Digital Commons Network^™

Cultivating Quality: Ten Tools Managers Can Use To Get Long-Term Committed Shareholders, Lawrence A. Cunningham

GW Law Faculty Publications & Other Works

Special Note: This Article is part of The Quality Shareholder Initiative at the Center for Law, Economics and Finance (C-LEAF), at The George Washington University Law School, Prof. Lawrence A. Cunningham, Faculty Director. Considerable effort goes into forging tools a corporation can use to shape its shareholder base. Much effort is geared toward promoting long investor time horizons, presumed to be a valuable but rare appetite among many shareholders. Less attention has been focused on promoting greater commitment, though attracting shareholders willing to stake large percentages of their portfolio in a given company’s stock may prove way more valuable than …

Risk And Anxiety: A Theory Of Data Breach Harms, Daniel J. Solove, Danielle Citron

GW Law Faculty Publications & Other Works

In lawsuits about data breaches, the issue of harm has confounded courts. Harm is central to whether plaintiffs have standing to sue in federal court and whether their claims are viable. Plaintiffs have argued that data breaches create a risk of future injury from identity theft or fraud and that breaches cause them to experience anxiety about this risk. Courts have been reaching wildly inconsistent conclusions on the issue of harm, with most courts dismissing data breach lawsuits for failure to allege harm. A sound and principled approach to harm has yet to emerge, resulting in a lack of consensus …

Berkshire's Blemishes: Lessons For Buffett's Successors, Peers, And Policy, Lawrence A. Cunningham

GW Law Faculty Publications & Other Works

Berkshire Hathaway’s unique managerial model is lauded for its great value; this article highlights its costs. Most costs stem from the same features that yield such great value, which boil down, ironically, to Berkshire trying to be something it isn’t: it is a massive industrial conglomerate run as an old-fashioned investment partnership. An advisory board gives unchecked power to a single manager (Warren Buffett); Buffett makes huge capital allocations and pivotal executive hiring-and-firing decisions with modest investigation and scant oversight; Berkshire’s autonomous and decentralized structure grants operating managers enormous discretion with limited second-guessing; its trust-based culture relies on a cultivated …

Deferred Prosecutions And Corporate Governance: An Integrated Approach To Investigation And Reform, Lawrence A. Cunningham

GW Law Faculty Publications & Other Works

When evaluating how to proceed against a corporate investigative target, law enforcement authorities often ignore the target’s governance arrangements, while subsequently negotiating or imposing governance requirements, especially in deferred prosecution agreements. Ignoring governance structures and processes amid investigation can be hazardous and implementing improvised reforms afterwards may have severe unintended consequences—particularly when prescribing standardized governance devices. Drawing, in part, on new lessons from three prominent cases—Arthur Andersen, AIG and Bristol-Myers Squibb—this Article criticizes prevailing discord and urges prosecutors to contemplate corporate governance at the outset and to articulate rationales for prescribed changes. Integrating the role of corporate governance into prosecutions …

Competition Agencies With Complex Policy Portfolios: Divide Or Conquer?, William E. Kovacic, David A. Hyman

GW Law Faculty Publications & Other Works

Antitrust law has been adopted by 120 jurisdictions worldwide. In more than half of these jurisdictions, the agency charged with enforcing antitrust law also has other responsibilities. The assignment of multiple regulatory tasks can affect the performance of a competition agency in complex and subtle ways. We present a framework for analyzing the consequences of creating public bodies with complex policy portfolios. Using examples from across the administrative state, we analyze the forces that shape the content of an agency’s policy duties, and how the portfolio of assigned duties affects the way an agency approaches its assigned tasks, and its …

The Uneasy Case For The Inside Director, Lisa M. Fairfax

GW Law Faculty Publications & Other Works

In the wake of recent scandals and the economic meltdown, there is nearly universal support for the notion that corporations must have independent directors. Conventional wisdom insists that independent directors can more effectively monitor the corporation and prevent or otherwise better detect wrongdoing. As the movement to increase director independence has gained traction, inside directors have become an endangered species, relegated to holding a minimal number of seats on the corporate board. This Article questions the popular trend away from inside directors by critiquing the rationales in favor of director independence, and assessing the potential advantages of inside directors. This …

The Influence Of Law And Economics On Law And Accounting: Two Steps Forward, One Step Back, Lawrence A. Cunningham

