Business Organizations Law Commons^™

Securities Disclosure As Soundbite: The Case Of Ceo Pay Ratios, Steven A. Bank, George S. Georgiev

Faculty Articles

This Article analyzes the history, design, and effectiveness of the highly controversial CEO pay ratio disclosure rule, which went into effect in 2018. Based on a regulatory mandate contained in the Dodd-Frank Act of 2010, the rule requires public companies to disclose the ratio between CEO pay and median worker pay as part of their annual filings with the Securities and Exchange Commission (SEC). The seven-year rulemaking process was politically contentious and generated a level of public engagement that was virtually unprecedented in the long history of the SEC disclosure regime. The SEC sought to minimize compliance costs by providing …

The Outsized Influence Of The Fcpa?, Veronica Root Martinez

Faculty Scholarship

The current power and influence of the Foreign Corrupt Practices Act (“FCPA”) is really quite remarkable when one considers the statute was largely ignored for its first twenty-five years of existence. This statute, meant to reign in corruption by United States companies doing business abroad; has generated billions of dollars in revenue for the United States government; prompted the development of law firm practice groups and law school courses; become the subject of numerous scholarly articles; and has, arguably, made anti-bribery efforts the highest of priorities for multinational corporations engaged in robust compliance efforts. Corporations, scholars, and the public would …

Successor Ceos, Yaron Nili

Faculty Scholarship

Recent years have seen a push towards separating the roles of CEO and chairperson of the board. While many companies still maintain a combined CEO-chair role, investors consistently express their concern that the dual CEO-chair position jeopardizes the independence and effectiveness of the board. Yet, while investors and academic research have focused on one channel for achieving such separation—through the appointment of an independent director as chair—a second has been left relatively unexplored. In fact, in many cases, as this Article documents, the separation of CEO-chair has occurred through the second channel: the current CEO-chair steps down as CEO while …

The Enduring Distinction Between Business Entities And Security Interests, Ofer Eldar, Andrew Verstein

Faculty Scholarship

What are business entities for? What are security interests for? The prevailing answer in legal scholarship is that both bodies of law exist to partition assets for the benefit of designated creditors. But if both bodies of law partition assets, then what distinguishes them? In fact, these bodies of law appear to be converging as increasing flexibility irons out any differences. Indeed, many legal products, such as securitization vehicles, insurance products known as captive insurance, and mutual funds, employ entities to create distinct asset pools. Moreover, recent legal innovations, such as “protected cells,” which were created to facilitate such products, …

A New Standard For Governance: Reflections On Worker Representation In The United States, Julian Constain

Fordham Journal of Corporate & Financial Law

The contemporary state of corporate law in the United States is one that is skewed toward the archaic principle of shareholder primacy. This narrow conception of corporate purpose has resulted in governance mechanisms that tend to overlook the many stakeholders that are affected by, and, in turn, affect the bottom line of modern corporations. In the wake of the recently proposed Accountable Capitalism Act, this Note investigates the viability of adopting a system of mandated worker board representation—codetermination—in the United States. The Note employs a comparative analysis of the German and Swedish experiences with codetermination, and then evaluates the policy, …

Labor Interests And Corporate Power, Matthew T. Bodie

All Faculty Scholarship

Labor unions exert significant power through collective bargaining, pension fund investing, and political advocacy. But in each of these areas, unions face inherent structural limitations that severely constrain these powers. Workers need participation rights in corporate governance to overcome the multiplicity of forces arrayed against them. And rather than obviating the need for unions, worker corporate power would facilitate a different kind of labor representation — a transition to labor power that advocates for occupational interests and forms coalitions across the shifting political interests of different worker groups.

Corporate Control And The Regulation Of Controlling Shareholders, Zohar Goshen, Assaf Hamdani

Faculty Scholarship

In this chapter, we outline the theory of idiosyncratic vision and explored its implications. Our theory can be summarized as follows: First, while investors value control because it offers them protection from agency costs, entrepreneurs value control because it allows them to pursue their idiosyncratic vision. Second, any contract between entrepreneurs and investors represents a balance between the entrepreneurs’ freedom to secure their idiosyncratic vision and the investors’ protection against agency costs. Third, the investors and entrepreneurs will allocate cash-flow and control rights through the bargaining process to achieve this balance.

