Law Commons^™

Impact Investing As A Form Of Lobbying And Its Corporate-Governance Effects, Andrzej Rapaczynski

Faculty Scholarship

Impact investment is attractive to many because it seems to combine support for progressive causes with an apparent commitment to the principles of a market economy. In fact, however, a rational impact investor is not simply creating demand for certain types of corporate actions; he/she is attempting to use corporate governance mechanisms to influence fiduciary decisions of the management. The cost of this tactic for the health of the capitalist economy is potentially very considerable. The American capitalist system relies heavily on a relatively fragile corporate governance arrangement in which the agency problems of a modern corporation are minimized by …

Four Pillars To Build A New Corporate Law Federalism: Crowd Funding Exchanges, A Codified Internal Affairs Doctrine, City-Based Incorporation, And An Arbitrated Corporate Code, J.W. Verret

John W Verret

This article examines the event window opened by the pending creation of new crowdfunding platforms, a new means of creating publicly traded equity for smaller, early stage firms than have ever been permitted by the Securities and Exchange Commission to access the public securities markets. That event window could support a completely new paradigm for the development of corporation law and completely upend existing wisdom about interstate competition to develop corporate governance. This article considers the economics of crowdfunding precursors which share some of the attributes of equity crowdfunding, and also considers the expected attributes of equity crowdfunding, to demonstrate …

Person, State Or Not: The Place Of Business Corporations In Our Constitutional Order, Daniel J.H. Greenwood

Daniel J.H. Greenwood

Business corporations are critical institutions in our democratic republican market-based economic order. The United States Constitution, however, is completely silent as to their status in our system. The Supreme Court has filled this silence by repeatedly granting corporations rights against the citizenry and its elected representatives.

Instead, we ought to view business corporations, like municipal corporations, as governance structures created by We the People to promote our general Welfare. On this social contract view, corporations should have the constitutional rights specified in the text: none. Instead, we should be debating which rights of citizens against governmental agencies should also apply …

Employee Say-On-Pay: Monitoring And Legitimizing Executive Compensation, Robert J. Rhee

Robert Rhee

This Article proposes the adoption of employee say-on-pay in corporate governance. The board would benefit from an advisory vote of employees on executive compensation. This proposal is based on two considerations: firstly, the benefits of better monitoring and reduced agency cost in corporate governance; secondly, the link between executive compensation and income inequity and wealth disparity in the broader economy. If adopted, shareholders and employees would monitor executive performance and pay at different levels. Shareholders through the market mechanism can only monitor at the level of public disclosures and share price. Employees can leverage private information. Non-executive managers in particular …

Rediscovering Corporate Governance In Bankruptcy, David A. Skeel Jr.

All Faculty Scholarship

In this Essay on Lynn LoPucki and Bill Whitford’s corporate reorganization project, written for a symposium honoring Bill Whitford, I begin by very briefly describing its historical antecedents. The project draws on the insights and perspectives of two closely intertwined traditions: the legal realism of 1930s, whose exemplars included William Douglas and other participants in the SEC study; and the law in action movement at the University of Wisconsin. In Section II, I briefly survey the key contributions of the corporate governance project, which punctured the then-conventional wisdom about the treatment of shareholders in bankruptcy, managers’ principal allegiance, and many …

Confronting The Peppercorn Settlement In Merger Litigation: An Empirical Analysis And A Proposal For Reform, Jill E. Fisch, Sean J. Griffith, Steven M. Davidoff

All Faculty Scholarship

Shareholder litigation challenging corporate mergers is ubiquitous, with the likelihood of a shareholder suit exceeding 90%. The value of this litigation, however, is questionable. The vast majority of merger cases settle for nothing more than supplemental disclosures in the merger proxy statement. The attorneys that bring these lawsuits are compensated for their efforts with a court-awarded fee. This leads critics to charge that merger litigation benefits only the lawyers who bring the claims, not the shareholders they represent. In response, defenders of merger litigation argue that the lawsuits serve a useful oversight function and that the improved disclosures that result …

