Business Commons^™

Initiation Payments, Scott Hirst

Faculty Scholarship

Many of the central discussions in corporate governance, including those regarding proxy contests, shareholder proposals, and other activism or stewardship, can be understood as a single question: Is there under-initiation of corporate changes that investors would collectively prefer?

This Article sheds light on this question in three ways. First, the Article proposes a theory of investor initiation, which explains the hypothesis that there is under-initiation of collectively-preferred corporate change by investors. Even though investors collectively prefer that certain corporate changes take place, the costs to any individual investor from initiating such changes through high-cost proxy contests, or even low-cost shareholder …

How Much Do Investors Care About Social Responsibility?, Scott Hirst, Kobi Kastiel, Tamar Kricheli-Katz

Faculty Scholarship

Perhaps the most important corporate law debate over the last several years concerns whether directors and executives should manage the corporation to maximize value for investors or also take into account the interests of other stakeholders and society. But, do investors themselves wish to maximize returns, or are they willing to forgo returns for social purposes? And more broadly, do market participants, such as investors and consumers, differ from donors in the ways in which they prioritize monetary gains and the promotion of social goals?

This project attempts to answer these questions with evidence from an experiment conducted with 279 …

10 Things Judges Should Know About Cryptocurrency, Lee Reiners

Faculty Scholarship

No abstract provided.

Cleaning Corporate Governance, Jens Frankenreiter, Cathy Hwang, Yaron Nili, Eric L. Talley

Faculty Scholarship

Although empirical scholarship dominates the field of law and finance, much of it shares a common vulnerability: an abiding faith in the accuracy and integrity of a small, specialized collection of corporate governance data. In this paper, we unveil a novel collection of three decades’ worth of corporate charters for thousands of public companies, which shows that this faith is misplaced.

We make three principal contributions to the literature. First, we label our corpus for a variety of firm- and state-level governance features. Doing so reveals significant infirmities within the most well-known corporate governance datasets, including an error rate exceeding …

Cryptocurrency And The State: An Unholy Alliance, Lee Reiners

Faculty Scholarship

This article contextualizes the rise of cryptocurrency within the historical relationship between money and the state. It begins by asking two simple yet critical questions: What is money and where did it come from? Armed with the answers, the article proceeds by taking a fresh look at cryptocurrency through the lens of the credit theory of money. It finds that cryptocurrency, by using new technologies and incentive-based design, attempts to overcome the previous geographic limitations that hindered broad adoption of private currencies. Even with these innovations, cryptocurrency appeared unlikely to challenge the supremacy of sovereign money until Facebook announced the …

Federal Corporate Law And The Business Of Banking, Lev Menand, Morgan Ricks

Faculty Scholarship

The only profit-seeking business enterprises chartered by a federal government agency are banks. Yet there is barely any scholarship justifying this exception to state primacy in U.S. corporate law.

This Article addresses that gap. It reinterprets the National Bank Act (NBA) – the organic statute governing national banks, the heavyweights of the financial sector – as a corporation law and recovers the reasons why Congress wrote this law: not to catalyze private wealth creation or to regulate an existing industry, but to solve an economic governance problem. National banks are federal instrumentalities charged with augmenting the money supply – a …

Tepoel Lecture: Bond Trustees And The Rising Challenge Of Activist Investors, Steven L. Schwarcz

Faculty Scholarship

No abstract provided.

Regulating Offshore Finance, William J. Moon

Faculty Scholarship

From the Panama Papers to the Paradise Papers, massive document leaks in recent years have exposed trillions of dollars hidden in small offshore jurisdictions. Attracting foreign capital with low tax rates and environments of secrecy, a growing number of offshore jurisdictions have emerged as major financial havens hosting thousands of hedge funds, trusts, banks, and insurance companies.

While the prevailing account has examined offshore financial havens as “tax havens” that facilitate the evasion or avoidance of domestic tax, this Article uncovers how offshore jurisdictions enable corporations to evade domestic regulatory law. Specifically, recent U.S. Supreme Court cases restricting the geographic …

Securitization Ten Years After The Financial Crisis: An Overview, Steven L. Schwarcz

Faculty Scholarship

This symposium issue examines securitization a decade after the 2008 financial crisis. Prior to the crisis, securitization was one of America’s dominant means of financing. Many observers, however, blamed securitization for causing the crisis, sparking regulation that arguably has been overly restrictive and, in some cases, even punitive. Where are we now?

