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Articles 1 - 30 of 32
Full-Text Articles in Law
Killing Conscience: The Unintended Behavioral Consequences Of "Pay For Performance", Lynn A. Stout
Killing Conscience: The Unintended Behavioral Consequences Of "Pay For Performance", Lynn A. Stout
Lynn A. Stout
Contemporary lawmakers and reformers often argue that ex ante incentive contracts providing for large material rewards are the best and possibly only way to motivate corporate executives and other employees to serve their firms' interests. This Article offers a critique of the "pay for performance" approach. In particular, it explores why, for a variety of mutually reinforcing reasons, workplaces that rely on ex ante incentive contracts suppress unselfish prosocial behavior (conscience) and promote selfishness and opportunism. The end result may not be more efficient, but more uncooperative, unethical, and illegal employee behavior.
Bad And Not-So-Bad Arguments For Shareholder Primacy, Lynn A. Stout
Bad And Not-So-Bad Arguments For Shareholder Primacy, Lynn A. Stout
Lynn A. Stout
In 1932, the Harvard Law Review published a debate between two preeminent corporate scholars on the subject of the proper purpose of the public corporation. On one side stood the renowned Adolph A. Berle, coauthor of the classic The Modern Corporation and Private Property. Berle argued for what is now called "shareholder primacy"—the view that the corporation exists only to make money for its shareholders. According to Berle, "all powers granted to a corporation or to the management of a corporation, or to any group within the corporation. . . [are] at all times exercisable only for the ratable …
Director Accountability And The Mediating Role Of The Corporate Board, Margaret M. Blair, Lynn A. Stout
Director Accountability And The Mediating Role Of The Corporate Board, Margaret M. Blair, Lynn A. Stout
Lynn A. Stout
One of the most pressing questions facing both corporate scholars and businesspeople today is how corporate directors can be made accountable. Before addressing this issue, however, it seems important to consider two antecedent questions: To whom should directors be accountable? And for what? Contemporary corporate scholarship often starts from a "shareholder primacy" perspective that holds that directors of public corporations ought to be accountable only to the shareholders, and ought to be accountable only for maximizing the value of the shareholders' shares. This perspective rests on the conventional contractarian assumption that the shareholders are the sole residual claimants and risk …
On The Proper Motives Of Corporate Directors (Or, Why You Don't Want To Invite Homo Economicus To Join Your Board), Lynn A. Stout
On The Proper Motives Of Corporate Directors (Or, Why You Don't Want To Invite Homo Economicus To Join Your Board), Lynn A. Stout
Lynn A. Stout
One of the most important questions in corporate governance is how directors of public corporations can be motivated to serve the interests of the firm. Directors frequently hold only small stakes in the companies they manage. Moreover, a variety of legal rules and contractual arrangements insulate them from liability for business failures. Why then should we expect them to do a good job? Conventional corporate scholarship has great difficulty wrestling with this question, in large part because conventional scholarship usually adopts the economist's assumption that directors are rational actors motivated purely by self-interest. This homo economicus model of behavior may …
How Deregulating Derivatives Led To Disaster, And Why Re-Regulating Them Can Prevent Another, Lynn A. Stout
How Deregulating Derivatives Led To Disaster, And Why Re-Regulating Them Can Prevent Another, Lynn A. Stout
Lynn A. Stout
When credit markets froze up in the fall of 2008, many economists pronounced the crisis both inexplicable and unforeseeable. That’s because they were economists, not lawyers. Lawyers who specialize in financial regulation, and especially the small cadre who specialize in derivatives regulation, understood what went wrong. (Some even predicted it.) That’s because the roots of the catastrophe lay not in changes in the markets, but changes in the law. Perhaps the most important of those changes was the U.S. Congress’s decision to deregulate financial derivatives with the Commodity Futures Modernization Act (CFMA) of 2000. Prior to 2000, off-exchange derivatives contracts …
The Shareholder Value Myth, Lynn Stout
Specific Investment: Explaining Anomalies In Corporate Law, Margaret M. Blair, Lynn A. Stout
Specific Investment: Explaining Anomalies In Corporate Law, Margaret M. Blair, Lynn A. Stout
Lynn A. Stout
