Business Organizations Law Commons^™

Understanding Enron: "It's About Gatekeepers, Stupid", John C. Coffee Jr.

Faculty Scholarship

What do we know after Enron's implosion that we did not know before it? The conventional wisdom is that the Enron debacle reveals basic weaknesses in our contemporary system of corporate governance. Perhaps, this is so, but where is the weakness located? Under what circumstances will critical systems fail? Major debacles of historical dimensions – and Enron is surely that – tend to produce an excess of explanations. In Enron's case, the firm's strange failure is becoming a virtual Rorschach test in which each commentator can see evidence confirming what he or she already believed.

Racial Discrimination And The Relationship Between The Directorial Duty Of Care And Corporate Disclosure, Cheryl L. Wade

Faculty Publications

(Excerpt)

Two corporate employers paid settlements of seismic proportions to minority employees alleging race discrimination in recent years. In 1996, Texaco settled a class action alleging race discrimination for $176 million, and in 2000, Coca-Cola settled race discrimination litigation for $192.5 million. The terms of both settlements required the insertion of outside auditors into typically internal and private corporate governance decisions, and the creation of governance processes designed to investigate and monitor compliance with laws prohibiting race discrimination. In this article I conclude that the settlements mandate managerial and directorial conduct that should have been undertaken when the charges of …

Enron And The Dark Side Of Shareholder Value, William W. Bratton

Georgetown Law Faculty Publications and Other Works

This Article addresses the implications that the Enron collapse holds out for the self-regulatory system of corporate governance. The case shows that the incentive structure that motivates actors in the system generates much less powerful checks against abuse than many observers have believed. Even as academics have proclaimed rising governance standards, some standards have declined, particularly those addressed to the numerology of shareholder value. The Article's inquiry begins with Enron's business plan. The Article asserts that there may be more to Enron's "virtual firm" strategy than meets the eye beholding a firm in collapse. The Article restates the strategy as …

Why A Board? Group Decisionmaking In Corporate Governance, Stephen M. Bainbridge

Vanderbilt Law Review

This Article begins by briefly describing the role of the board both in law and in practice. Part II explores the distinction be- tween consensus and authority as modes of institutional decision- making. As hierarchical institutions, corporations rely far more heavily on authority than on consensus. Yet, at the apex of the hierarchy is a collegial body that functions mainly by consensus.

Part III is the core of the Article. In order to evaluate corporate law's preference for collective decisionmaking, we need to know whether group decisionmaking is superior to that of individuals. A wealth of experimental data suggests that …

Corporate Norms And Contemporary Law Firm Practice, Milton C. Regan

Georgetown Law Faculty Publications and Other Works

Larry Mitchell's book describes the movement toward share price maximization by corporate managers. More intensive market competition both domestically and abroad has led managers to believe that their corporations have little choice but to focus on short-term profits. This practice leads to greater instability for corporate workers and efforts to externalize other costs on third parties. It also intensifies the erosion of "local" cultural practices that are seen as impediments to profit maximization, whether they are associated with countries abroad, communities in the United States, or within the corporation itself. In this process, the norms of the market gain increasing …

Never Trust A Corporation, William W. Bratton

Georgetown Law Faculty Publications and Other Works

I would like to start by noting multitudinous objections to assertions made in Larry Mitchell's Corporate Irresponsibility: America's Newest Export. But I waive these points for purposes of this Symposium. I would prefer to take the occasion to celebrate the book. So I will make two points on the subject of corporate social responsibility on which the book and I stand in complete accord.

The Organizational Psychology Of Hyper-Competition: Corporate Irresponsibility And The Lessons Of Enron, Donald C. Langevoort

Georgetown Law Faculty Publications and Other Works

What I want to do here is first explain my fears and then explore the Enron story from the standpoint of both social psychology and organizational behavior. My sense going in, at least, is that the social forces and selfish norms that emerge fairly naturally in highly competitive settings such as these dominate as behavioral influences over anything but high-powered legal controls. The kind of firm that I want to concentrate on is the "new economy" sort that requires a high rate of creative productivity from a large number of key managers and employees. Thus, I will put to the …

The Enduring Illegitimacy Of The Poison Pill, Julian Velasco

Journal Articles

The poison pill is the ultimate defense against a hostile takeover. From management's perspective, it is almost too good to be true. Originally, the poison pill was seen as a way to guard against the worst of hostile takeover tactics. It has been successful; the poison pill has virtually eliminated these tactics from the repertoires of hostile bidders. However, the poison pill is extremely potent, capable of preventing all hostile takeovers, regardless of their underlying merit. Thus, the poison pill eventually became the means to employ a just say no defense of resisting hostile takeovers, regardless of the interests of …

Teaching Students How To Become In-House Counsel, Christian C. Day

Journal of Legal Education

No abstract provided.

Purpose With Profit: Governance, Enforcement, Capital-Raising And Capital-Locking In Low-Profit Limited Liability Companies, J. Haskell Murray, Edward I. Hwang

University of Miami Law Review

No abstract provided.