Downstream Securities Regulation, Anita Krug

All Faculty Scholarship

Securities regulation wears two hats. Its “upstream” side governs firms in connection with their obtaining financing in the securities markets. That is, it regulates firms’ and issuers’ offers and sales of securities, whether in public offerings to retail investors or in private offerings to institutional investors. Its “downstream” side, by contrast, governs financial services providers, who assist with investors’ activities in those markets. Their services include providing advice regarding securities investments, as investment advisers do; aggregating investors’ assets for purposes of enabling those investors to invest their assets collectively, as mutual funds do; and acting as “middlemen” between buyers and …

A Comparative Study Of Monitoring Of Management In German And U.S. Corporations After Sarbanes-Oxley: Where Are The German Enrons, Worldcoms, And Tycos?, Florian Stamm

Georgia Journal of International & Comparative Law

No abstract provided.

Present At The Creation: Reflections On The Early Years Of The National Association Of Corporate Directors, Lawrence J. Trautman

Lawrence J. Trautman Sr.

Effective corporate governance is critical to the productive operation of the global economy and preservation of our way of life. Excellent governance execution is also required to achieve economic growth and robust job creation in any country. In the United States, the premier director membership organization is the National Association of Corporate Directors (NACD). Since 1978, NACD plays a major role in fostering excellence in corporate governance in the United States and beyond. The NACD has grown from a mere realization of the importance of corporate governance to become the only national membership organization created by and for corporate directors. …

Confronting The Peppercorn Settlement In Merger Litigation: An Empirical Analysis And A Proposal For Reform, Jill E. Fisch, Sean J. Griffith, Steven M. Davidoff

Steven Davidoff Solomon

Shareholder litigation challenging corporate mergers is ubiquitous, with the likelihood of a shareholder suit exceeding 90%. The value of this litigation, however, is questionable. The vast majority of merger cases settle for nothing more than supplemental disclosures in the merger proxy statement. The attorneys that bring these lawsuits are compensated for their efforts with a court-awarded fee. This leads critics to charge that merger litigation benefits only the lawyers who bring the claims, not the shareholders they represent. In response, defenders of merger litigation argue that the lawsuits serve a useful oversight function and that the improved disclosures that result …

Corporate Governance Theory And Review Of Board Decisions, Christopher M. Bruner

Scholarly Works

No abstract provided.

Separation Anxiety: A Cautious Endorsement Of The Independent Board Chair, Lisa Fairfax

All Faculty Scholarship

This Article critically examines the competing arguments related to splitting the roles of CEO and board chair. Although the campaign for independent board chairs has received increased attention from shareholders and regulators, there has been very little academic analysis of such campaign. This Article seeks to fill this void not only by examining the campaign, but also by assessing its implications in light of the available empirical evidence and normative claims. Based on this assessment, this Article offers two conclusions. First, while there appear to be costs associated with splitting the roles of CEO and board chair, those costs likely …

Toward A Theory Of Shareholder Leverage, Lisa Fairfax

All Faculty Scholarship

On Friday, April 11, and Saturday, April 12, 2014, the UCLA School of Law Lowell Milken Institute for Business Law and Policy sponsored a conference on competing theories of corporate governance.

Corporate law and economics scholarship initially relied mainly on agency cost and nexus of contracts models. In recent years, however, various scholars have built on those foundations to construct three competing models of corporate governance: director primacy, shareholder primacy, and team production.

