A Call for Reflection on Sustainable Corporate Governance

Together with other European Corporate Governance Institute (ECGI) research members, we have recently issued a Call for Reflection on Sustainable Corporate Governance to express our concerns over the risk that new legislation on EU companies’ governance is adopted without properly considering the concerns raised by many academics and interested parties during the consultations that have taken place so far. These concerns, as detailed below, focus on the three misconceptions in the approach of the European Commission and the Study on directors’ duties and sustainable corporate governance it has commissioned: (1) the conflation of two separate issues, namely corporations’ horizons and … Read more

The Contractarian Theory of the Corporation and the Paradox of Implied Terms

The contractarian theory of the corporation holds that a business corporation is a creature of contract and, more specifically, a nexus of incomplete contracts between directors, shareholders, employees, suppliers, customers, and other parties (see here). This draws attention to the express or implied consent of all the participants and suggests that the role of corporate law and the courts is to enable and support private ordering: Corporate law supplies the transaction-cost reducing standard-form terms the parties would have agreed to had they addressed them explicitly, and courts settle disagreements by filling the contractual gaps using the same hypothetical bargain … Read more

Why Board Diversity and the Nasdaq Rule Requiring It Make Sense

In December 2020, Nasdaq asked the Securities and Exchange Commission (SEC) to approve a new boardroom diversity rule.[1] The aim is for most Nasdaq-listed companies to have at least one director self-identifying as a woman and another self-identifying as an underrepresented minority or LGBTQ+.  The rule is not a requirement that listed firms have such (minimally) diverse boards, but instead is a requirement that firms either comply with this expectation or explain in their securities disclosure filings why they have not complied. Foreign companies and smaller companies will be given flexibility in satisfying this requirement with two women directors.… Read more

Religiosity, Higher Purpose, and the Effectiveness of Intense Board Oversight

Corporate boards that monitor their companies intensely engage in more effective oversight: Turnover of their CEOs is more closely linked to annual firm performance; CEO compensation is less often excessive; and earnings management is rarer. However, such boards are also associated with being lax in advising management and, as a result, the net impact of their intense monitoring on firm value is negative (e.g., Faleye, Hoitash, and Hoitash, 2011). More broadly, intense board monitoring destroys trust and hampers communication between the chief executive officer (CEO) and the independent directors and reduces the amount of strategic information that the directors receive … Read more

Can Excess CEO Confidence Increase Risk of Corporate Failure?

A recent report by KPMG [1] on the behavior of chief executive officers (CEOs) suggests that 67 percent of UK CEOs trust their intuition over data. The impact of intuition may become problematic if it is driven by biased perception. One of the most common biases among CEOs is overconfidence, a tendency to believe that they are better than they objectively are, particularly in their judgment, ability, and knowledge.

In a recent paper, we investigate whether CEO overconfidence can help explain the probability of corporate failure. Despite extensive research exploring the consequences of managerial overconfidence for corporate policies and outcomes, … Read more

The Rise of Dual-Class Stock IPOs

Public securities markets have undergone dramatic changes in recent years. Not only has the number of publicly traded firms been declining, but the nature of the firms that choose to go public has also changed. While publicly traded firms in the classic sense are thought of as widely-held  with dispersed shareholders, many of the firms that have recently elected to go public are tightly controlled by their founders or other entities via a dual-class stock structure. Almost 30 percent of IPOs in 2017-2019 had dual-class structures, including Snap, Twitter, and Dropbox. Because dual-class structures shield managers from the discipline of … Read more

Latham & Watkins Discusses ESG Considerations for Cryptocurrency

The huge rise in popularity of Bitcoin — and the growing interest by mainstream financial institutions in virtual assets as an investable and tradable asset class — has shone a light on the cryptocurrency industry’s environmental, social, and governance (ESG) performance.