GW Law Faculty Publications & Other Works

Theory can have profound effects on practice, some intended and desirable, others unintended and undesirable. That's the story of the influence the field of law and economics has had on the domain of law and accounting. That influence comes primarily from agency theory and modern finance theory, specifically through the efficient capital market hypothesis and capital asset pricing model. Those theories have forged considerable change in federal securities regulation, accounting standard setting, state corporation law, and financial auditing. Affected areas include the nature of disclosure, the measure of financial concepts, the limits of shareholder protection, and the scope of auditor …

The End Of Corporate Law, Dalia Tsuk Mitchell

GW Law Faculty Publications & Other Works

This article examines how corporate law, specifically the rules applicable to the allocation of power among directors, executives, and shareholders, has become ineffective as a means of regulating corporate power. I argue that in the course of the twentieth century corporate law has been used first to legitimate corporate power and then to exempt those exercising it from liability. The article focuses on jurists’ responses to the growth of the publicly held corporation in the early twentieth century, their midcentury attempts to create corporate democracy, and their ultimate turn to markets as the means of regulating corporate power.

Rediscovering Board Expertise: Legal Implications Of The Empirical Literature, Lawrence A. Cunningham

GW Law Faculty Publications & Other Works

This paper reviews and draws insights from recent empirical research in financial accounting on the value of director expertise for financial reporting quality. Among important consequences of Sarbanes-Oxley is an increase in the percentage of accounting experts on boards of directors, particularly on audit committees.

The research reviewed here documents the value of this expertise in promoting financial reporting quality measured in terms of "accounting earnings management" (artificial bookkeeping manipulations). These findings contrast with well-known evidence showing little value arising from director independence.

The research holds numerous implications and raises important questions, including the following:

1. It shows that accounting …

Private Monitoring Of Gatekeepers: The Case Of Immigration Enforcement, Jeffrey Manns

GW Law Faculty Publications & Other Works

This article shows how the enlistment of private monitors can overcome the limits of public enforcers in overseeing gatekeeper compliance with liability-induced duties. Gatekeepers are private actors who possess skills or advantages that allow them to detect and prevent wrongdoing in a more cost-effective way than the state. The problem enforcers face is that the same skills or advantages that equip gatekeepers with the ability to identify wrongdoing often provide them with the means and incentives to subvert their duties and to evade public oversight. Policymakers have largely attempted to remedy this challenge by increasing sanctions against gatekeepers and have …

The Sarbanes-Oxley Act: Legal Implications And Research Opportunities, Lawrence A. Cunningham, Stephen Kwaku Asare, Arnold Wright

GW Law Faculty Publications & Other Works

Congress passed the Sarbanes Oxley Act to restore investor confidence, which had been deflated by massive business and audit failures, epitomized by the demise of the Enron Corporation and Arthur Anderson LLP. The Act altered the roles and responsibilities of auditors, corporate officers, audit committee members, as well as other participants in the financial reporting process. We evaluate the potential legal implications of some of the Act's major provisions and anticipate participants' likely responses. Our evaluation suggests that these provisions will significantly change behavior, increase compliance costs and alter the legal landscape. We also identify promising avenues for future research …

Law And Accounting: Cases And Materials, Lawrence A. Cunningham

GW Law Faculty Publications & Other Works

Accounting textbooks for law or business schools invariably provide secondary narrative presentations of materials in the authors' own words. A better approach to learning this subject is to present thematically arranged original accounting pronouncements. The design this innovative book, helps readers appreciate how accounting is a tool that provides conceptual organization to economic exchange. The tool facilitates analyzing legal, business and public policy aspects of the transactions that accounting addresses. The original accounting standards, as well as SEC enforcement actions, presented in this book illuminate why transactions are pursued and related decisions made, economic aspects of transactions, and the conceptual …

Finance Theory And Accounting Fraud: Fantastic Futures Versus Conservative Histories, Lawrence A. Cunningham

GW Law Faculty Publications & Other Works

Intellectual tension between the fields of finance and accounting may help to explain explosion of public company frauds. Finance theory diminishes the relevance of accounting information. Enron exploited this consequence while the SEC bought into it. After widespread frauds were exposed, Congress passed laws that address symptoms of finance's futurism, not disease. Laws essentially prohibit pro forma financial reporting and regulate the selective flow of futuristic information to financial analysts. Untouched is the underlying disease of regulatory mandates requiring extensive disclosure of forward-looking information. Until the 1970s, the SEC prudently prohibited such futuristic disclosure as inherently unreliable; assisted by finance …

