Addressing the Auditor Independence Puzzle: Regulatory Models and Proposal for Reform

Auditors play a major role in corporate governance and capital markets. They facilitate firms’ access to financing by creating trust among public investors with efforts to prevent misbehavior and financial fraud by corporate insiders. In order to fulfill these goals, however, in addition to having the adequate knowledge and expertise, auditors should perform their functions in an independent manner. Unfortunately, auditors are subject to conflicts of interest by, for example, providing non-audit services or the mere fact of being hired and paid by the audited company. Therefore, even if auditors act independently, investors have reason to think otherwise. This lack … Read more

Implementing Basel Capital Requirements: The Dark Side

Following the recommendations of the Basel Committee on Banking Supervision, most financial systems around the world have imposed new capital requirements for banks in recent years. These moves seem to be justified on two powerful economic grounds. First, better capitalized banks promote financial stability by reducing banks’ incentives to take risks and increasing banks’ buffers against losses. Second, lack of compliance with a set of rules established by an internationally recognized institution such as the Basel Committee may harm confidence in a country´s financial system.

In a recent paper (available here), however, we argue that the implementation of Basel … Read more

Shareholder Activists: A Threat for the Global Economy?

The rise of shareholder activism has become a global phenomenon. Shareholder activists are not only present–as they started–in the US, but also in European and Asian Markets.[1] This situation has generated a vast literature about the desirability (or not) of shareholder activism. [2] In essence, there are two main positions: (i) those who argue that shareholder activists improve the corporate governance of the firm, and therefore they help increase the value of the firm;[3] and (ii) those who claim that shareholder activists only improve the value of the firm in the short-term, and they encourage managers to cut … Read more

Re-Examining the Business Judgment Rule from a Comparative Perspective: Is it Really in the Shareholders’ Interest?

One of the most remarkable features of US corporate law–at least, from the perspective of a foreign scholar–is the power given to the board of directors. Under current US corporate law (especially, in Delaware), the authority of the board of directors is not in significant question. Several arguments have been given to explain this reality; and various policy justifications may even support the lack of substantive checks on board discretion.

From the shareholders’ perspective, this authority of the board of directors means that they will virtually have no powers to intervene in the business affairs of the corporation, even with … Read more