Securities Law Commons^™

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 …

Mutual Fund Stewardship And The Empty Voting Problem, Jill E. Fisch

All Faculty Scholarship

When Roberta Karmel wrote the articles that are the subject of this symposium, she was skeptical of both the potential value of shareholder voting and the emerging involvement of institutional investors in corporate governance. In the ensuing years, both the increased role and engagement of institutional investors and the heightened importance of shareholder voting offer new reasons to take Professor Karmel’s concerns seriously. Institutional investors have taken on a broader range of issues ranging from diversity and political spending to climate change and human capital management, and their ability to influence corporate policy on these issues has become more significant. …

Synthetic Governance, Byung Hyun Anh, Jill E. Fisch, Panos N. Patatoukas, Steven Davidoff Solomon

All Faculty Scholarship

Although securities regulation is distinct from corporate governance, the two fields have considerable substantive overlap. By increasing the transparency and efficiency of the capital markets, securities regulation can also enhance the capacity of those markets to discipline governance decisions. The importance of market discipline is heightened by the increasingly vocal debate over what constitutes “good” corporate governance.

Securities product innovation offers new tools to address this debate. The rise of index-based investing provides a market-based mechanism for selecting among governance options and evaluating their effects. Through the creation of bespoke governance index funds, asset managers can create indexes that correspond …

Reconstructing The Corporation: A Mutual-Control Model Of Corporate Governance, Grant M. Hayden, Matthew T. Bodie

All Faculty Scholarship

The consensus around shareholder primacy is crumbling. Investors, long assumed to be uncomplicated profit-maximizers, are looking for ways to express a wider range of values in allocating their funds. Workers are agitating for greater voice at their workplaces. And prominent legislators have recently proposed corporate law reforms that would put a sizable number of employee representatives on the boards of directors of large public companies. These rumblings of public discontent are echoed in recent corporate law scholarship, which has cataloged the costs of shareholder control, touted the advantages of nonvoting stock, and questioned whether activist holders of various stripes are …

The Corporation Reborn: From Shareholder Primacy To Shared Governance, Grant M. Hayden, Matthew T. Bodie

All Faculty Scholarship

The consensus around shareholder primacy is crumbling. Investors, long assumed to be uncomplicated profit-maximizers, are looking for ways to express a wider range of values in allocating their funds. Workers are agitating for greater voice at their workplaces. And prominent legislators have recently proposed corporate law reforms that would put a sizable number of employee representatives on the boards of directors of large public companies. These rumblings of public discontent are echoed in recent corporate law scholarship, which has cataloged the costs of shareholder control, touted the advantages of nonvoting stock, and questioned whether activist holders of various stripes are …

Standing Voting Instructions: Empowering The Excluded Retail Investor, Jill E. Fisch

All Faculty Scholarship

Despite the increasing importance of shareholder voting, regulators have paid little attention to the rights of retail investors who own approximately 30% of publicly traded companies but who vote less than 30% of their shares. A substantial factor contributing to this low turnout is the antiquated mechanism by which retail investors vote. The federal proxy voting rules place primary responsibility for facilitating retail voting in the hands of custodial brokers who have limited incentives to develop workable procedures, and current regulatory restrictions impede market-based innovation that incorporate technological innovations.

One of the most promising such innovations is standing voting instructions …

The Long Road Back: Business Roundtable And The Future Of Sec Rulemaking, Jill E. Fisch

All Faculty Scholarship

The Securities and Exchange Commission has suffered a number of recent setbacks in areas ranging from enforcement policy to rulemaking. The DC Circuit’s 2011 Business Roundtable decision is one of the most serious, particularly in light of the heavy rulemaking obligations imposed on the SEC by Dodd-Frank and the JOBS Act. The effectiveness of the SEC in future rulemaking and the ability of its rules to survive legal challenge are currently under scrutiny.

