Law Commons^™

Non-Profit Organizations Should Prioritize Governance In Board Selection Decisions—Those That Prioritize Money May Pay Too Much, Heidi Grunwald, Daniel Isaacs

Fordham Journal of Corporate & Financial Law

Non-profit corporations must comply with federal tax laws, and their governing bodies must satisfy corporation law-based duties, but they are not subject to the regulatory requirements of publicly traded corporations. This discrepancy should be troubling, because the stakeholders of non-profit organizations are far more vulnerable than the typical investor. Accordingly, non-profit boards have a particularly strong need for good governance. However, our research shows that non-profit board members believe that board selection procedures prioritize giving over the ability to attract and retain members with attributes commonly associated with good governance. To address this problem, we argue that laws should require …

Lifting Labor’S Voice: A Principled Path Toward Greater Worker Voice And Power Within American Corporate Governance, Leo E. Strine Jr., Aneil Kovvali, Oluwatomi O. Williams

Ira M. Millstein Center for Global Markets and Corporate Ownership

The dramatic decline in corporate gainsharing with American workers over the last two generations has contributed to stagnating wages, soaring inequality, and economic insecurity. There are global causes of greater inequality and depressed pay that go beyond the decline in workers’ share. But many public policymakers and economists believe that the reduced share of corporate prof its that American workers receive has been a major factor in the much larger increase in inequality that has occurred in the United States, compared to its market economy allies in the Organization for Economic Co-operation and Development (OECD). To some, the explanation for …

Why Corporate Purpose Will Always Matter, Lyman P.Q. Johnson

Scholarly Articles

Business persons and lawyers (and law professors) perennially struggle over the question whether a business corporation does or should have a purpose other than advancing the interests of shareholders. After briefly setting the stage by describing the dispute over what the positive law of corporate purpose really is and the normative argument over what corporate purpose should be, this short article takes a different turn. It addresses why, in a dynamic, democratic, pluralist society, the foundational issue of corporate purpose remains so important and will not (and should not) go away. However adamantly divergent descriptive and prescriptive positions are held, …

Judicial Review Of Directors' Duty Of Care: A Comparison Between U.S. & China, Zhaoyi Li

Articles

Articles 147 and 148 of the Company Law of the People’s Republic of China (“Chinese Company Law”) establish that directors owe a duty of care to their companies. However, both of these provisions fail to explain the role of judicial review in enforcing directors’ duty of care. The duty of care is a well-trodden territory in the United States, where directors’ liability is predicated on specific standards. The current American standard, adopted by many states, requires directors to “discharge their duties with the care that a person in a like position would reasonably believe appropriate under similar circumstances.” However, both …

Artificially Intelligent Boards And The Future Of Delaware Corporate Law, Christopher Bruner

Scholarly Works

The prospects for Artificial Intelligence (AI) to impact the development of Delaware corporate law are at once over- and under-stated. As a general matter, claims to the effect that AI systems might ultimately displace human directors not only exaggerate the foreseeable technological potential of these systems, but also tend to ignore doctrinal and institutional impediments intrinsic to Delaware's competitive model – notably, heavy reliance on nuanced and context-specific applications of the fiduciary duty of loyalty by a true court of equity. At the same time, however, there are specific applications of AI systems that might not merely be accommodated by …

The Landscape Of Startup Corporate Governance In The Founder-Friendly Era, Jennifer S. Fan

Articles

In corporate governance scholarship, there is an important debate about the nature and roles of the members of the board of directors in venture capital-backed private companies. The impact of a newly emerged, founder-centric model has been underappreciated, while the role of the independent director as tiebreaker or swing vote is vastly overstated. The reality is that corporate governance in these companies is a norm-driven, consensus-building process that rarely spills out into open conflict.

This is the first empirical study of startup corporate governance post-Great Recession and during the pandemic. Using survey and interview methodologies, this Article makes four primary …

Artificially Intelligent Boards And The Future Of Delaware Corporate Law, Christopher Bruner

Scholarly Works

This article argues that the prospects for Artificial Intelligence (AI) to impact corporate law are at once over- and under-stated, focusing on the law of Delaware – the predominant jurisdiction of incorporation for US public companies. Claims that AI systems might displace human directors not only exaggerate AI’s foreseeable technological potential, but ignore doctrinal and institutional impediments intrinsic to Delaware’s competitive model – notably, heavy reliance on nuanced applications of the fiduciary duty of loyalty by a true court of equity. At the same time, however, there are discrete AI applications that might not merely be accommodated by Delaware corporate …