A New Product For The State Corporation Law Market: Audit Committee Certifications, Lawrence A. Cunningham

GW Law Faculty Publications & Other Works

Audit committees of corporate boards of directors are central to corporate governance for many corporations. Their effectiveness in supervising financial managers and overseeing the financial reporting process is important to promote reliable financial statements. This centrality suggests that it is likewise important for investors and others to have a basis for justifiable confidence in audit committee effectiveness. At present, there is no such mechanism. This Article explains why, considers a way states can provide it and assesses as low the likelihood that states will do so. In the swirling corporate governance reforms led by SOX, the SEC, SROs and PCAOB, …

The Sarbanes-Oxley Yawn: Heavy Rhetoric, Light Reform (And It Might Just Work), Lawrence A. Cunningham

GW Law Faculty Publications & Other Works

A thorough examination of the much ballyhooed Sarbanes-Oxley Act reveals dominantly a federal codification of extant rules, regulations, practices, and norms. Despite advertising it as "the most far-reaching reforms of American business practices since the time of FDR," a soberly apolitical view sees the Act as more sweep than reform. Important are provisions calling for nine studies; redundant but much publicized were the certification requirements imposed during the summer of 2002; other moves are mere patchwork responses to precise transgressions present in the popularized scandals. The Act is far from trivial, however. A silver bullet relates to the structure and …

Sharing Accounting's Burden: Business Lawyers In Enron's Dark Shadows, Lawrence A. Cunningham

GW Law Faculty Publications & Other Works

A familiar pass-the-buck pas de deus in deal meetings occurs when the accountant says, after an impasse, "that's a legal problem" while the lawyer says "that's an accounting problem." The truth is, both are right; the trouble is, as Enron shows, prevailing professional cultures create a crack between law and accounting that resolute fraud artists exploit, not cultures that emphasize the intersection of law and accounting that should foil would-be fraudsters. As policymakers rush to respond to Enron, this perspective on law and accounting should be appreciated, as should Enron's place in soecity's parade of corporate debacles. At Enron's core …

Access And Aggregation: Privacy, Public Records, And The Constitution, Daniel J. Solove

GW Law Faculty Publications & Other Works

In this article, Professor Solove develops a theory to reconcile the tension between transparency and privacy in the context of public records. Federal and state governments maintain public records containing personal information spanning an individual's life from birth to death. The web of state and federal regulation that governs the accessibility of these records generally creates a default rule in open access to information. Solove contends that the ready availability of public records creates a significant problem for privacy because various bits of information when aggregated paint a detailed portrait of a person's life that Solove refers to as a …

Privacy And Power: Computer Databases And Metaphors For Information Privacy, Daniel J. Solove

GW Law Faculty Publications & Other Works

Journalists, politicians, jurists, and legal academics often describe the privacy problem created by the collection and use of personal information through computer databases and the Internet with the metaphor of Big Brother - the totalitarian government portrayed in George Orwell's Nineteen Eighty-Four. Professor Solove argues that this is the wrong metaphor. The Big Brother metaphor as well as much of the law that protects privacy emerges from a longstanding paradigm for conceptualizing privacy problems. Under this paradigm, privacy is invaded by uncovering one's hidden world, by surveillance, and by the disclosure of concealed information. The harm caused by such invasions …

Introduction To The Essays Of Warren Buffett: Lessons For Corporate America, Lawrence A. Cunningham

GW Law Faculty Publications & Other Works

This Professor Cunningham's Introduction to his edited collection of Warren Buffett's noted letters to shareholders of Berkshire Hathaway Inc. The collection was prepared for a symposium held at Cardozo Law School in New York City in 1997 and originally published in the Cardozo Law Review. The Introduction serves as an encapsulation of the main themes of the resulting collection and locates them in contemporary discourse on matters of corporate governance; corporate finance and investing; mergers and acquisitions; and accounting and taxation. Professor Cunningham subsequently published the edited collection as a book under the title The Essays of Warren Buffett: Lessons …