of the present report," said Ric Marshall, Chief Analyst and author of the study. The compensation link is so important that The Corporate Library will release a separate report to focus on that issue specifically in the first quarter of 2008, he said.

The Corporate Library's mission is to provide independent corporate governance research and analysis to enable its clients to enhance value. The company's corporate governance information products, research services and data are sold to the full spectrum of corporate governance stakeholders. Corporate governance research is compiled by market-leading analysts using a proprietary database of over 3,200 public companies and over 40,000 executives and directors. Additional information on The Corporate Library and its suite of online corporate governance data and analysis products can be found on its website at


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