Law Commons^™

Dynamic Disclosure: An Exposé On The Mythical Divide Between Voluntary And Mandatory Esg Disclosure, Lisa Fairfax

All Faculty Scholarship

In March 2022, for the first time in its history, the Securities and Exchange Commission (the “SEC”) proposed rules mandating disclosure related to climate change. The proposed rules are remarkable because heretofore many in the business community, including the SEC, vehemently resisted climate-related disclosure, based primarily on the argument that such disclosure is not material to investors. This resistance is exemplified by the current lack of any SEC disclosure mandates for climate change. The proposed rules have sparked considerable pushback including allegations that the rules violate the First Amendment, would be too costly, and focus on “social” or “political” issues …

A Proposed Sec Cyber Data Disclosure Advisory Commission, Lawrence J. Trautman, Neal Newman

Faculty Scholarship

Constant cyber threats result in: intellectual property loss; data disruption; ransomware attacks; theft of valuable company intellectual property and sensitive customer information. During March 2022, The Securities and Exchange Commission (SEC) issued a proposed rule addressing Cybersecurity Risk Management, Strategy, Governance, and Incident Disclosure, which requires: 1. Current reporting about material cybersecurity incidents; 2. Periodic disclosures about a registrant’s policies and procedures to identify and manage cybersecurity risks; 3. Management’s role in implementing cybersecurity policies and procedures; 4. Board of directors’ cybersecurity expertise, if any, and its oversight of cybersecurity risk; 5. Registrants to provide updates about previously reported cybersecurity …

The Corporate Forum, Sergio Alberto Gramitto Ricci, Christina M. Sautter

Faculty Works

In this response to Professor Jill Fisch’s article "GameStop and the Reemergence of the Retail Investor," we focus on one of the risks associated with the growth of retail investing that Fisch surveys, uncontrolled information sourcing. Drawing on our work on retail investors, we revisit an instrument dear to the U.S. Securities and Exchange Commission, whose potential has not been unleashed so far, the corporate forum. Our response succinctly discusses the main mechanics of the corporate forum, the benefits the corporate forum could provide, and the feasibility hurdles that might undermine the success of corporate forums.

The Environmental, Social, Governance (Esg) Debate Emerges From The Soil Of Climate Denial, Lawrence J. Trautman, Neal Newman

Faculty Scholarship

It has been almost six decades since Rachel Carson’s ominous warning of pending environmental disaster. During 2019 the United Nations requested urgent action from world leaders, given that “just over a decade is all that remains to stop irreversible damage from climate change.” With every passing year, damage resulting from destructive climate change causes increased pain, suffering, death and massive property loss. During 2020 and 2021 alone, severe weather events have included: destructive fires in California; record breaking freeze, power outage, and threat to the electrical grid in Texas; continuation of disruptive drought in U.S. Western states; and record-breaking high …

Purpose Proposals, Jill E. Fisch

All Faculty Scholarship

Repurposing the corporation is the hot issue in corporate governance. Commentators, investors and increasingly issuers, maintain that corporations should shift their focus from maximizing profits for shareholders to generating value for a more expansive group of stakeholders. Corporations are also being called upon to address societal concerns – from climate change and voting rights to racial justice and wealth inequality.

The shareholder proposal rule, Rule 14a–8, offers one potential tool for repurposing the corporation. This Article describes the introduction of innovative proposals seeking to formalize corporate commitments to stakeholder governance. These “purpose proposals” reflect a new dynamic in the debate …

Solving The "King Lear Problem", Benjamin Means

Faculty Publications

In Shakespeare’s play, King Lear, an aging ruler relinquished control to two of his three daughters. The succession failed miserably, destroying his family and destabilizing his kingdom. King Lear shows why few family businesses survive beyond three generations. Understanding Lear’s failure is crucial to avoiding Lear’s fate, whether the family business in question is a monarchy, a media empire, or a hardware store. The conventional wisdom is that Lear gave away his kingdom too soon and left himself vulnerable to predatory heirs. This has been referred to as the “King Lear Problem.”

The conventional wisdom is wrong. Lear’s succession plan …

Board Committee Charters And Esg Accountability, Lisa Fairfax

All Faculty Scholarship

We are currently witnessing a sharp increase in corporate attention on environmental, sustainability, and governance (“ESG”). The steep rise in corporate focus on ESG has prompted considerable criticism, not only from those concerned about how best to ensure that corporations are held accountable for their ESG commitments, but also from those who strenuously insist that corporate commitment to ESG is merely rhetorical or otherwise merely a passing fad. In an effort to shed light on the concerns around ESG accountability, and gain perspective about the potential illusory or short-term nature of ESG, I conducted my own survey of the committee …

Big Three Power, And Why It Matters, Scott Hirst, Lucian Bebchuk

Faculty Scholarship

This Article focuses on the power and corporate governance significance of the three largest index fund managers commonly referred to collectively as the “Big Three.” We present current evidence on the substantial voting power of the Big Three and explain why it is likely to persist and, indeed, further grow. We show that, due to their voting power, the Big Three have considerable influence on corporate outcomes through both what they do and what they fail to do. We also discuss the Big Three’s undesirable incentives both to underinvest in stewardship and to be excessively deferential to corporate managers.

In …

Climate Change Compliance, Susan S. Kuo, Benjamin Means

Faculty Publications

Unless corporations prioritize climate change mitigation, efforts to control global warming will fail. Yet, the strategies that have been proposed for enlisting corporations are insufficient to the task. In our era of political polarization, a comprehensive “Green New Deal” to transition the U.S. economy away from fossil fuels is a nonstarter. Nor can we expect corporate risk management or social responsibility to fill the gap; there are practical limits to how far corporate managers can depart from strategies designed to maximize profits for investors.

