Business Organizations Law Commons^™

The Limits Of Corporate Governance, Cathy Hwang, Emily Winston

Seattle University Law Review

What is the purpose of the corporation? For decades, the answer was clear: to put shareholders’ interests first. In many cases, this theory of shareholder primacy also became synonymous with the imperative to maximize shareholder wealth. In the world where shareholder primacy was a north star, courts, scholars, and policymakers had relatively little to fight about: most debates were minor skirmishes about exactly how to maximize shareholder wealth.

Part I of this Essay discusses the shortcomings of shareholder primacy and stakeholder governance, arguing that neither of these modes of governance provides an adequate framework for incentivizing corporations to do good. …

The Rise Of Corporate Guidelines In The United States, 2005-2021: Theory And Evidence, Asaf Eckstein

Indiana Law Journal

Institutional investors are legally obliged to be faithful stewards of their portfolio companies. Yet, the conventional wisdom among commentators is that institutional investors have failed to perform this obligation because they are not incentivized to make adequate investments in corporate governance. This Article contends that this criticism is based on an incomplete analysis that misses a critical aspect of the operation of institutional investors. The critics focus exclusively on institutional investors’ efforts in actively engaging with the managements of their portfolio companies. They ignore, however, an important passive governance tool that institutional investors routinely use: corporate guidelines. Corporate guidelines are …

Corporate Governance And Gender Equality: A Study Of Comply-Or-Explain Disclosure Regulation, Aaron A. Dhir, Sarah Kaplan, Maria Arabella Robles

Seattle University Law Review

In 2020, the Nasdaq Stock Market filed a proposal with the U.S. Securities and Exchange Commission seeking permission to adopt a board diversity-related disclosure requirement for its listed companies. In 2021, the SEC approved the proposal, thus entrenching Nasdaq’s position as the most significant stock exchange to date to mandate listing rules that reflect the intention of diversifying corporate boardrooms. Nasdaq’s movement into the diversity space is not the first attempt to address homogeneous boards in the U.S. In 2009, the SEC adopted a rule requiring publicly traded firms to report on whether they consider diversity in identifying director nominees. …

Artificial Intelligence And Corporate Decisions: Fantasy, Reality Or Destiny, Jingchen Zhao

Catholic University Law Review

Fueled by the ever-growing significance of big data and advances in AI, tasks in relation to decision-making in contemporary societies have been increasingly delegated to AI at different levels. While there is massive investment all over the world related to one side of AI, namely engineering, it is also important to create rules and competence related to humanistic AI and its effects on people and societies. This article aims to examine AI’s role in the boardroom and associated legal challenges, by exploring the interplay between AI and corporate law and governance. We observe that the delegation of board tasks to …

Good Corporate Governance Policies And Disclosure Mechanisms In Startup Companies, Yahel Kaplan

University of Miami Business Law Review

In the past decades, particularly following the collapse of huge corporation such as WorldCom and Enron due to dubious or illegal financial management, countries began gradually increasing the oversight of publicly traded companies with few jurisdictions conjuring recommended corporate governance codes (RCGC) to ensure sufficient oversight, reduce manager’s ability to loot their companies, and ensure that shareholders’ and stakeholders’ interests are monitored effectively by companies. While RCGC was intended namely for public company, several organizations called for the adoption of RCGC in startup companies. Startup companies suffer from various failures which the classic corporate laws are not equipped to address …

The Use And Misuse Of Fiduciary Duties: Corporate Social Responsibility And The Standard Of Review, Jonathan R. Povilonis

William & Mary Business Law Review

This Article provides a crucial corrective to the “corporate social responsibility” debate, which concerns whether corporations have the obligation to protect or serve the interests of groups other than their shareholders, like employees or customers (often called “stakeholders”). Scholars on one side of the debate have repeatedly presumed that corporate directors’ fiduciary duties to shareholders play an important role in protecting shareholders from decisions that favor stakeholders at their expense. Scholars on the other side agree that fiduciary duties provide meaningful protection against unfavorable conduct but argue that directors should also owe fiduciary duties to stakeholders so they may be …

Designing Dual-Class Sunsets: The Case For A Transfer-Centered Approach, Marc T. Moore

William & Mary Business Law Review

Dual-class stock (DCS) structures, and their implications for managerial accountability and corporate governance more broadly, have become prevalent concerns for corporate lawyers and policymakers. Recent academic and practitioner debates on DCS have tended to focus less on the general merits and drawbacks of DCS versus one share/one vote structures, and more on the specific common-ground concern as to whether and how such structures are subjected to contingent reversal or “sunset”. This Article compares the relative advantages and disadvantages of time-, ownership- and transfer-centered models of DCS sunset provisions. It argues in favor of the transfer-centered model on the grounds that: …