This Article has two goals: to praise Professor Robert Clark as a remarkable corporate scholar, and to explore how his work has helped to advance our understanding of corporations and corporate law. Clark wrote his classic treatise at a time when corporate scholarship was dominated by a principal-agent paradigm that viewed shareholders as the principals or sole residual claimants in public corporations and treated directors as shareholders' agents. This view naturally led contemporary scholars to believe that the chief economic problem of interest in corporate law was the "agency cost" problem of getting corporate directors to do what shareholders wanted …
Derivatives And The Legal Origin Of The 2008 Credit Crisis, Lynn A. Stout
Derivatives And The Legal Origin Of The 2008 Credit Crisis, Lynn A. Stout
Lynn A. Stout
Experts still debate what caused the credit crisis of 2008. This Article argues that dubious honor belongs, first and foremost, to a little-known statute called the Commodities Futures Modernization Act of 2000 (CFMA). Put simply, the credit crisis was not primarily due to changes in the markets; it was due to changes in the law. In particular, the crisis was the direct and foreseeable (and in fact foreseen by the author and others) consequence of the CFMA’s sudden and wholesale removal of centuries-old legal constraints on speculative trading in over-the-counter (OTC) derivatives. Derivative contracts are probabilistic bets on future events. …
On The Nature Of Corporations, Lynn A. Stout
On The Nature Of Corporations, Lynn A. Stout
Lynn A. Stout
Legal experts traditionally distinguish corporations from unincorporated business forms by focusing on corporate characteristics like limited shareholder liability, centralized management, perpetual life, and free transferability of shares. While such approaches have value, this essay argues that the nature of the corporation can be better understood by focusing on a fifth, often-overlooked, characteristic of corporations: their capacity to "lock in" equity investors' initial capital contributions by making it far more difficult for those investors to subsequently withdraw assets from the firm. Like a tar pit, a corporation is much easier for equity investors to get into, than to get out of. …
Judges As Altruistic Hierarchs, Lynn A. Stout
On The Rise Of Shareholder Primacy, Signs Of Its Fall, And The Return Of Managerialism (In The Closet), Lynn Stout
On The Rise Of Shareholder Primacy, Signs Of Its Fall, And The Return Of Managerialism (In The Closet), Lynn Stout
Lynn A. Stout
In their 1932 opus "The Modern Corporation and Public Property," Adolf Berle and Gardiner Means famously documented the evolution of a new economic entity—the public corporation. What made the public corporation “public,” of course, was that it had thousands or even hundreds of thousands of shareholders, none of whom owned more than a small fraction of outstanding shares. As a result, the public firm’s shareholders had little individual incentive to pay close attention to what was going on inside the firm, or even to vote. Dispersed shareholders were rationally apathetic. If they voted at all, they usually voted to approve …
Shareholder As Ulysses: Some Empirical Evidence On Why Investors In Public Corporations Tolerate Board Governance, Lynn A. Stout
Shareholder As Ulysses: Some Empirical Evidence On Why Investors In Public Corporations Tolerate Board Governance, Lynn A. Stout
Lynn A. Stout
This Article evaluates two possible explanations for why shareholders of public corporations tolerate board control of corporate assets and outputs: the widely accepted monitoring hypothesis, which posits that shareholders rely on boards primarily to control the "agency costs" associated with turning day-to-day control over the firm over to self-interested corporate executives, and the mediating hypothesis, which posits that shareholders also seek to "tie their own hands" by ceding control to directors as a means of attracting the extracontractual, firm-specific investments of such stakeholder groups as executives, creditors, and rank-and- file employees. Part I reviews each hypothesis and concludes that each …
Uncertainty, Dangerous Optimism, And Speculation: An Inquiry Into Some Limits Of Democratic Governance, Lynn A. Stout
Uncertainty, Dangerous Optimism, And Speculation: An Inquiry Into Some Limits Of Democratic Governance, Lynn A. Stout
Lynn A. Stout
People are often optimistic. Nearly fifty percent of marriages end in divorce, but one survey found that 100 percent of individuals planning to get married believed they would never get divorced. Most people think they drive better than the average driver, and at one university, ninety-four percent of professors placed themselves in the top fifty percent in terms of teaching skills. We often seem to think we are like the youth of Garrison Keillor’s fictional hometown Lake Wobegon, where “all the children are above average.” This is not always a bad thing. Optimism can be advantageous. Without optimism, Columbus might …
Are Stock Markets Costly Casinos? Disagreement, Market Failure, And Securities Regulation, Lynn Stout
Are Stock Markets Costly Casinos? Disagreement, Market Failure, And Securities Regulation, Lynn Stout
Lynn A. Stout
No abstract provided.