The shareholder primacy model treats the board of directors as agents of the shareholders charged with maximizing shareholder wealth. Scholars such as Lucian Bebchuk working with this …

Concentrated Ownership And Corporate Control: Wallenberg Sphere And Samsung Group, Hwa-Jin Kim

Articles

Samsung Group’s success cannot be attributed to its corporate governance structure, at least thus far. The corporate governance of Samsung has been rather controversial. As the group faces the succession issue the corporate governance has become as crucial as their new products and services. Samsung has discovered a role model on the other side of the planet, Wallenberg Sphere in Sweden. Much effort has been made to learn about Wallenberg’s arrangements and key to its success. However, a fundamental difference between the institutions in Sweden and Korea has made the corporate structures of the two groups radically different. Wallenberg uses …

The Nordic Model Of Corporate Governance: The Role Of Ownership, Ronald J. Gilson

Faculty Scholarship

It is commonplace to credit the invention of the public corporation as an important engine of economic growth. The creation of a long-lived vehicle that gave investors both tradable shares and limited liability allowed talented managers to raise capital to fund enterprise. Writing in 1926, the Economist magazine heralded this role:

The economic historian of the future may assign to the nameless inventor of the principle of limited liability, as applied to trading corporations, a place of honor with Watt and Stephenson, and other pioneers of the Industrial Revolution. The genius of these men produced the means by which man’s …

Present At The Creation: Reflections On The Early Years Of The National Association Of Corporate Directors, Lawrence J. Trautman

Lawrence J. Trautman Sr.

Effective corporate governance is critical to the productive operation of the global economy and preservation of our way of life. Excellent governance execution is also required to achieve economic growth and robust job creation in any country. In the United States, the premier director membership organization is the National Association of Corporate Directors (NACD). Now over 36 years old, NACD plays a major role in fostering excellence in corporate governance in the United States and beyond. Over the past thirty-six years NACD has grown from a mere realization of the importance of corporate governance to become the only national membership …

Towards The Declassification Of S&P 500 Boards, Scott Hirst, Lucian A. Bebchuk, June Rhee

Faculty Scholarship

This report provides an overview and analysis of the work that the Shareholder Rights Project (SRP) undertook on behalf of a number of institutional investors during 2012 and 2013, the SRP’s first two years of operations. During 2012 and 2013, the SRP worked on behalf of eight SRP-represented investors on board declassification proposals submitted for a vote at the 2012 and/or 2013 annual meetings of 122 S&P 500 and Fortune 500 companies, and this work has produced substantial results:

100 Negotiated Outcomes: Negotiated outcomes involving a commitment to board declassification were reached with 100 S&P 500 and Fortune 500 companies, …

Sovereign Investing And Corporate Governance: Evidence And Policy, Paul Rose

Paul Rose

Discussions of corporate governance often focus solely on the attractiveness of firms to investors, but it is also true that firms seek out preferred investors. What, then, are the characteristics of an attractive investor? With nearly $6 trillion in assets, sovereign wealth funds (SWFs) are increasingly important players in equity markets in the United States and abroad, and possess characteristics that firms prize: deep pockets, long-term (and for some, theoretically infinite) investment horizons, and potential network benefits that many other shareholders cannot offer. However, despite their economic power, their reach, and their general desirability as investors, SWFs are almost entirely …

The Law Of Corporate Purpose, David Yosifon

David G. Yosifon

Delaware corporate law requires corporate directors to manage firms for the benefit of shareholders, and not for any other constituency. Delaware jurists have been clear about this in their case law, and they are not coy about it in extra-judicial settings, such as speeches directed at law students and practicing members of the corporate bar. Nevertheless, the reader of leading corporate law scholarship is continually exposed to the scholarly assertion that the law is ambiguous or ambivalent on this point, or even that case law affirmatively empowers directors to pursue non-shareholder interests. It is shocking, and troubling, for corporate law …

Investment Company As Instrument: The Limitations Of The Corporate Governance Regulatory Paradigm, Anita Krug

All Faculty Scholarship

U.S. regulation of public investment companies (such as mutual funds) is based on a notion that, from a governance perspective, investment companies are simply another type of business enterprise, not substantially different from companies that produce goods or provide (noninvestment) services. In other words, investment company regulation is founded on what this Article calls a “corporate governance paradigm,” in that it provides a significant regulatory role for boards of directors, as the traditional governance mechanism in business enterprises, and is “entity centric,” focusing on intraentity relationships to the exclusion of superentity ones. This Article argues that corporate governance norms, which …