The Diversity Risk Paradox, Veronica Root Martinez

Faculty Scholarship

There is a growing body of literature discussing the proper role of diversity, equity, and inclusion efforts by and within public firms. A combination of forces brought renewed energy to this topic over the past few years. The #MeToo movement demonstrated a whole host of inequities faced by women within workplaces. Business Roundtable’s 2019 Statement on the Purpose of a Corporation rejected the view that the purpose of the corporation was solely to be focused on the maximization of shareholder wealth. And, in 2020, the murder of George Floyd ignited a racial reckoning within the United States, which prompted many …

Enabling Esg Accountability: Focusing On The Corporate Enterprise, Rachel Brewster

Faculty Scholarship

Environmental, social, and governance accountability for companies has become an important topic in popular and academic debate in modern society. The idea that corporations should have ESG goals has been embraced by major investment companies, employees, and many corporations themselves. Yet, less attention has been focused on how corporate enterprise law—which governs how corporations structure their relationships between parent corporations and their subsidiaries—creates or contributes to the ESG concerns that the public has with corporations in the first place. Modern enterprise law allows corporations, particularly those operating across national borders, to use their subsidiaries to avoid responsibility for their public …

Racial Rhetoric Or Reality? Cautious Optimism On The Link Between Corporate #Blm Speech And Behavior, Lisa Fairfax

All Faculty Scholarship

The summer of 2022 marks the two-year anniversary of the dramatic rekindling of the #BlackLivesMatter movement because of the murders of George Floyd, Breonna Taylor and other unarmed Black people at the hands of police. The summer of 2020 saw cities in the United States and around the world erupt in protest, with calls to dismantle racist policies and practices both in the criminal system and within the broader society, with a particular emphasis on policies and practices impacting Black people. The summer of 2022 also marks the two-year anniversary of the visible and somewhat surprising avalanche of corporate statements …

In Search Of Good Corporate Governance, Dorothy S. Lund

Faculty Scholarship

In this Forum Response, Dorothy Lund considers whether the “corporate governance gap” between large and small public companies is the product of harmful or beneficial forces, and in so doing, rejects the idea that there is a single governance framework that is optimal for all public companies.

Monitoring Facebook, Hillary A. Sale

Georgetown Law Faculty Publications and Other Works

Few companies still in business have a track record as negative as Facebook. Facebook has paid billions of dollars in government fines and paid hundreds of millions in private settlements. Yet, the financial penalties are actually minimal relative to the harm done. Facebook seems to have been involved one way or another in privacy breaches, organized crime, election manipulation, suicide, and even genocide. Mark Zuckerberg, who still controls Facebook, appears to ignore the consequences of his choices, seemingly prioritizing profits over people. He appears to disregard the law and operate without integrity or honesty, excommunicating insiders who speak out or …

In Re The Walt Disney Co. Derivative Litigation Rewritten, Hillary A. Sale

Georgetown Law Faculty Publications and Other Works

In re The Walt Disney Co. Derivative Litigation is notable for upholding the broad latitude courts afford to boards through the business judgment rule. The case addressed a $130 million termination package delivered to former Disney CEO, Michael Ovitz, after fourteen months of underperformance at the company. This rewritten opinion, to be published in “Feminist Judgements: Rewritten Corporate Law,” (Kelli Alces Williams, Anne Choike, & Usha R. Rodrigues, eds.) (Cambridge Univ. Press, forthcoming 2022), follows the style of the Delaware Supreme Court and reaches the same outcome with a different approach. The opinion expounds on the corporate governance practices in …

Soft Law, Risk Cultures, And Law Abidingness: The Caremark Connection, Donald C. Langevoort

Georgetown Law Faculty Publications and Other Works

As Vice Chancellor, Chancellor, Chief Justice, and recidivist law review author, Leo Strine has had much to say about the often-frustrating effort at corporate behavior modification. One point he makes very insistently is that pursuant to their state-granted charters, corporations are authorized to take part only in lawful business, not any profitable business. Respect for life-giving law is thus a necessary corollary of good corporate citizenship. But good citizenship is so hard to instill, which irks him. An angry display of this is Strine’s Delaware Supreme Court dissenting opinion in City of Birmingham Retirement System v. Good, involving Duke …

The Educated Retail Investor: A Response To "Regulating Democratized Investing", Sergio Alberto Gramitto Ricci, Christina M. Sautter

Faculty Works

The diffusion of mobile-first investing apps, like Robinhood, has increased retail investor participation in financial markets, particularly from the Millennial and GenZ generations, and has increased the diversity of retail investors. However, mobile-first investing apps are not free from controversy. In Regulating Democratized Investing, Abraham Cable tackles the debate on regulating mobile-first investing apps and largely opposes paternalistic regulation, which would raise unsurmountable barriers at the entrance of the stock market for retail investors. But it concedes to a form of regulation that in Cable’s own words “serves ultra-retail investors a modest portion of what they really want.” We strongly …

Stealth Governance: Shareholder Agreements And Private Ordering, Jill E. Fisch

All Faculty Scholarship

Corporate law has embraced private ordering -- tailoring a firm’s corporate governance to meet its individual needs. Firms are increasingly adopting firm-specific governance through dual-class voting structures, forum selection provisions and tailored limitations on the duty of loyalty. Courts have accepted these provisions as consistent with the contractual theory of the firm, and statutes, in many cases, explicitly endorse their use. Commentators too support private ordering for its capacity to facilitate innovation and enhance efficiency.