Share Price As A Poor Criterion For Good Corporate Law, Lynn A. Stout
Share Price As A Poor Criterion For Good Corporate Law, Lynn A. Stout
Lynn A. Stout
Academics, reformers, and business leaders all yearn for a single, objective, easy-to-read measure of corporate performance that can be used to judge the quality of public corporation law and practice. This collective desire is so powerful that it has led many commentators to grab onto the first marginally plausible candidate: share price. Contemporary economic and corporate theory, as well as recent business history, nevertheless warn us against unthinking acceptance of share price as a measure of corporate performance. This Essay offers a brief reminder of some of the many reasons why stock prices often fail to reflect true corporate performance, …
Regulate Otc Derivatives By Deregulating Them, Lynn A. Stout
Regulate Otc Derivatives By Deregulating Them, Lynn A. Stout
Lynn A. Stout
When credit markets froze up in the fall of 2008, many economists pronounced the crisis inexplicable and unforeseeable. Lawyers who specialize in financial regulation, and especially the small cadre who specialize in derivatives regulation, knew better.That's because the roots of the catastrophe lay not in changes in the markets, but changes in the law. In particular, the credit crisis can be traced to Congress's 2000 passage of the Commodity Futures Modernization Act, which radically altered the traditional legal approach to financial derivatives. This shift in the legal treatment of financial derivatives has brought the banking system to its knees. The …
How Efficient Markets Undervalue Stocks: Capm And Ecmh Under Conditions Of Uncertainty And Disagreement, Lynn A. Stout
How Efficient Markets Undervalue Stocks: Capm And Ecmh Under Conditions Of Uncertainty And Disagreement, Lynn A. Stout
Lynn A. Stout
No abstract provided.
Betting The Bank: How Derivatives Trading Under Conditions Of Uncertainty Can Increase Risks And Erode Returns In Financial Markets, Lynn A. Stout
Betting The Bank: How Derivatives Trading Under Conditions Of Uncertainty Can Increase Risks And Erode Returns In Financial Markets, Lynn A. Stout
Lynn A. Stout
On April 12, 1994, Procter & Gamble Co. announced that it had incurred pre-tax losses of $157 million from trading in leveraged interest rate swaps, a form of financial derivative. At the time that figure seemed enormous. Yet within a year, Procter & Gamble's misfortune had been overshadowed by that of Orange County, a wealthy California enclave that lost an estimated $2.5 billion of its investment fund as a result of dealings in reverse-repurchase agreements, inverse floaters, and other arcane instruments. Recent months have seen further losses by investment funds, government entities, and even colleges and Native American tribes. Perhaps …
The Investor Confidence Game, Lynn A. Stout
The Investor Confidence Game, Lynn A. Stout
Lynn A. Stout
Academic discussions of securities policy often assume that investors are hyperrational and distrustful actors who do not need the protections of the securities laws to avoid being defrauded. The time has come to recognize the limitations of this assumption and to consider as well the possibility and implications of investor trust. Experienced policymakers and businesspeople (and certainly experienced con artists) have long known that trust is a potent force in explaining and manipulating investor behavior. They are right. They are right to believe that investor confidence-meaning investor trust-is important to the market. They are right to think that trust has …
Some Thoughts On Poverty And Failure In The Market For Children's Human Capital, Lynn A. Stout
Some Thoughts On Poverty And Failure In The Market For Children's Human Capital, Lynn A. Stout
Lynn A. Stout
No abstract provided.
