Business Organizations Law Commons^™

Report From The General Counsel Summit On Short-Termism And Public Trust, Ira M. Millstein Center For Global Markets And Corporate Ownership

Ira M. Millstein Center for Global Markets and Corporate Ownership

This summary report was prepared for participants in the General Counsel Corporate Governance Summit and presents some of the key discussion topics and views of participants at the summit. It is not intended to provide a complete summary or represent a unanimous consensus of the summit’s proceedings.

Curbing Managerial Agency Costs: Private Litigation And Its Substitutes In The Us, James D. Cox, Randall S. Thomas

Faculty Scholarship

No abstract provided.

Rethinking Corporate Governance For A Bondholder Financed, Systemically Risky World, Steven L. Schwarcz

Faculty Scholarship

This Article makes two arguments that, combined, demonstrate an important synergy: first, including bondholders in corporate governance could help to reduce systemic risk because bondholders are more risk averse than shareholders; second, corporate governance should include bondholders because bonds now dwarf equity as a source of corporate financing and bond prices are increasingly tied to firm performance.

Regulatory Competition And The Market For Corporate Law, Ofer Eldar, Lorenzo Magnolfi

Faculty Scholarship

This article develops an empirical model of firms’ choice of corporate laws under inertia. Delaware dominates the incorporation market, though recently Nevada, a state whose laws are highly protective of managers, has acquired a sizable market share. Using a novel database of incorporation decisions from 1995- 2013, we show that most firms dislike protectionist laws, such as anti-takeover statutes and liability protections for officers, and that Nevada’s rise is due to the preferences of small firms.Our estimates indicate that despite inertia, Delaware would lose significant market share and revenues if it adopted protectionist laws. Our findings support the hypothesis that …

Corporate Officers As Agents, Deborah A. Demott

Faculty Scholarship

Although officers are crucial to corporate operations, scholarly and theoretical accounts tend to slight officers and amalgamate them with directors into a single category, "managers." This essay anchors officers within the common law of agency-as does black-letter law-which crisply differentiates officers from directors. Understanding that agency is central of the legal account of officers' positions and responsibilities is crucial to seeing why, like directors, officers are fiduciaries, but distinctively so, not as instances of generic "corporate fiduciaries." Officers, like directors, owe duties of loyalty, but also particularized duties of care, competence, and diligence. Additionally, officers' duties of performance encompass two …

The Responsibility Gap In Corporate Crime, Samuel W. Buell

Faculty Scholarship

In many cases of criminality within large corporations, senior management does not commit the operative offense — or conspire or assist in it — but nonetheless bears serious responsibility for the crime. That responsibility can derive from, among other things, management’s role in cultivating corporate culture, in failing to police effectively within the firm, and in accepting lavish compensation for taking the firm’s reins. Criminal law does not include any doctrinal means for transposing that form of responsibility into punishment. Arguments for expanding doctrine — including broadening of the presently narrow “responsible corporate officer” doctrine — so as to authorize …

Coordinating Compliance Incentives, Veronica Root

Faculty Scholarship

In today’s regulatory environment, a corporation engaged in wrongdoing can be sure of one thing: regulators will point to an ineffective compliance program as a key cause of institutional misconduct. The explosion in the importance of compliance is unsurprising given the emphasis that governmental actors — from the Department of Justice, to the Securities and Exchange Commission, to even the Commerce Department — place on the need for institutions to adopt “effective compliance programs.” The governmental actors that demand effective compliance programs, however, have narrow scopes of authority. DOJ Fraud handles violations of the Foreign Corrupt Practices Act, while the …

“Captured Boards”: The Rise Of “Super Directors” And The Case For A Board Suite, Kobi Kastiel, Yaron Nili

Faculty Scholarship

Boards of public corporations in the United States are becoming increasingly independent, due to an effort to ensure that shareholders' interests in the company are protected. Yet, little attention has been given to the way that board members obtain and digest the information necessary for their independent decision-making. In this Article, we highlight how "independent" boards remain extremely dependent on management for the information they need to accomplish their role -- we classify as the "informational capture" of the board. We further describe how activist hedge funds identified this capture and are using what is commonly termed as "super directors" …