This Article contends that climate change is a compliance issue. Scholars have overlooked compliance as a …

Stress Testing Governance, Rory Van Loo

Faculty Scholarship

In their efforts to guard against the world’s greatest threats, administrative agencies and businesses have in recent years increasingly used stress tests. Stress tests simulate doomsday scenarios to ensure that the organization is prepared to respond. For example, agencies role-played a deadly pandemic spreading from China to the United States the year before COVID-19, acted out responses to a hypothetical hurricane striking New Orleans months before Hurricane Katrina devastated the city, and required banks to model their ability to withstand a recession prior to the economic downturn of 2020. But too often these exercises have failed to significantly improve readiness …

Initial Public Offering And Optimal Corporate Governance, Albert H. Choi

Law & Economics Working Papers

This paper examines the long-standing debate over whether firms have a market-based incentive to adopt optimal governance provisions at their initial public offering (IPO). Various scholars and practitioners have argued that firms that offer stock to the public with suboptimal governance structure will be penalized by the market through a lower IPO price. At the same time, others have documented empirical evidence that many IPO firms have putatively suboptimal governance provisions, such as anti-takeover provisions and dual class structure, and many, especially those with dual-class structure, enjoy a market premium at their IPO. This paper attempts to bridge this gap. …

Corporate Governance Reform And The Sustainability Imperative, Christopher Bruner

Scholarly Works

Recent years have witnessed a significant upsurge of interest in alternatives to shareholder-centric corporate governance, driven by a growing sustainability imperative—widespread recognition that business as usual, despite the short-term returns generated, could undermine social and economic stability and even threaten our long-term survival if we fail to grapple with associated costs. We remain poorly positioned to assess corporate governance reform options, however, because prevailing theoretical lenses effectively cabin the terms of the debate in ways that obscure many of the most consequential possibilities. According to prevailing frameworks, our options essentially amount to board-versus-shareholder power, and shareholder-versus stakeholder purpose. This narrow …

Emergency Bylaws: An Underutilized Tool For Corporate Operation During An Emergency, Grace Myers

William & Mary Business Law Review

Emergency bylaws are an underutilized tool for corporate governance whose importance has been highlighted by COVID-19. Emergency bylaws can be included within corporations’ bylaws and only operate during an “emergency” as defined by state statutes. These provisions usually give boards more agency to act during an emergency through mechanisms such as looser quorum and notice requirements. These provisions will be increasingly important during future pandemics, wars, and global warming. However, few corporations have these bylaws, and the current hodgepodge of state statutes hinders their adoption. The current state of emergency bylaws regulation and implementation raises some questions about shareholder rights …

The Corporate Forum, Christina M. Sautter, Sergio Alberto Gramitto Ricci

Journal Articles

In this response to Professor Jill Fisch’s article "GameStop and the Reemergence of the Retail Investor," we focus on one of the risks associated with the growth of retail investing that Fisch surveys, uncontrolled information sourcing. Drawing on our work on retail investors, we revisit an instrument dear to the U.S. Securities and Exchange Commission, whose potential has not been unleashed so far, the corporate forum. Our response succinctly discusses the main mechanics of the corporate forum, the benefits the corporate forum could provide, and the feasibility hurdles that might undermine the success of corporate forums.

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 …

Board Gatekeepers, Yaron G. Nili

Emory Law Journal

For the last decade, investors, scholars, and regulators have turned to independent directors in key leadership positions as a means to safeguard corporate boards’ ability to serve as a robust check on management’s power. As a result, a vast majority of public companies’ boards are now led by an Independent Chair, or, alternatively, include a Lead Independent Director.

These ostensible outsiders—which this Article calls “board gatekeepers”— are meant to be even more empowered and detached from management compared to the rest of the board. This allows them to serve an independent gatekeeping function—a necessary guardrail against management’s ability to exert …

Teaching Theranos, Priya Baskaran

Tennessee Law Review

The story of Theranos and disgraced CEO Elizabeth Holmes highlights numerous missed opportunities for effective intervention by corporate counsel. In particular, the lawyers at Theranos served as weak gate-keepers who were easily steamrolled by a power-drunk entrepreneur. The dominant business law pedagogy contributes to this problem by emphasizing litigation mitigation as the primary function of corporate lawyers. This framing improperly minimizes the role and influence of transactional attorneys to the detriment of all involved. Law Professors can change this narrative through much needed pedagogical innovation. Currently, any innovation in business law courses centers on the incorporation of drafting and other …

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 …

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 …

Corporate Governance Guidelines: How To Improve Disclosure And Promote Better Corporate Governance In Public Companies, Jennifer O'Hare

Florida State University Law Review

If you are a shareholder of a public corporation, you may think it would be easy to find basic information about your shareholder rights, such as whether shareholders have the right to call special stockholder meetings. You would probably assume that the information would be disclosed in the company's "Corporate Governance Guidelines," (CGGs) which, according to a New York Stock Exchange (NYSE) rule, must be posted on the company's website for shareholder review. But, as this article shows, companies are not required to disclose information about shareholder rights in their corporate governance guidelines, and most companies have chosen not to …

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 …

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 …

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 …

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 …

The Banker Removal Power, Da Lin, Lev Menand

Faculty Scholarship

The Federal Reserve (“the Fed”) can remove bankers from office if they violate the law, engage in unsafe or unsound practices, or breach their fiduciary duties. The Fed, however, has used this power so rarely that few even realize it exists. Although major U.S. banks have admitted to repeated and flagrant lawbreaking in recent years, the Fed has never removed a senior executive from one of these institutions.

This Article offers the first comprehensive account of the banker removal power. It makes four contributions. First, drawing on a range of primary sources, it recovers the power’s statutory foundations, showing that …

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 …

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.

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) …

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 …

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 …