The Mechanisms Of Market Inefficiency: An Introduction To The New Finance, Lynn A. Stout
The Mechanisms Of Market Inefficiency: An Introduction To The New Finance, Lynn A. Stout
Lynn A. Stout
During the 1970s and early 1980s, the Efficient Capital Market Hypothesis (ECMH) became one of the most widely-accepted and influential ideas in finance economics. More recently, however, the idea of market efficiency has fallen into disrepute as a result of market events and growing empirical evidence of inefficiencies. This essay argues that the weaknesses of the efficient market theory are, and were, apparent from a careful inspection of its initial premises, including the presumptions of homogeneous investor expectations, effective arbitrage, and investor rationality. By the same token, a wide range of market phenomena inconsistent with the ECHM can be explained …
Do Antitakeover Defenses Decrease Shareholder Wealth? The Ex Post/Ex Ante Valuation Problem, Lynn A. Stout
Do Antitakeover Defenses Decrease Shareholder Wealth? The Ex Post/Ex Ante Valuation Problem, Lynn A. Stout
Lynn A. Stout
Over the past two decades, academics have generated a large empirical literature examining whether antitakeover defenses like poison pills or staggered board provisions decrease the wealth of shareholders in target corporations. Many studies, however, rely primarily on ex post analysis-they consider only how antitakeover defenses (ATDs) influence shareholder wealth after the corporation has been formed and, in some cases, long after the ATD was adopted. This Response argues that it may be impossible to fully understand the purpose or effects of ATDs without also considering their ex ante effects. In particular, ATDs may increase net target shareholder wealth ex ante …
The Mythical Benefits Of Shareholder Control, Lynn A. Stout
The Mythical Benefits Of Shareholder Control, Lynn A. Stout
Lynn A. Stout
In "The Myth of the Shareholder Franchise," Professor Lucian Bebchuk elegantly argues that the notion that shareholders in public corporations have the power to remove directors is a myth. Although a director facing a proxy contest might find this to be a bit of an overstatement, the core idea is sound. In a public company with widely dispersed share ownership, it is difficult and expensive for shareholders to overcome obstacles to collective action and wage a proxy battle to oust an incumbent board. Nor is success likely when directors can use corporate funds to solicit proxies to stay in place. …
Fiduciary Duties For Activist Shareholders, Iman Anabtawi, Lynn Stout
Fiduciary Duties For Activist Shareholders, Iman Anabtawi, Lynn Stout
Lynn A. Stout
Corporate law and scholarship generally assume that professional managers control public corporations, while shareholders play only a weak and passive role. As a result, corporate officers and directors are understood to be subject to extensive fiduciary duties, while shareholders traditionally have been thought to have far more limited obligations. Outside the contexts of controlling shareholders and closely held firms, many experts argue shareholders have no duties at all. The most important trend in corporate governance today, however, is the move toward "shareholder democracy." Changes in financial markets, in business practice, and in corporate law have given minority shareholders in public …
Agreeing To Disagree Over Excessive Trading, Lynn A. Stout
Agreeing To Disagree Over Excessive Trading, Lynn A. Stout
Lynn A. Stout
No abstract provided.
Trust, Trustworthiness, And The Behavioral Foundations Of Corporate Law, Margaret M. Blair, Lynn A. Stout
Trust, Trustworthiness, And The Behavioral Foundations Of Corporate Law, Margaret M. Blair, Lynn A. Stout
Lynn A. Stout
No abstract provided.
Technology, Transactions Costs, And Investor Welfare: Is A Motley Fool Born Every Minute?, Lynn A. Stout
Technology, Transactions Costs, And Investor Welfare: Is A Motley Fool Born Every Minute?, Lynn A. Stout
Lynn A. Stout
Computer network technology promises to revolutionize the secondary securities market and particularly to reduce dramatically the marginal costs associated with trading corporate equities. Lowering transactions costs usually is presumed to increase trader welfare. Certain unique characteristics of the secondary securities market suggest, however, that reducing the marginal costs associated with trading stocks may have the perverse and counterintuitive effect of decreasing investor welfare. Policymakers should consider this possibility as they respond to the market's rapid evolution.
Are Takeover Premiums Really Premiums? Market Price, Fair Value, And Corporate Law, Lynn Stout
Are Takeover Premiums Really Premiums? Market Price, Fair Value, And Corporate Law, Lynn Stout
Lynn A. Stout
No abstract provided.
The Toxic Side Effects Of Shareholder Primacy, Lynn A. Stout
The Toxic Side Effects Of Shareholder Primacy, Lynn A. Stout
Lynn A. Stout
No abstract provided.
Why We Should Stop Teaching Dodge V. Ford, Lynn A. Stout
Why We Should Stop Teaching Dodge V. Ford, Lynn A. Stout
Lynn A. Stout
What is the purpose of a corporation? To many people, the answer to this question seems obvious: corporations exist to make money for their shareholders. Maximizing shareholder wealth is the corporation's only true concern, its raison d'être. Devoted corporate officers and directors should direct all their efforts toward this goal. Some find this picture of the corporation as an engine for increasing shareholder wealth to be quite attractive. Nobel Prize-winning economist Milton Friedman famously praised this view of corporate purpose in his 1970 New York Times essay, "The Social Responsibility of Business Is to Increase Its Profits." To others, the …