Sacred Corporate Law, Giancarlo Anello, Mohamed Arafa, Sergio Alberto Gramitto Ricci

Seattle University Law Review

This Article investigates the sacred origins of the corporate form. It sheds light on the sacred rituals performed to establish Ancient Roman cities as legal entities. It discusses the role of the Roman Catholic Church in developing the corporate form and in giving birth to a systemized set of rules regulating corporations, which we commonly call corporate law. It analyzes the limitations to the use of the corporate form in Islamic law as well as the streams of Islamic law jurisprudence that recognize legal capacity to specific entities with religious, social, or charitable purposes. It surveys the characteristics of two …

Spirit Of The Corporation, Russell Powell

Seattle University Law Review

Christian theologians have analyzed the productive and destructive qualities of institutions, sometimes attributing to them human virtues and vices. In City of God, Saint Augustine describes a utopian vision of human community within a Christian context as an alternative to the flawed “City of Man.” Contemporary theologians and sociologists have described collective structures of human behavior in institutions as having a kind of “spirit” analogous to the individual human “spirit.” Institutions are then assumed to take on an existence separate from the individuals within them, and in fact, the “spirit” of an institution influences the behavior of individuals. In The …

Spirit Of The Corporation, Russell Powell

Seattle University Law Review

This Article provides a contemporary theoretical framework for Berle’s insight as a basis for considering its legal and ethical implications for corporate governance. Part II attempts to unpack contemporary understandings of spirit in order to provide a helpful working definition. Part III considers the origins and essential traits of the modern business corporation in the United States. The question posed by Berle—whether corporations can or ought to have a sort of moral orientation—is discussed in Part IV, while Part V ponders potential policy shifts that might tilt the orientation of the “spirit of the corporation” toward the common good. Part …

Externalities And The Common Owner, Madison Condon

Washington Law Review

Due to the embrace of modern portfolio theory, most of the stock market is controlled by institutional investors holding broadly diversified economy-mirroring portfolios. Recent scholarship has revealed the anti-competitive incentives that arise when a firm’s largest shareholders own similarly sized stakes in the firm’s industry competitors. This Article expands the consideration of the effects of common ownership from the industry level to the market portfolio level and argues that diversified investors should rationally be motivated to internalize intra-portfolio negative externalities. This portfolio perspective can explain the increasing climate change related activism of institutional investors, who have applied coordinated shareholder power …

Cybersecurity Oversight Liability, Benjamin P. Edwards

Georgia State University Law Review

A changing cybersecurity environment now poses a significant corporate-governance challenge. Although some cybersecurity data breaches may be inevitable, courts now increasingly consider when a corporation’s officers and directors may be held liable on theories that they acted in bad faith and failed to adequately oversee the corporation’s affairs. This short essay reviews recent derivative decisions and encourages corporate boards to recognize that in an environment filled with increasing threats, a reasonable response will require devoting real resources and attention to cybersecurity issues.

Interpreting Organizational "Contracts" And The Private Ordering Of Public Company Governance, Megan Wischmeier Shaner

William & Mary Law Review

Corporate law is undergoing an explosion of governance by private ordering. With increasing frequency and creativity, the charter and bylaws of public corporations are being used as tools for restructuring key aspects of corporate governance. The current focus of parties, courts, and scholars has been on the facial validity of these efforts. In light of courts’ willingness to uphold corporate governance contracting, legal battles will morph from validity challenges to interpretation disputes. Yet interpretation principles are a topic to which corporate scholars have devoted limited attention. With interpretation poised to take on an influential role in shaping corporate law and …

From Value Protection To Value Creation: Rethinking Corporate Governance Standards For Firm Innovation, Roger M. Barker, Iris H-Y Chiu

Fordham Journal of Corporate & Financial Law

A company’s pro-innovation needs are often met by the exploitation of its resources, widely defined. The resource-based theory of the firm provides immense empirical insights into how a firm’s corporate governance factors can contribute to promoting innovation. However, these implications may conflict with the prevailing standards of corporate governance imposed on many securities markets for listed companies, which have developed based on theoretical models supporting a shareholder-centered and agency-based theory of the firm. Although prevailing corporate governance standards can to an extent support firm innovation, tensions are created in some circumstances where companies pit their corporate governance compliance against resource-based …

Mutuals: An Area Of Legal Climate Change, Karl T. Muth, Andrew Leventhal

William & Mary Business Law Review

Underappreciated in its importance and often-misunderstood in its implications, the choice between a company limited by shares and a company organized as a mutual is an important decision in sectors ranging from agriculture to banking to insurance. Adding gravity to this particular decision is the difficulty and enormous cost of corporate metamorphosis between company types later in the company’s life. The authors examine the history of the mutual form, its popularity’s rise and fall during the twentieth century, and its advantages and disadvantages in today’s environment.