In addition, this chapter demonstrates that ownership structures are …

Citizen Capitalism: How A Universal Fund Can Provide Influence And Income To All (2019), Lynn A. Stout, Sergio Gramitto, Tamara Belinfanti

Books

Corporations have a huge influence on the life of every citizen--this book offers a visionary but practical plan to give every citizen a say in how corporations are run while also gaining some supplemental income. It lays out a clear approach that uses the mechanisms of the private market to hold corporations accountable to the public.

This would happen through the creation of what the authors call the Universal Fund, a kind of national, democratic, mega mutual fund. Every American over eighteen would be entitled to a share and would participate in directing its share voting choices. Corporations and wealthy …

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

Faculty Articles

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 …

Do Conflicts Of Interest Require Outside Boards? Yes. Bsps? Maybe., Usha Rodrigues

Scholarly Works

From the Symposium: Outsourcing the Board: How Board Service Providers Can Improve Corporate Governance

Boards of directors are curious creatures. The law generally requires corporations to have them—indeed, they are the focus of the corporate law we teach in Business Associations in U.S. law schools. The corporation is managed by directors or under their direction; directors hire and fire officers; directors are necessary for fundamental transactions.

But the reason why corporations have directors is not entirely clear. In the prototypical privately held corporation, the family firm, the same individuals serve both as directors and officers. The CEO (better known as …

The Core Corporate Governance Puzzle: Contextualizing The Link To Performance, Merritt B. Fox, Ronald J. Gilson, Darius Palia

Faculty Scholarship

There is a puzzle at the core of corporate governance theory. Prior scholarship reports a strong relationship between firms best at creating shareholder value and those rated highly by the established corporate governance indices. Little work explores why, however. We hypothesize that the link between governance and performance depends centrally on context. We illustrate the importance of context by exploring circumstances when a firm's governance structure can operate as a signal of the quality of its management. The idea is that better managers are on average more likely to choose a highly rated governance structure than are bad managers because …

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 …

The Corporate Purpose Of Social License, Hillary A. Sale

Georgetown Law Faculty Publications and Other Works

This Article deploys the sociological theory of social license, or the acceptance of a business or organization by the relevant communities and stakeholders, in the context of the board of directors and corporate governance. Corporations are generally treated as “private” actors and thus are regulated by “private” corporate law. This construct allows for considerable latitude. Corporate actors are not, however, solely “private.” They are the beneficiaries of economic and political power, and the decisions they make have impacts that extend well beyond the boundaries of the entities they represent.

Using Wells Fargo and Uber as case studies, this Article explores …

Activist Directors And Agency Costs: What Happens When An Activist Director Goes On The Board?, John C. Coffee Jr., Robert J. Jackson Jr., Joshua R. Mitts, Robert E. Bishop

Faculty Scholarship

We develop and apply a new and more rigorous methodology by which to measure and understand both informed trading and the agency costs of hedge fund activism. We use quantitative data to show a systematic relationship between the appointment of a hedge fund-nominated director to a corporate board and an increase in informed trading in that corporation’s stock (with the relationship being most pronounced when the fund’s slate of directors includes a hedge fund employee). This finding is important from two different perspectives. First, from a governance perspective, activist hedge funds represent a new and potent force in corporate governance. …

Beyond The Numbers: Substantive Gender Diversity In Boardrooms, Yaron Nili

Faculty Scholarship

No abstract provided.

Private Equity's Governance Advantage: A Requiem, Elisabeth De Fontenay

Faculty Scholarship

Private equity’s original purpose was to optimize companies’ governance and operations. Reuniting ownership and control in corporate America, the leveraged buyout (or the mere threat thereof) undoubtedly helped reform management practices in a broad swath of U.S. companies. Due to mounting competitive pressures, however, private equity is finding relatively fewer underperforming companies to fix. This is particularly true of U.S. public companies, which are continuously dogged by activist hedge funds and other empowered shareholders looking for any sign of slack.