Out Of Sight Out Of Mind: The Case For Improving Director Independence Disclosure, Yaron Nili

Faculty Scholarship

Director independence is a cornerstone of modern corporate law. Independent directors are entrusted with objectively and impartially monitoring management and ensuring that the interests of shareholders are well served. But translating the notion of independence into practice is far from a simple task, and while regulators and stock exchanges have tackled this elusive standard in different ways, for the most part their attempts have come up short. Currently, boards designate themselves as independent, and as this Article demonstrates empirically, they provide little information to investors regarding the considerations that supported their designation.

Regulating director independence is at heart a means …

Misalignment: Corporate Risk-Taking And Public Duty, Steven L. Schwarcz

Notre Dame Law Review

This Article argues for a “public governance duty” to help manage excessive risk-taking by systemically important firms. Although governments worldwide, including the United States, have issued an array of regulations to attempt to curb that risk-taking by aligning managerial and investor interests, those regulations implicitly assume that investors would oppose excessively risky business ventures. That leaves a critical misalignment: because much of the harm from a systemically important firm’s failure would be externalized onto the public, including ordinary citizens impacted by an economic collapse, such a firm can engage in risk-taking ventures with positive expected value to its investors but …

Wage-Setting Institutions And Corporate Governance, Matthew Dimick, Neel Rao

Journal Articles

Why do corporate governance law and practice differ across countries? This paper explains how wage-setting institutions influence ownership structures and investor protection laws. In particular, we identify a nonmonotonic relationship between the level of centralization in wage-bargaining institutions and the level of ownership concentration and investor protection laws. As wage setting becomes more centralized, ownership concentration within firms at first becomes more, and then less, concentrated. In addition, the socially optimal level of investor protection laws is decreasing in ownership concentration. Thus, as wage-setting institutions become more centralized, investor protection laws become less and then more protective. This explanation is …

Using Proactive Legal Strategies For Corporate Environmental Sustainability, Gerlinde Berger-Walliser, Paul Shrivastava, Adam Sulkowski

Michigan Journal of Environmental & Administrative Law

We argue that proactive law can help organizations be more sustainable. Toward that end, this Article first summarizes proactive law literature as it pertains to corporate sustainability. Next, it examines a series of cases on the pivotal nexus between proactive law and corporate sustainability. It then advances novel propositions that connect proactive law to central organizational design elements. The discussion traces further implications and suggests fruitful avenues for research and ways of using proactive law for firms to become more sustainable.

The Rise Of Independent Directors In Australia: Adoption, Reform, And Uncertainty, Luke Nottage, Fady Aoun

University of Miami International and Comparative Law Review

No abstract provided.

Economic Crisis And The Integration Of Law And Finance: The Impact Of Volatility Spikes, Edward G. Fox, Merritt B. Fox, Ronald J. Gilson

Articles

The 2008 financial crisis raised puzzles important for understanding how the capital market prices common stocks and in turn, for the intersection between law and finance. During the crisis, there was a dramatic five-fold spike, across all industries, in “idiosyncratic risk”—the volatility of individual-firm share prices after adjustment for movements in the market as a whole.

This phenomenon is not limited to the most recent financial crisis. This Article uses an empirical review to show that a dramatic spike in idiosyncratic risk has occurred with every major downturn from the 1920s through the recent financial crisis. It canvasses three possible …

Disciplining Corporate Boards And Debtholders Through Targeted Proxy Access, Michelle M. Harner

Faculty Scholarship

Corporate directors committed to a failed business strategy or unduly influenced by the company’s debtholders need a dissenting voice—they need shareholder nominees on the board. This article examines the bias, conflicts, and external factors that impact board decisions, particularly when a company faces financial distress. It challenges the conventional wisdom that debt disciplines management, and it suggests that, in certain circumstances, the company would benefit from having the shareholders’ perspective more actively represented on the board. To that end, the article proposes a bylaw that would give shareholders the ability to nominate directors upon the occurrence of predefined events. Such …