This article critically evaluates the Business Roundtable decision in the context of the applicable statutory and structural constraints on SEC rulemaking. Toward that end, the essay questions …

Who Calls The Shots?: How Mutual Funds Vote On Director Elections, Stephen J. Choi, Jill E. Fisch, Marcel Kahan

All Faculty Scholarship

Shareholder voting has become an increasingly important focus of corporate governance, and mutual funds control a substantial percentage of shareholder voting power. The manner in which mutual funds exercise that power, however, is poorly understood. In particular, because neither mutual funds nor their advisors are beneficial owners of their portfolio holdings, there is concern that mutual fund voting may be uninformed or tainted by conflicts of interest. These concerns, if true, hamper the potential effectiveness of regulatory reforms such as proxy access and say on pay. This article analyzes mutual fund voting decisions in uncontested director elections. We find that …

The Destructive Ambiguity Of Federal Proxy Access, Jill E. Fisch

All Faculty Scholarship

After almost seventy years of debate, on August 25, 2010, the SEC adopted a federal proxy access rule. This Article examines the new rule and concludes that, despite the prolonged rule-making effort, the new rule is ambiguous in its application and unlikely to increase shareholder input into the composition of corporate boards. More troubling is the SEC’s ambiguous justification for its rule which is neither grounded in state law nor premised on a normative vision of the appropriate role of shareholder nominations in corporate governance. Although the federal proxy access rule drew an unprecedented number of comment letters and is …

The Bizarre Law & Economics Of 'Business Roundtable V. Sec', Grant M. Hayden, Matthew T. Bodie

All Faculty Scholarship

Corporations are legal entities designed to foster certain kinds of collective economic activity. The decisionmaking power within a corporation ultimately rests with a board of directors elected by shareholders. Shareholders, however, do not use anything like a conventional ballot in these elections; instead, they fill out a “proxy ballot,” delivered to them by the incumbent board. This proxy ballot lists only the incumbent board’s chosen nominees, very often the board members themselves. If a shareholder wants to run for director or propose another nominee for the board, she needs to provide all other shareholders with a separate proxy ballot — …

Inside-Out Corporate Governance, David A. Skeel Jr., Vijit Chahar, Alexander Clark, Mia Howard, Bijun Huang, Federico Lasconi, A.G. Leventhal, Matthew Makover, Randi Milgrim, David Payne, Romy Rahme, Nikki Sachdeva, Zachary Scott

All Faculty Scholarship

Until late in the twentieth century, internal corporate governance—that is, decision making by the principal constituencies of the firm—was clearly distinct from outside oversight by regulators, auditors and credit rating agencies, and markets. With the 1980s takeover wave and hedge funds’ and equity funds’ more recent involvement in corporate governance, the distinction between inside and outside governance has eroded. The tools of inside governance are now routinely employed by governance outsiders, intertwining the two traditional modes of governance. We argue in this Article that the shift has created a new governance paradigm, which we call inside-out corporate governance.

Using the …

Arrow's Theorem And The Exclusive Shareholder Franchise, Grant M. Hayden, Matthew T. Bodie

All Faculty Scholarship

In this essay, we contest one of the main arguments for restricting corporate board voting to shareholders. In justifying the limitation of the franchise to shareholders, scholars have repeatedly turned to social choice theory—specifically, Arrow’s theorem—to justify the exclusive shareholder franchise. Citing to the theorem, corporate law commentators have argued that lumping different groups of stakeholders together into the electorate would result in a lack of consensus and, ultimately, the lack of coherence that attends intransitive social choices, perhaps even leading the corporation to self-destruct. We contend that this argument is misguided. First, we argue that scholars have greatly overestimated …

Director Elections And The Role Of Proxy Advisors, Stephen Choi, Jill E. Fisch, Marcel Kahan

All Faculty Scholarship

Using a dataset of proxy recommendations and voting results for uncontested director elections from 2005 and 2006 at S&P 1500 companies, we examine how advisors make their recommendations. Of the four firms we study, Institutional Shareholder Services (ISS), Proxy Governance (PGI), Glass Lewis (GL), and Egan Jones (EJ), ISS has the largest market share and is widely regarded as the most influential. We find that the four proxy advisory firms differ substantially from each other both in their willingness to issue a withhold recommendation and in the factors that affect their recommendation. It is not clear that these differences, or …