In response, private equity is shifting its center of gravity away from governance reform, towards a dizzying array of new …

Are Passive Index Funds Active Owners? Corporate Governance Consequences Of Passive Investing, Giovanni Strampelli

San Diego Law Review

The exponential rise of mutual funds designed to track stock indices has been one of the drivers behind the re-concentration of ownership of listed companies in the United States. Because of the high concentration of the passive index funds industry, the three leading passive fund managers—BlackRock, Vanguard, and State Street—make up an increasingly important component of the shareholder base of listed companies. In spite of this however, it remains questionable whether they are actually interested in playing an active role in the corporate governance of investee companies. In fact, although passive investors are, by definition, focused on the long term …

Too-Big-To-Fail Shareholders, Yesha Yadav

Vanderbilt Law School Faculty Publications

To build resilience within the financial system, post-Crisis regulation relies heavily on banks to fund themselves more fully by issuing equity. This reserve of value should buttress failing banks by providing a mechanism to pay off creditors and depositors and preserve the health of financial markets. In the process, shareholders are wiped out. Scholars and policymakers, however, have neglected to examine which equity investors, in fact, are purchasing bank equity and taking on the default risk of U.S. banks. This Article addresses this question. First, it shows that five asset managers - BlackRock, Vanguard, State Street Global Advisors, Fidelity and …

The Diminishing Duty Of Loyalty, Julian Velasco

Journal Articles

Fiduciary duties comprise an integral part of corporate law. It is generally understood that directors owe the corporation and its shareholders two fiduciary duties: the duty of care and the duty of loyalty. Although both duties are firmly established in corporate law, they are not treated equally. It is generally understood that the duty of loyalty is enforced far more rigorously than the duty of care. The justification for this dichotomy is twofold. First, differential treatment is appropriate because of the relative urgencies of the underlying subject matter: loyalty issues pose greater risks than do care issues. Second, the deference …

The Law And Finance Of Initial Coin Offerings, Aurelio Gurrea-Martinez, Nydia Remolina Leon

Research Collection Yong Pung How School Of Law

The rise of new technologies is changing the way companies raise funds. Along with the increase of crowdfunding in recent years, the use of Initial Coin Offerings (ICOs) has emerged more recently as a new form to raise capital. Companies in the United States raised more than $4 billion in 2017 and over $6.3 billion were raised through ICOs in the first three months of 2018. In a typical ICO, a company receives cryptocurrencies in exchange for certain rights embodied in “tokens”, whose nature, treatment and implications are generating controversy among securities regulators around the world.

Whistling In The Wind: Why Federal Whistleblower Protections Fall Short Of Their Corporate Governance Goals, Meera Khan

University of Miami Business Law Review

Teetering on the line between hero and villain, whistleblowers have a remarkably unusual role in contemporary American society. Those who blow the whistle on public sector activities, like Edward Snowden and the Watergate Scandal’s “Deep Throat”, are often vilified in history as treasonous and unprincipled rogues. In the private sector, however, whistleblowers are seen as moral compasses for corporate behavior, and are even afforded federal protections for speaking out against internal malfeasance. The piecemeal evolution of whistleblower legislation including the Sarbanes–Oxley Act of 2002 and the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 created regulatory and enforcement …

Do Institutional Owners Monitor? Evidence From Voting On Connected Transaction Proposals In Hong Kong-Listed Companies, Félix E. Mezzanotte, Simon Fung

Michigan Business & Entrepreneurial Law Review

The conventional view in Hong Kong has been that institutional owners tend to be passive owners and that they do little to monitor the companies’ management. We investigated whether the presence of institutional owners in Hong Kong-listed companies was associated with greater monitoring of management through dissent voting by hand-collecting information for a sample (n= 96) of connected transaction proposals (“CT proposals”) and of their voting outcomes, as announced in the Stock Exchange of Hong Kong during the period from 2012–14. Our study shows that voting approval rates on CT proposals were lower (i.e. greater dissent voting) when institutional owners …