Private ordering typically occurs through firm-specific charter and bylaw provisions. VC-funded startups, however, frequently use an alternative tool – shareholder agreements. These agreements, which have …

Stakeholderism, Corporate Purpose, And Credible Commitment, Lisa Fairfax

All Faculty Scholarship

One of the most significant recent phenomena in corporate governance is the embrace, by some of the most influential actors in the corporate community, of the view that corporations should be focused on furthering the interests of all corporate stakeholders as well as the broader society. This stakeholder vision of corporate purpose is not new. Instead, it has emerged in cycles throughout corporate law history. However, for much of that history—including recent history—the consensus has been that stakeholderism has not achieved dominance or otherwise significantly influenced corporate behavior. That honor is reserved for the corporate purpose theory that focuses on …

The Rejected Threat Of Corporate Vote Suppression: The Rise And Fall Of The Anti-Activist Pill, Jeffrey N. Gordon

Faculty Scholarship

As disciplinary takeovers are replaced by activist shareholder campaigns, managements may well want to turn to the “anti-activist pill” as shelter from the storm. The economic shock from the widespread shutdown to combat the Covid-19 pandemic produced dozens of so-called “crisis pills.” The defense of these pills as avoiding “disruption” and “distraction” of managements can be seen as a test run for broader use of poison pills to fend off shareholder activism. The Delaware courts, first Chancery and then the Supreme Court, rejected this managerial defense tactic in a way that clarifies the role of the poison pill in corporate …

Systemic Stewardship, Jeffrey N. Gordon

Faculty Scholarship

This Article frames a normative theory of stewardship engagement by large institutional investors and asset managers that is congruent with their theory of investment management — “Modern Portfolio Theory” — which describes investors as attentive to both systematic risk as well as expected returns. Because investors want to maximize risk-adjusted returns, it will serve their interests for asset managers to support and sometimes advance shareholder initiatives that will reduce systematic risk. “Systematic stewardship” provides an approach to “ESG” matters that serves both investor welfare and social welfare and fits the business model of large, diversified funds, especially index funds. The …

Agents Of Inequality: Common Ownership And The Decline Of The American Worker, Zohar Goshen, Doron Levit

Faculty Scholarship

The last forty years have seen two major economic trends: wages have stalled despite rising productivity, and institutional investors have replaced retail shareholders as the predominant owners of the U.S. equity markets. A few powerful institutional investors — dubbed common owners — now hold large stakes in most U.S. corporations. And in no coincidence, when U.S. workers acquired this new set of bosses, their wages stopped growing while shareholder returns increased. This Article explains how common owners shift wealth from labor to capital, thereby exacerbating income inequality.

Powerful institutional investors pushing public corporations en masse to adopt strong corporate governance …

Asset Managers As Regulators, Dorothy S. Lund

Faculty Scholarship

The conventional view of regulation is that it exists to constrain corporate activity that harms the public. But amid perceptions of government failure, many now call on corporations to tackle social problems themselves. And in this moment of dissatisfaction with government, powerful asset managers have stepped in to serve as regulators of last resort, adopting rules that bind corporate America on issues of great social importance, including climate change and workplace diversity. This Article describes this dynamic — where shareholders have become regulators — which has been made possible by the rise of institutional shareholding (and index investing in particular) …

Shifting Influences On Corporate Governance: Capital Market Completeness And Policy Channeling, Ronald J. Gilson, Curtis J. Milhaupt

Faculty Scholarship

Corporate governance scholarship is typically portrayed as driven by single factor models, for example, shareholder value maximization, director primacy or team production. These governance models are Copernican; one factor is or should be the center of the corporate governance solar system. In this essay, we argue that, as with binary stars, the shape of the governance system is at any time the result of the interaction of two central influences, which we refer to as capital market completeness and policy channeling. In contrast to single factor models, which reflect a stable normative statement of what should drive corporate governance, in …

Toward A Fair And Sustainable Corporate Governance System: Reflections On Leo Strine, Jr.'S Writing On Institutional Investors, Dorothy S. Lund

Faculty Scholarship

It is a privilege to contribute to this Festschrift for my friend, mentor, and co-author, Leo Strine, Jr. It is also a pleasure to revisit his vast body of work and to re-experience the breadth and depth of his scholarship, as well as reflect on his unparalleled influence on the development of corporate law that he brought about while presiding over its most influential courts for twenty-one years.