The Stewardship Of Trust In The Global Value Chain, Kishanthi Parella

Scholarly Articles

Global governance has not yet caught up with the globalization of business. As a result, our headlines provide daily accounts of the extent and consequences of these "governance gaps." The ability of corporations to evade state control also contributes to an unusual, even frightening, phenomenon: corporations are governing like states. Some governance functions traditionally delivered by state actors are now increasingly undertaken by transnational corporations. One area that is experiencing this substitution is dispute resolution of human rights. Corporations and other business enterprises, individually or collectively, are creating a variety of grievance mechanisms to address human rights and other conflicts …

The New Governance And The Challenge Of Litigation Bylaws, Jill E. Fisch

Brooklyn Law Review

Corporate governance mechanisms designed to ensure that managers act in shareholders’ interest have evolved dramatically over the past 40 years. “Old governance” mechanisms such as independent directors and performance-based executive compensation have been supplemented by innovations that give shareholders greater input into both the selection of directors and ongoing operational decisions. Issuer boards have responded with tools to limit the exercise of shareholder power both procedurally and substantively. This article terms the adoption and use of these tools, which generally take the form of structural provisions in the corporate charter or bylaws, the “new governance.”

Delaware law has largely taken …

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 …

The Underground Rulification Of The Ordinary Business Operations Exclusion, Reilly S. Steel

Faculty Scholarship

In its landmark Cracker Barrel no-action letter, the SEC staff an­nounced a bright-line rule permitting exclusion of any shareholder pro­posal pertaining to a company’s management of its general workforce, even if focused on a significant social policy issue such as employment discrimination, under the “ordinary business operations” exclusion. The SEC reversed Cracker Barrel in 1998, returning to a case-specific approach to determining whether proposals fall under the exclusion. This Note examines 250 no-action letters from the 2015 proxy season and finds evidence indicating that the staff has, contrary to official SEC policy, returned to a rule-like approach to the ordinary …

The Corporation's Place In Society, Gabriel Rauterberg

Faculty Scholarship

The vast majority of economic activity is now organized through corporations. The public corporation is usurping the state’s role as the most important institution of wealthy capitalist societies. Across the developed world, there is increasing convergence on the shareholder-owned corporation as the primary vehicle for creating wealth. Yet nothing like this degree of convergence has occurred in answering the fundamental questions of corporate capitalism: What role do corporations serve? What is the goal of corporate law? What should corporate managers do? Discussion of these questions is as old as the institutions involved.

Open Sesame: The Myth Of Alibaba's Extreme Corporate Governance And Control, Yu-Hsin Lin, Thomas Mehaffy

Brooklyn Journal of Corporate, Financial & Commercial Law

In September 2014, Alibaba Group Holding Limited (Alibaba) successfully launched a $25 billion initial public offering (IPO), the largest IPO ever, on New York Stock Exchange. Alibaba’s IPO success witnessed a wave among Chinese Internet companies to raise capital in U.S capital markets. A significant number of these companies have employed a novel, but poorly understood corporate ownership and control mechanism—the variable interest entity (VIE) structure and/or the disproportional control structure. The VIE structure was created in response to the Chinese restriction on foreign investments; however, it carries the risk of being declared illegal under Chinese law. The disproportional control …

Servants Of Two Masters? The Feigned Hysteria Over Activist-Paid Directors, Yaron Nili

Faculty Scholarship

Directors of U.S. public firms have been paid for their directorship exclusively by the company in which they serve. Recently, however, activist investors have asked shareholders to elect director-candidates who received a lucrative compensation package from the activist in addition to their compensation arrangement with the company. Incumbent managers and their defenders, such as Wachtell, Lipton, have sharply condemned this practice, terming it a ‘Golden Leash’ that subjects the nominated director to the activist’s control. I explain why these critics are mistaken. Activist-paid directors can be expected to improve corporate performance at poorly performing firms, and the cost of such …

On The Use And Misuse Of Stock Price, Ira M. Millstein Center For Global Markets And Corporate Ownership