The Public Cost Of Private Equity, William Magnuson

Faculty Scholarship

This Article presents a theory of the corporate governance costs of private equity. In doing so, it challenges the common view that private equity’s governance structure has resolved, or at least significantly mitigated, one of the fundamental tensions in corporate law, that is, the conflict between management and ownership. The Article argues that this widespread perception about the corporate governance benefits of private equity overlooks the many ways in which the private equity model, far from eliminating agency costs, in fact exacerbates them. These governance costs include compensation structures that incentivize excessive risk-taking, governance rights that provide investors with few …

Third-Party Institutional Proxy Advisors: Conflicts Of Interest And Roads To Reform, Matthew Fagan

University of Michigan Journal of Law Reform

With the rise of institutional activist investors in recent decades—including a purported 495 activist campaigns against U.S. corporations in 2016 alone—the role that third-party institutional proxy advisors play in corporate governance has greatly increased. The United States Office of Government Accountability estimates that clients of the top five proxy advisory firms account for about $41.5 trillion in equity throughout the world. For several years, discussions have developed regarding conflicts of interest faced by proxy advisors. For example, Institutional Shareholder Services, the top proxy advisory firm in the world, frequently provides advice to institutional investors on how to vote proxies while …

To Understand Us V. Microsoft, Consider 'Acme V. Shamrock', Peter B. Rutledge, Amanda W. Newton

Popular Media

The February 27, 2018, Supreme Court argument in United States v. Microsoft Corp. raises profound questions about issues of executive power, corporate governance, technology, judicial power and international affairs. At stake for the government is the scope of its investigative authority to obtain information located in a foreign country, irrespective of that country’s laws. At stake for Microsoft is its ability to organize its international corporate affairs and the predictability of the laws that will govern those affairs. This article analyzes the potential effects of this critical Supreme Court case.

Contested Visions: The Value Of Systems Theory For Corporate Law, Tamara Belinfanti, Lynn A. Stout

Cornell Law Faculty Publications

Despite the dominant role corporations play in our economy, culture, and politics, the nature and purpose of corporations remains hotly contested. This conflict was brought to the fore in the recent Supreme Court opinions in Citizens United and Hobby Lobby. Although the prevailing narrative for the past quarter-century has been that corporations “belong” to shareholders and should pursue “shareholder value,” support for this approach, which has been justified as essential for managerial accountability, is eroding. It persists today primarily in the form of the argument that corporations should seek “long-term” shareholder value. Yet, as this Article shows, when shareholder value …

The Rise Of Foreign Ownership And Corporate Governance, Merritt B. Fox

Faculty Scholarship

This chapter explores the link between corporate governance and the rise of foreign ownership. It presents statistics that illustrate the dramatic rise in foreign ownership over the last few decades and then seeks to explain this rise and its relationship to corporate governance. In order to situate the subject under study within its larger context, this explanation starts with an exploration of the factors independent of corporate-governance considerations that favor a global market for securities and those that impede it. It will be shown that the rise in foreign ownership globally can be explained in significant part by the weakening …

Is Corporate Governance A First Order Cause Of The Current Malaise?, Jeffrey N. Gordon

Faculty Scholarship

The US has evolved a regime of high-powered corporate governance in which managerial performance is disciplined through shareholder value metrics. This paper argues against over-stating the importance of this regime in creating problems of inequality, greater economic insecurity, and slower economic growth. Corporate governance acts principally as the transmission mechanism to the behaviour of the particular firm of changes in the global and domestic competitive environment. The critical problem is a risk-shift from shareholders, who now have access to robust diversification against firm-specific risks, and towards employees, whose concentrated firm-specific investments are hard to protect or diversify. The paper argues …

Quacks Or Bootleggers: Who’S Really Regulating Hedge Funds?, Jeremy Kidd

Articles

Influential scholars of corporate law have questioned previous federal interventions into corporate governance, calling it quackery. Invoking images of medical malpractice, these critiques have argued persuasively that Congress, in responding to crises, makes policy that disrupts efficient private rules and established state laws. This Article applies the Bootleggers and Baptists theory to show that Dodd–Frank’s hedge fund rules are more than just negligent or reckless, but designed to benefit special interests that compete with the hedge fund model. Those rules offer no solutions to any real or perceived risks arising from hedge fund investing, but might offer an advantage to …