Sales And Elections As Methods For Transferring Corporate Control, Ronald J. Gilson, Alan Schwartz

Faculty Scholarship

Delaware case law has rendered the tender offer obsolete as a method for purchasing a company whose directors oppose the acquisition. A potential acquirer facing target opposition today must run an insurgent director slate, in the expectation that its directors are more likely to sell. The Delaware courts have not justified their preference for elections over markets as the preferred vehicle for implementing changes in control. Informal scholarly analyses ask transaction cost questions, such as whether proxy contests are more costly than takeovers. This article attempts to break new ground by asking whether there are systematic differences in the performance …

A Property Theory Perspective On Russian Enterprise Reform, Michael Heller

Book Chapters

Why have Russian enterprises performed so poorly since privatization? This is a problem with many answers, each independently sufficient: the bleak mix includes vacillating macroeconomic policy, endemic corruption, a corrosive tax structure, poor human capital, and so forth. Even well-performing companies must hide good results because visible profits or dividends provoke confiscatory taxation and mafia visits. In such a difficult environment, the rule of law generally, and corporate governance in particular, may seem not to count. Macroeconomic implosions dwarf subtle distinctions in corporate dividend rules or minority voting rights.

Director Accountability And The Mediating Role Of The Corporate Board, Margaret M. Blair, Lynn A. Stout

Cornell Law Faculty Publications

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 …

The Statutory Derivative Action In Singapore: A Critical And Comparative Examination, Pearlie Koh

Research Collection Yong Pung How School Of Law

As a mechanism for shareholder control of corporate wrongs and thus as a tool of corporate governance, the statutory derivative action has had much international attention given to it, particularly in the last 10 years. Singapore introduced its statutory derivative action in 1993 and since then, there have been two reported cases in which the action was invoked. In this paper, I consider the Singapore derivative action as contained in sections 216A and 216B of the Singapore Companies Act. The approach taken is a comparative one as I also look at the statutory derivative actions in Australia and other common …

Seeking Sunlight In Santa Fe's Shadow: The Sec's Pursuit Of Managerial Accountability, Donald C. Langevoort

Georgetown Law Faculty Publications and Other Works

My aim in this paper is not to justify at length an expansive "new corporation law" perspective, though I do believe in it. Nor do I want to try to resolve a controversial question that the new learning admittedly leaves open: which jurisdictional body should set the disclosure and antifraud standards insofar as they are designed to promote better corporate governance? To say that corporate and securities law are largely unitary does not necessarily mean that centralization of authority in the Securities and Exchange Commission (SEC or Commission) is the right choice. Perhaps the states, foreign countries, or stock exchanges …

Unocal Revisited: No Tiger In The Tank, Mark J. Loewenstein

Publications

No abstract provided.

Corporate Governance In The Former Soviet Union: The Failure Of The Self-Enforcing Model, J. Robert Brown Jr., Kostyantyn Shkurupiy

Sturm College of Law: Faculty Scholarship

With the fall of the Soviet Union, a number of newly independent countries emerged, many of them attempting to put in place market based institutions and legal regimes. A number of corporate scholars from the United States participated in the development of these legal regimes. In the area of corporate law, problems arose from poor draftsmanship, lack of adequate expertise and institutions, poorly functioning courts, the problem of hold over directors from the Soviet period, and corruption. As a result of these and other factors, traditional corporate statutes of the type used in most developed countries did not work effectively. …

Corporate Governance Lessons From Russian Enterprise Fiascos, Merritt B. Fox, Michael A. Heller

Articles

This Article draws on a rich array of deviant behavior in Russian enterprises to craft lessons for corporate governance theory. First, Professors Fox and Heller define corporate governance by looking to the economic functions of the firm. Based on this definition, they develop a typology that comprehensively shows all the channels through which bad corporate governance can inflict damage on a country's real economy. Second, they explain the causes of Russian enterprise fiascoes by looking to the particular initial conditions prevailing at privatization-untenable firm boundaries and insider allocation of firm shares-and the bargaining dynamics that have followed. This focus offers …

Corporate Governance Lessons From Russian Enterprise Fiascoes, Merritt B. Fox, Michael A. Heller

Faculty Scholarship

This Article draws on a rich array of deviant behavior in Russian enterprises to craft lessons for corporate governance theory. First, Professors Fox and Heller define corporate governance by looking to the economic functions of the firm. Based on this definition, they develop a typology that comprehensively shows all the channels through which bad corporate governance can inflict damage on a country's real economy. Second, they explain the causes of Russian enterprise fiascoes by looking to the particular initial conditions prevailing at privatization – untenable firm boundaries and insider allocation of firm shares – and the bargaining dynamics that have …

Executives And Hedging: The Fragile Legal Foundation Of Incentive Compatibility, David M. Schizer

Faculty Scholarship

Options are granted to executives to inspire better performance by tying pay to the employer's stock price. Yet this incentive rationale no longer holds if executives can use the derivatives market to simulate a sale of their options, a practice known as hedging. This Article evaluates the effectiveness of existing legal constraints on hedging by executives, including limits derived from contract, securities and tax law. Although investment bankers have been searching for ways around these constraints, the bottom line is that, at least for now, executives are unable to hedge option grants: While contractual limits are rare, the securities law …