In thinking about this essay, I recalled a conversation that I had with “CJS” when I was serving as his law clerk. In this conversation, he decried (with James Taylor blasting in …

The Future Of Board Time And Priorities, Janet Foutty, Eric L. Talley, Carey Oven, Erica Mitnick Klein, Maureen Bujno, Katherine Waldock, Molly Calkins, Lyssa Bantleon Little, Caroline Schoenecker

Faculty Scholarship

“Houston, we’ve had a problem.”

Popularized by the 1995 film Apollo 13, this one line signals a dramatic turning point in the story of the 1970 mission to land three people on the surface of the moon.

It recounts the pivotal moment when carefully laid plans for a 33-hour stay on the moon are about to go awry. The very purpose of the mission — two space walks, a series of geological surveys, and the placement of scientific instruments that would send data back to Earth for long after — is in jeopardy.

It is the moment when the playbook …

Optimizing The World’S Leading Corporate Law: A 20-Year Retrospective And Look Ahead, Lawrence Hamermesh, Jack B. Jacobs, Leo E. Strine Jr.

All Faculty Scholarship

In a 2001 article (Function Over Form: A Reassessment of Standards of Review in Delaware Corporation Law) two of us, with important input from the other, argued that in addressing issues like hostile takeovers, assertive institutional investors, leveraged buyouts, and contested ballot questions, the Delaware courts had done exemplary work but on occasion crafted standards of review that unduly encouraged litigation and did not appropriately credit intra-corporate procedures designed to ensure fairness. Function Over Form suggested ways to make those standards more predictable, encourage procedures that better protected stockholders, and discourage meritless litigation, by restoring business judgment rule …

Shareholder Wealth Maximization: A Schelling Point, Martin Edwards

St. John's Law Review

(Excerpt)

Imagine a reality television game show where two contestants begin the game in two different places in New York City. The object of the game is for the two contestants to find each other, but they do not know anything about each other and they have no way of communicating. If they succeed, both contestants win a prize. If they fail, they get nothing. With no ability to explicitly bargain over the meeting, the parties have to make an educated guess about what the other person is most likely to do. Most people, confronted with this sort of tacit …

Sustainable Business Law? The Key Role Of Corporate Governance And Finance, Jason J. Czarnezki, Colin Meyers

Elisabeth Haub School of Law Faculty Publications

Lawyers, law schools, and corporate entities have shown an increased interest in sustainable business strategies. This is reflected by the increase in sustainability practice groups, law school courses, and textbooks focusing on the relationship between sustainability and business law; lawyers moving into executive-level sustainability positions in the private sector; and the proliferation of corporate sustainability policies, as well as increased interest in mitigating climate risk and engaging in sustainable finance. But what exactly is sustainable business law, and what role do lawyers play in advancing sustainability in the corporate world? This Article argues that “sustainable business law” has emerged as …

Corporate Governance Gaming: The Collective Power Of Retail Investors, Sergio Alberto Gramitto Ricci, Christina M. Sautter

Faculty Works

The GameStop saga and meme stock frenzy have shown the pathway to the most disruptive revolution in corporate governance of the millennium. New generations of retail investors use technologies, online forums, and gaming dynamics to coordinate their actions and obtain unprecedented results. Signals indicate that these investors, whom we can dub wireless investors, are currently expanding their actions to corporate governance. Wireless investors’ generational characteristics suggest that they will use corporate governance to pursue social and environmental causes. In fact, wireless investors can set in motion a social movement able to bring business corporations to serve their original partly-private-partly-public purpose. …

The Separation Of Voting And Control: The Role Of Contract In Corporate Governance, Gabriel V. Rauterberg

Articles

The default rules of corporate law make shareholders’ control rights a function of their voting power. Whether a director is elected or a merger is approved depends on how shareholders vote. Yet, in private corporations shareholders routinely alter their rights by contract. This phenomenon of shareholder agreements—contracts among the owners of a firm— has received far less attention than it deserves, mainly because detailed data about the actual contents of shareholder agreements has been lacking. Private companies disclose little, and shareholder agreements are thought to play a trivial or nonexistent role in public companies. I show that this is false—fifteen …

The “Value” Of A Public Benefit Corporation, Jill E. Fisch, Steven Davidoff Solomon

All Faculty Scholarship

We examine the “value” a PBC form provides for publicly-traded corporations. We analyze the structure of the PBC form and find that other than requiring a designated social purpose it does not differ significantly in siting control and direction with shareholders. We also examine the purpose statements in the charters of the most economically significant PBCs. We find that, independent of structural limitations on accountability, these purpose statements are, in most cases, too vague and aspirational to be legally significant, or even to serve as a reliable checks on PBC behavior. We theorize, and provide evidence, that without a legal …