The Power Few Of Corporate Compliance, Todd Haugh

Georgia Law Review

Corporate compliance in most companies is carried out under the assumption that unethical and illegal conduct occurs in a more or less predictable fashion. That is, although corporate leaders may not know precisely when, where, or how compliance failures will occur, they assume that unethical employee conduct will be sprinkled throughout the company in a roughly normal distribution, exposing the firm to compliance risk but in a controllable manner. This assumption underlies many of the common tools of compliance — standardized codes of conduct, firm-wide compliance trainings, and uniform audit and monitoring practices. Because regulators also operate under this assumption, …

Can Taxes Mitigate Corporate Governance Inefficiencies?, Noam Noked

William & Mary Business Law Review

Policymakers have long viewed tax policy as an instrument to influence and change corporate governance practices. Certain tax rules were enacted to discourage pyramidal business structures and large golden parachutes, and to encourage performance-based compensation. Other proposals, such as imposing higher taxes on excessive executive compensation, have also attracted increasing attention.

Contrary to this view, this Article contends that the ability to effectively mitigate corporate governance inefficiencies through the use of corrective taxes is very limited, and that these taxes may cause more harm than benefit. There are a few reasons for the limited effectiveness of corrective taxes. Importantly, the …

Distributed Governance, Carla L. Reyes, Nizan Geslevich Packin, Ben Edwards

William & Mary Law Review Online

Distributed ledger technology disrupts traditional business organizations by introducing new business entities without the directors and officers of traditional corporate entities. Although these emerging entities offer intriguing possibilities, distributed entities may suffer significant collective action problems and expose investors to catastrophic regulatory and governance risks. Our Article examines key considerations for stakeholders and argues that distributed entities must be carefully structured to function effectively. This Article breaks new ground by critically examining distributed entities. We argue that a distributed model is most appropriate when distributed ledger technology solves a unique corporate governance problem. We caution against ignoring the lessons painstakingly …

Is There Hope For Change? The Evolution Of Conceptions Of Good Corporate Governance, Lynne L. Dallas

San Diego Law Review

To provide a useful perspective on corporate governance today, this Article examines the evolution of conceptions of “good” corporate governance that have successively revolutionized the corporate landscape. By the use of “evolution,” I do not mean some natural evolution, but changes in the beliefs of managers concerning how to run their businesses effectively. “Good” corporate governance refers to what is perceived as good from the point of view of firm managers and may or may not translate into what is good for society. This Article shows that corporate decision making was influenced over the years by successive, rationalized ideals of …

Balancing The Governance Of Financial Institutions, David Min

Seattle University Law Review

Part I briefly describes the traditional agency–cost approach to corporate governance and the rationale that is offered for elevating the agency–cost concerns of shareholders over those of other stakeholders (especially creditors). But as Part I goes on to argue, even if this justification for shareholder primacy is convincing in corporate governance generally (and there are many who do not find it so), several unique characteristics of banks obviate the reasoning behind shareholder primacy. Banks are highly leveraged, which exacerbates creditor–shareholder agency conflicts and places greater importance on the interests of creditors. Banks enjoy government guarantees, and thus their corporate governance …

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

William & Mary Law Review

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.

Corporate Governance In An Era Of Compliance, Sean J. Griffith

William & Mary Law Review

Compliance is the new corporate governance. The compliance function is the means by which firms adapt behavior to legal, regulatory, and social norms. Formerly, this might have been conceived as a typical governance matter to be handled at the discretion of the board of directors. Compliance, however, does not fit traditional models of corporate governance. It does not come from the board of directors, state corporate law, or federal securities law. Compliance amounts instead to an internal governance structure imposed upon the firm from the outside by enforcement agents. This insight has important implications, both practical and theoretical, for corporate …

"Special," Vestigial, Or Visionary? What Banking Regulation Tells Us About The Corporation—And Vice Versa, Robert C. Hockett, Saule T. Omarova