Regulating Complacency: Human Limitations And Legal Efficacy, Steven L. Schwarcz

Faculty Scholarship

This Article examines how insights into limited human rationality can improve financial regulation. The Article identifies four categories of limitations—herd behavior, cognitive biases, overreliance on heuristics, and a proclivity to panic—that undermine the perfect-market regulatory assumptions that parties have full information and will act in their rational self-interest. The Article then analyzes how insights into these limitations can be used to correct resulting market failures. Requiring more robust disclosure and due diligence, for example, can help to reduce reliance on misleading information cascades that motivate herd behavior. Debiasing through law, such as requiring more specific, poignant, and concrete disclosure of …

Benchmark Regulation, Gina-Gail S. Fletcher

Faculty Scholarship

Benchmarks are metrics that are deeply embedded in the financial markets. They are essential to the efficient functioning of the markets and are used in a wide variety of ways—from pricing oil to setting interest rates for consumer lending to valuing complex financial instruments. In recent years, benchmarks have also been at the epicenter of numerous, multi-year market manipulation scandals. Oil traders, for example, deliberately execute trades to drive benchmarks lower artificially, allowing the traders to capitalize on the manipulated benchmarks. This ensures that later trades relying on the benchmarks will be more profitable than they otherwise would have been. …

Too Big To Fool: Moral Hazard, Bailouts, And Corporate Responsibility, Steven L. Schwarcz

Faculty Scholarship

Domestic and international regulatory efforts to prevent another financial crisis have been converging on the idea of trying to end the problem of “too big to fail”—that systemically important financial firms take excessive risks because they profit from success and are (or at least, expect to be) bailed out by government money to avoid failure. The legal solutions being advanced to control this morally hazardous behavior tend, however, to be inefficient, ineffective, or even dangerous—such as breaking up firms and limiting their size, which can reduce economies of scale and scope; or restricting central bank authority to bail out failing …

Controlling Systemic Risk Through Corporate Governance, Steven L. Schwarcz

Faculty Scholarship

Most of the regulatory measures to control excessive risk taking by systemically important firms are designed to reduce moral hazard and to align the interests of managers and investors. These measures may be flawed because they are based on questionable assumptions. Excessive corporate risk taking is, at its core, a corporate governance problem. Shareholder primacy requires managers to view the consequences of their firm’s risk taking only from the standpoint of the firm and its shareholders, ignoring harm to the public. In governing, managers of systemically important firms should also consider public harm. This proposal engages the long-standing debate whether …

Rethinking Corporate Governance For A Bondholder Financed, Systemically Risky World, Steven L. Schwarcz

Faculty Scholarship

This Article makes two arguments that, combined, demonstrate an important synergy: first, including bondholders in corporate governance could help to reduce systemic risk because bondholders are more risk averse than shareholders; second, corporate governance should include bondholders because bonds now dwarf equity as a source of corporate financing and bond prices are increasingly tied to firm performance.

Understanding The Global In Global Finance And Regulation, Lawrence G. Baxter

Faculty Scholarship

No abstract provided.

Shadow Banking And Regulation In China And Other Developing Countries, Steven L. Schwarcz

Faculty Scholarship

The rapid but largely unregulated growth in shadow banking in developing countries such as China can jeopardize financial stability. This article discusses that growth and argues that a regulatory balance is needed to help protect financial stability while preserving shadow banking as an important channel of alternative funding. The article also analyzes how that regulation could be designed.

Keynote Address, Regulating Corporate Governance In The Public Interest: The Case Of Systemic Risk, Steven L. Schwarcz

Faculty Scholarship

There’s long been a debate whether corporate governance law should require some duty to the public. The accepted wisdom is not to require such a duty—that corporate profit maximization provides jobs and other public benefits that exceed any harm. This is especially true, the argument goes, because imposing specific regulatory requirements and making certain actions illegal or tortious can mitigate the harm without unduly impairing corporate wealth production. Whether that is true in other contexts, this paper—delivered as the keynote address at the June 2016 National Business Law Scholars Conference at The University of Chicago Law School—questions if it’s true …

Misalignment: Corporate Risk-Taking And Public Duty, Steven L. Schwarcz

Faculty Scholarship

This article argues for a “public governance duty” to help manage excessive risk-taking by systemically important firms. Although governments worldwide, including the United States, have issued an array of regulations to attempt to curb that risk-taking by aligning managerial and investor interests, those regulations implicitly assume that investors would oppose excessively risky business ventures. That leaves a critical misalignment: because much of the harm from a systemically important firm’s failure would be externalized onto the public, including ordinary citizens impacted by an economic collapse, such a firm can engage in risk-taking ventures with positive expected value to its investors but …

Perspectives On Regulating Systemic Risk, Steven L. Schwarcz

Faculty Scholarship

This book chapter, which synthesizes several of the author’s articles, attempts to provide useful perspectives on regulating systemic risk. First, it argues that systemic shocks are inevitable. Accordingly, regulation should be designed not only to try to reduce those shocks but also to protect the financial system against their unavoidable impact. This could be done, the chapter explains, by applying chaos theory to help stabilize the financial system. The chapter then focuses on trying to prevent excessive corporate risk-taking, which is one of the leading triggers of systemic shocks and widely regarded to have been a principal cause of the …

Corporate Risk-Taking And Public Duty, Steven L. Schwarcz

Faculty Scholarship

No abstract provided.