Required Disclosure And Corporate Governance, Merritt B. Fox

Faculty Scholarship

One of the most distinctive features of U.S. business law is the stringent requirements of ongoing disclosure imposed on issuers of publicly traded securities. This scheme usually has been justified as necessary to protect investors from making poor trading decisions as a result of being uninformed. Little scholarly attention, however, has been paid to the corporate governance effects of such required disclosure. In analyzing these effects, this article concludes that required disclosure can improve corporate governance in important ways. Indeed, improving corporate governance, not investor protection, provides the most persuasive justification for imposing on issuers the obligation to provide ongoing …

The Devil Made Me Do It: Replacing Corporate Directors' Veil Of Secrecy With The Mantle Of Stewardship, Constance E. Bagley, Karen L. Page

San Diego Law Review

This Article argues that the nature of the corporate form coupled with an exclusive focus on shareholder value leads to economically and socially inefficient results. The "profit maximization" view of directors' duties ignores the historical reasons why corporations were given special privileges, such as limited liability, by the state. This narrow view should be replaced with a doctrine of stewardship that imposes a more comprehensive view of the corporation's and directors' responsibility to manage the vast resources held in corporate form. This broader view is consistent not only with the values of a free market economy, but also with modem …

Directors' Duty Of Care To Monitor Information Systems In Hmos: Some Lessons From The Oxford Health Plan, Mary E. O'Byrne

Journal of Law and Health

Given this scale of investment, the centrality of information systems to the success of an HMO, the obligation of regulatory compliance, plus the attention now focused on the year 2000 "millenium bug" problem, information systems are clearly a major area of concern and oversight by corporate directors. This paper analyzes the role of information systems in HMOs and the nature of the HMO directors' duty of care in monitoring the integrity of the information systems to determine when directors may be held personally liable for losses suffered by the corporation when the systems collapse. Section I addresses in general the …

Team Production In Business Organizations: An Introduction, Margaret M. Blair, Lynn A. Stout

Vanderbilt Law School Faculty Publications

For the past two decades, legal and economic scholarship has tended to assume that the central economic problem addressed by corporation law is getting managers and directors to act as faithful agents for shareholders. There are other important economic problems faced by business firms, however. This article introduces a Symposium that explores one of those alternate economic problems: the problem of "team production". Team production problems can arise whenever three conditions are met: (1) economic production requires the combined inputs of two or more individuals; (2) at least some of these inputs are "team-specific," meaning they have a significantly higher …

Privatization And Corporate Governance: The Lessons From Securities Market Failure, John C. Coffee Jr.

Faculty Scholarship

Should privatization be "fast" or "slow"? Should policymakers adopt a "Damn the torpedoes, full speed ahead" approach that accepts the inevitability of some overreaching by controlling shareholders, but justifies this cost as necessary to realize and expedite the efficiency gains incident to privatization? Or should privatization proceed more cautiously because of the risks of market failure and political corruption that may result when control seekers are tempted to bribe and seduce the judicial and regulatory systems to achieve the private benefit of control? These tempting private benefits arise, of course, precisely to the extent that privatization preceded the creation of …

Shareholder Derivative Litigation And Corporate Governance, Mark J. Loewenstein

Publications

In approving settlements of derivative actions that include fees for plaintiff's attorney, courts typically announce that attorney's fees are approved if a substantial benefit is obtained. In fact, courts, particularly Delaware courts, approve settlements in shareholder derivative actions that included substantial fees for plaintiff's attorney, despite the absence of a corresponding benefit to the corporation. Frequently, the "benefit" obtained is a reform in corporate governance, which is of dubious value to the corporation. To deter frivolous litigation, courts should resist the temptation to approve these settlements just to dispose of the litigation. The paper concludes that fees should not be …

Larger Board Size And Decreasing Firm Value In Small Firms, Theodore Eisenberg, Stefan Sundgren, Martin T. Wells

Cornell Law Faculty Publications

Several studies hypothesize a relation between board size and financial performance. Empirical tests of the relation exist in only a few studies of large U.S. firms. We find a significant negative correlation between board size and profitability in a sample of small and midsize Finnish firms. Finding a board-size effect for a new and different class of firms affects the range of explanations for the board-size effect.

Realigning Corporate Governance: Shareholder Activism By Labor Unions, Stewart J. Schwab, Randall S. Thomas

Michigan Law Review

Labor unions are active again - but this time as capitalists. The potential strength of union pension funds has long been noted, but until recently unions have held their stock passively or invested in union-friendly companies. In the 1990s, however, unions have become the most aggressive of all institutional shareholders. In most cases, it is hard to find a socialist or proletarian plot in what unions are doing with their shares. Rather, labor activism is a model for any large institutional investor attempting to maximize return on capital. Unions, union pension funds, individual union members, and labor-oriented investment funds are …

Default Rules, Wealth Distribution, And Corporate Law Reform: Employment At Will Versus Job Security, David K. Millon

Scholarly Articles

None available.

Corporate Decisionmaking And The Moral Rights Of Employees: Participatory Management And Natural Law, Stephen M. Bainbridge

Villanova Law Review (1956 - )

No abstract provided.