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 …

Shareholders And Social Welfare, William W. Bratton, Michael L. Wachter

All Faculty Scholarship

This article addresses the question whether (and how) the shareholders matter for social welfare. Answers to the question have changed over time. Observers in the mid-twentieth century believed that the socio-economic characteristics of real world shareholders were highly pertinent to social welfare inquiries. But they went on to conclude that there followed no justification for catering to shareholder interest, for shareholders occupied elite social strata. The answer changed during the twentieth century’s closing decades, when observers came to accord the shareholder interest a key structural role in the enhancement of economic efficiency even as they also deemed irrelevant the characteristics …

Independent Directors And Shared Board Control In Venture Finance, Brian J. Broughman

Articles by Maurer Faculty

In most VC-backed firms neither the entrepreneurs nor the VC investors control the board. Instead control is typically shared with a mutually appointed independent director holding the tie-breaking seat. Contract theory, which treats control as an indivisible right held by one party, does not have a good explanation for this practice. Using a bargaining game similar to final offer arbitration, I show that an independent director as tie-breaker can reduce holdup by moderating each party’s ex post threat position, potentially expanding the range of firms which receive external financing. This project contributes to the literature on incomplete contracting and holdup, …

Proposals For Corporate Governance Reform: Six Decades Of Ineptitude And Counting, Douglas M. Branson

Articles

This article is a retrospective of corporate governance reforms various academics have authored over the last 60 years or so, by the author of the first U.S. legal treatise on the subject of corporate governance (Douglas M. Branson, Corporate Governance (1993)). The first finding is as to periodicity: even casual inspection reveals that the reformer group which controls the "reform" agenda has authored a new and different reform proposal every five years, with clock-like regularity. The second finding flows from the first, namely, that not one of these proposals has made so much as a dent in the problems that …

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 …

Adapting To The New Shareholder-Centric Reality, Edward B. Rock

All Faculty Scholarship

After more than eighty years of sustained attention, the master problem of U.S. corporate law—the separation of ownership and control—has mostly been brought under control. This resolution has occurred more through changes in market and corporate practices than through changes in the law. This Article explores how corporate law and practice are adapting to the new shareholder-centric reality that has emerged.

Because solving the shareholder–manager agency cost problem aggravates shareholder–creditor agency costs, I focus on implications for creditors. After considering how debt contracts, compensation arrangements, and governance structures can work together to limit shareholder–creditor agency costs, I turn to available …

Janus Capital Group, Inc. V. First Derivative Traders: Further Limited Liability, And Missing An Opportunity To Curb Corporate Misconduct, Zachary K. Ostro

Journal of Business & Technology Law

No abstract provided.

Beyond Economics In Pay For Performance, Tamara C. Belinfanti

Articles & Chapters

This article argues that while much of the intellectual energy has focused on the economics of executive pay, the challenge of executive compensation is as much a challenge of human behavior as it is one of economics. The raison d’etre of pay for performance (PFP) is to motivate executives to make decisions that are in the best interest of their firm and its shareholders. Attention to the relevant individual, situational, cultural, and institutional dynamics (what I term “behavioral dynamics”) that affect how executives are motivated and how they value future rewards is critical for the sustainability of PFP as a …

Shareholder Eugenics In The Public Corporation, Edward B. Rock

All Faculty Scholarship

In a world of active, empowered shareholders, the match between shareholders and public corporations can potentially affect firm value. This article examines the extent to which publicly held corporations can shape their shareholder base. Two sorts of approaches are available: direct/recruitment strategies; and shaping or socialization strategies. Direct/recruitment strategies through which “good” shareholders are attracted to the firm include: going public; targeted placement of shares; traditional investor relations; the exploitation of clientele effects; and de-recruitment. “Shaping” or “socialization” strategies in which shareholders of a “bad” or unknown type are transformed into shareholders of the “good” type include: choice of domicile; …

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

Faculty Journal Articles and Book Chapters

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 — …