Seattle University Law Review

A remarkable yet seldom noted set of parallels exists between modern U.S. bank regulation, on the one hand, and what used to be garden-variety American corporate law, on the other hand. For example, just as bank charters are matters not of right but of conditional privilege even today, so were all corporate charters not long ago. Just as chartered banks are authorized to engage only in limited, enumerated activities even today, so were all corporations restricted not long ago. And just as banks are subject to strict capital regulation even today, so were all corporations not long ago. In this …

Corporations In The Flow Of Culture, Greg Urban

Seattle University Law Review

As an anthropologist, coming out of three decades of research among indigenous Brazilian populations, I naturally saw modern for-profit business corporations as tribes—the collective bearers of adaptive cultural know-how. They appeared to me to be the entities housing the culture needed to produce commodities, to trade commodities on the open market, or both. I was also, of course, aware of the legal concept of the corporation as fictive person capable of owning property and having standing in court cases, which I thought of as akin to the anthropological corporation insofar as both recognized the group as social actor. However, it …

The Theory Of Fields And Its Application To Corporate Governance, Neil Fligstein

Seattle University Law Review

My goal here is twofold. First, I want to introduce the theory of strategic action fields to the law audience. The main idea in field theory in sociology is that most social action occurs in social arenas where actors know one another and take one another into account in their action. Scholars use the field construct to make sense of how and why social orders emerge, reproduce, and transform. Underlying this formulation is the idea that a field is an ongoing game where actors have to understand what others are doing in order to frame their actions. Second, I want …

The Rhetoric Of Negative Externalities, Claire A. Hill

Seattle University Law Review

Negative externalities are costs imposed on third parties. The paradigmatic example is pollution. A firm manufactures a product that generates toxic waste, and dumps the waste; society pays for the associated cost, including, for instance, the community’s health problems caused by the waste. Profit is supposed to measure the firm’s revenues in excess of the associated costs; because this cost is not included, the firm’s profits are higher than they should be, and there is more pollution than there should be. What is privately optimal diverges from what is socially optimal. The concept of negative externalities is intuitively appealing. It …

Corporate Social Responsibility & Concession Theory, Stefan J. Padfield

William & Mary Business Law Review

This Essay examines three related propositions: (1) Voluntary corporate social responsibility (CSR) fails to effectively advance the agenda of a meaningful segment of CSR proponents; (2) None of the three dominant corporate governance theories—director primacy, shareholder primacy, or team production theory—support mandatory CSR as a normative matter; and, (3) Corporate personality theory, specifically concession theory, can be a meaningful source of leverage in advancing mandatory CSR in the face of opposition from the three primary corporate governance theories. In examining these propositions, this Essay makes the additional claims that Citizens United: (A) supports the proposition that corporate personality theory matters; …

The Evolution Of Corporate Governance In Japan: The Continuing Relevance Of Berle And Means, Takaya Seki, Thomas Clarke

Seattle University Law Review

The evolution of corporate governance in Japan towards international standards continues, though at a gradual pace that often concerns outsiders. The substance of Japanese corporate governance is often questioned due to a lack of understanding of the unique elements of the Japanese institutional system. Japanese companies are under a sustained assault from overseas investors to introduce a greater number of independent directors on boards, improve accountability, and enhance transparency. The majority of Japanese companies have taken what they regard as significant steps in this direction of accountability. In Japan, however, there is a different conception of the role of the …

State Capital: Global And Australian Perspectives, George Gilligan, Megan Bowman

Seattle University Law Review

The activities of state-related pools of capital need to be understood within the context of an era of globalization, in which economic and political ties between many jurisdictions are deepening, A variety of modes of governance are emerging that have a capacity for impacts of broad international scope. The rising influence of more proactive state-led capitalism is one of the shaping variables in how the global economy has been changing swiftly in recent decades, and the effects of the Global Financial Crisis have arguably accelerated these structural shifts. This Article identifies three discrete phenomena in the state capital arena. First, …

What Is A Corporation? Liberal, Confucion, And Socialist Theories Of Enterprise Organization (And State, Family, And Personhood), Teemu Ruskola

Seattle University Law Review

What is a corporation? An easy, but not very informative, answer is that it is a legal person. More substantive answers suggest it is a moral person, a person/thing, a production team, a nexus of private agreements, a city, a semi-sovereign, or a (secular) God. Despite the economic, political, and social importance of the corporate form, we do not have a generally accepted legal theory of what a corporation is, apart from the law’s questionable assertion that it is a “person.” In this Article, the author places the idea, and law, of the corporation in a comparative context and suggests …