The Duty To Manage Risk, A. Christine Hurt

Faculty Scholarship

No abstract provided.

Incentivizing Credit Rating Agencies Under The Issuer Pay Model Through A Mandatory Compensation Competition, Robert J. Rhee

Faculty Scholarship

Credit rating agencies are important institutions of the global capital markets. If they had performed properly, the financial crisis of 2008-2009 would not have occurred. This article offers the simplest fix proposed thus far, and it is contrarian. This Article accepts the central role of rating agencies in the regulation of bond investments, the realities of a duopoly, and the issuer-pay model of compensation. The status quo is the baseline. The role of regulation should be to create the conditions necessary to induce competition. This article proposes that a small, recurring portion of revenue earned by the largest rating agencies …

Putting The Securities Laws To The Test: The Long-Standing Approach To Federal Securities Regulation Is Not Working, Elisabeth De Fontenay

Faculty Scholarship

No abstract provided.

The Bankruptcy-Law Safe Harbor For Derivatives: A Path-Dependence Analysis, Steven L. Schwarcz, Ori Sharon

Faculty Scholarship

U.S. bankruptcy law grants special rights and immunities to creditors in derivatives transactions, including virtually unlimited enforcement rights. This article argues that these rights and immunities result from a form of path dependence, a sequence of industry-lobbied legislative steps, each incremental and in turn serving as apparent justification for the next step, without a rigorous and systematic vetting of the consequences. Because the resulting “safe harbor” has not been fully vetted, its significance and utility should not be taken for granted; and thus regulators, legislators, and other policymakers—whether in the United States or abroad—should not automatically assume, based on its …

Regulating Systemic Risk In Insurance, Daniel Schwarcz, Steven L. Schwarcz

Faculty Scholarship

As exemplified by the dramatic failure of AIG, insurance companies and their affiliates played a central role in the 2008 global financial crisis. It is therefore not surprising that the Dodd-Frank Act—the United States’ primary legislative re-sponse to the crisis—contained an entire title dedicated to insurance regulation, which has traditionally been the responsibility of individual states. The most important insurance-focused reforms in Dodd-Frank empower the Federal Reserve Bank to impose an additional layer of regulatory scrutiny on top of state insurance regulation for a small number of “systemically important” nonbank financial companies, such as AIG. This Article argues, however, that …

Extraterritorial Impacts Of Recent Financial Regulation Reforms: A Complex World Of Global Finance, Lawrence G. Baxter

Faculty Scholarship

No abstract provided.

Do The Securities Laws Matter? The Rise Of The Leveraged Loan Market, Elisabeth De Fontenay

Faculty Scholarship

One of the enduring principles of federal securities regulation is the mantra that bonds are securities, while commercial loans are not. Yet the corporate bond and loan markets in the U.S. are rapidly converging, putting significant pressure on the disparity in their regulatory treatment. As securities, corporate bonds are subject to onerous public disclosure obligations and liability regimes, which corporate loans avoid entirely. This longstanding regulatory distinction between loans and bonds is based on the traditional conception of a commercial loan as a long-term relationship between the borrowing company and a single bank, in contrast to bonds, which may be …

Comments On The September 29, 2014 Fsb Consultative Document, ‘Cross-Border Recognition Of Resolution Action’, Steven L. Schwarcz, Mark Jewett, Bruce Leonard, Catherine Walsh, David Kempthorne

Faculty Scholarship

This CIGI Paper No. 51 was released on December 3, 2014 by the Centre for International Governance Innovation (CIGI) as a response to the Financial Stability Board’s (FSB) Consultative Document, “Cross-Border Recognition of Resolution Action.” Principally authored by CIGI Senior Fellow Steven L. Schwarcz (who works with the think tank’s International Law Research Program), the Paper comments on the policy measures proposed by the FSB, an international body that monitors and makes recommendations about the global financial system, to address the cross-border legal uncertainties of troubled systemically important financial firms. In that context, the Paper explains why a statutory approach …

Corporate Culture And Erm, Michelle M. Harner

Faculty Scholarship

The attitudes and actions of those viewed as leaders within a company (commonly referred to as “tone at the top”) help to define corporate culture and are critical to implementing a successful enterprise risk management (ERM) program. This paper explores the challenges and benefits of creating a risk-aware corporate culture, including the potential legal implications for boards of directors.

The Potential Cost And Value Of Erm, Michelle M. Harner

Faculty Scholarship

The concept of enterprise risk managment (ERM) as a holistic approach to managing a company's risk profile has tremendous appeal. However, companies are frequently skeptical about its value and whether the results will justify the cost, effort, and challenges of implementing a meaningful ERM process. This report considers some of those concerns and highlights the governance, compliance, and cultural value of ERM.