Ira M. Millstein Center for Global Markets and Corporate Ownership

In 2013, in an effort to better understand the purpose, use, and potential misuse of stock prices in public equity markets, the Millstein Center and the Investor Responsibility Research Center Institute (IRRCi) issued a call for papers on the role prices play as a corporate governance mechanism. In lieu of completed projects, proposals were sought for new research that explored how equity prices affect the decision-making processes of corporate management, boards of directors, and investors. On September 19, 2014, the Millstein Center and the IRRCi hosted a gathering entitled the Conference on the Use and Misuse of Stock Price, …

Discussion On Transparent And Effective Disclosure, Ira M. Millstein Center For Global Markets And Corporate Ownership

Ira M. Millstein Center for Global Markets and Corporate Ownership

On January 22, 2015, the Ira M. Millstein Center for Global Markets and Corporate Ownership and the Center for Audit Quality hosted a Discussion on Transparent and Effective Disclosure. The following is a summary of the panel discussions.

The Future Of Finance Colloquium, Ira M. Millstein Center For Global Markets And Corporate Ownership

Ira M. Millstein Center for Global Markets and Corporate Ownership

On April 25, 2014, the Ira M. Millstein Center for Global Markets and Corporate Ownership and the CFA Institute hosted the Future of Finance Colloquium. The following is a summary of the panel discussions.

Inversions: Implications For Tax Planning, Tax Policy, And Corporate Governance, Ira M. Millstein Center For Global Markets And Corporate Ownership

Ira M. Millstein Center for Global Markets and Corporate Ownership

On February 27, 2015, the Ira M. Millstein Center for Global Markets and Corporate Ownership, the Richard Paul Richman Center, the Charles Evans Gerber Transactional Studies Center, and David Polk & Wardwell hosted a conference on Inversions: Implications for Tax Planning, Tax Policy, and Corporate Governance. The following is a summary of the panel discussions.

Proxy Access 2.0: A Recap On 1.0 And The Economic Analysis, Ira M. Millstein Center For Global Markets And Corporate Ownership

Ira M. Millstein Center for Global Markets and Corporate Ownership

On April 27, 2015, the Ira M. Millstein Center for Global Markets and Corporate Ownership and the CFA Institute hosted a discussion on the state of proxy access. The following is a summary of the panel discussion.

Key Topics In Corporate Governance: Disclosure, Ira M. Millstein Center For Global Markets And Corporate Ownership

Ira M. Millstein Center for Global Markets and Corporate Ownership

On June 18, 2015, the Ira M. Millstein Center for Global Markets and Corporate Ownership hosted a symposium on transparency in the corporate and investment communities. The half-day event brought together prominent speakers from the business, regulatory and academic sectors to discuss current trends and emerging issues associated with disclosure. In a related vein, panelists also debated the case for furthering engagement with retail investors whose needs and resources may differ, at times substantially, from their institutional counterparts. The following is a summary of the panel discussions.

Officer Accountability, Megan Wischmeier Shaner

Faculty Articles

The officer is at the center of modern corporate governance. Wielding immense power and influence, officers’ conduct and decision-making can determine the success or failure of their companies and impact the economy more broadly. Fiduciary duties under state law serve as a vital check on officer power. This article is the third piece in a study of the role of fiduciary duties in regulating officer behavior. It examines an underlying premise in prior scholarship – that officers are rarely being held accountable for their conduct in the traditional fiduciary duty litigation context of state court. This article reviews opinions of …

Corporate Darwinism: Disciplining Managers In A World With Weak Shareholder Litigation, James D. Cox, Randall S. Thomas

Faculty Scholarship

Because representative shareholder litigation has been constrained by numerous legal developments, the corporate governance system has developed new mechanisms as alternative means to address managerial agency costs. We posit that recent significant governance developments in the corporate world are the natural consequence of the ineffectiveness and inefficiency of shareholder suits to address certain genre of managerial agency costs. We thus argue that corporate governance responses evolve to fill voids caused by the inability of shareholder suits to monitor and discipline corporate managers.

We further claim that these new governance responses are themselves becoming stronger due in part to the rising …