The vast majority of the world’s financial institutions manage climate risk and other ESG risks in their own portfolios. As a result, many financial institutions perform related diligence on corporates they look to service, whether by traditional lending, capital markets underwriting, or direct investment. While the focus has primarily been on the ESG performance of cryptocurrency miners (given their … Read more

The New Separation of Ownership and Control: Institutional Investors and ESG

In recent weeks, the Securities and Exchange Commission (SEC) has devoted considerable attention to environmental, social and governance, or ESG, matters. It has requested public comment on climate disclosure proposals, appointed a senior policy advisor for climate and ESG, and announced that its 2021 examination priorities will include climate-related risks. Taken together, these developments indicate the SEC may be poised to mandate ESG-related disclosures. A recent post on this blog discussed the SEC’s interest in climate disclosures.

In a new article, “The New Separation of Ownership and Control: Institutional Investors and ESG,” forthcoming in the Columbia Business Law Read more

Why Unions Lose Elections

Recently, workers at Amazon dealt what has been called a “decisive” and “crushing” blow to organized labor,[1] with their proposed union receiving less than 30 percent of the votes cast, according to the federal vote counters overseeing the election.  While union officials complain that Amazon cheated by campaigning too hard against the organizing effort, a close look at the election indicates that the better argument is that Amazon workers acted rationally.

The most likely explanation for the union’s drubbing was that Amazon workers had an informed and healthy concern that becoming unionized would make them worse off.  This … Read more

How Exclusion of Women and People of Color May Have Affected Debates About Corporate Purpose

Over the last few years, the #MeToo and #BlackLivesMatter movements have facilitated a deeper understanding of racial and gender inequality and have, generally speaking, begun to create tangible changes within American life.  At the same time, corporations have begun to reflect on what role they play within the larger community.  Academic conversations over the past year have dedicated time and thought to the role of the corporation as it relates to race and gender.  One question deserving more time and attention, however, is the historical context in which the foundational debates on the appropriate role and purpose of the corporation, … Read more

The Underside of Hedge Fund Activism: Looting the Pension Fund

Hedge fund activism is a topic on which most law professors have closed their minds. They learned in student days that activist hedge funds are excellent agents of change that efficiently discipline managements at targeted firms and increase shareholder wealth. Maybe that generally happens, but we cannot stop there.

Even if activism increases shareholder wealth, that still leaves open the question of where these wealth increases come from. The standard view is that activists increase firm productivity, force the “deconglomeratization” of stagnant firms, and expose others to efficient takeovers. Of course, that does happen — sometimes. But the rival view … Read more

Repurposing the Corporation Through Stakeholder Markets

In a new article, I argue that standardized, credible, publicly available ESG information will enable corporations’ stakeholders and potential stakeholders to repurpose their corporations. By “repurpose,” I mean control the corporation and redirect its employees’ efforts to corporate social responsibility (CSR).

Repurposing’s mechanism will be the competitive markets in which the corporations acquire their resources from potential stakeholders. Potential stakeholders – persons considering becoming or remaining customers, employees, suppliers, investors, or host communities – will, by their decisions, confer benefits on the corporations they choose (ESG Benefit).  Most will exercise their discretion to confer ESG Benefit in accord with CSR … Read more

Ownership Piercing

In a new article, I build upon the paradox of ownership. My central thesis is that those who own are not always in control; therefore, those who control should be held accountable like the owners would if they were in control.

I am inspired by the theory of the firm, particularly, the model created by professors Sanford Grossman and Oliver Hart in their path-breaking article, The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration. Grossman and Hart posit that “we do not distinguish between ownership and control and virtually define ownership as the power … Read more

What Can Autonomous Corporations Teach Us About Legal Personhood?

Corporations are increasingly using technology to conduct business, seeking greater automation and efficiencies while decreasing costs. Indeed, several states are considering changes to their business-formation laws to accommodate completely automated businesses – those run through, or by, self-executing computer code and artificial intelligence. Internationally, several jurisdictions already offer corporation-equivalent business structures to completely automated businesses. Together, these developments set the stage for a world where autonomous business organizations enjoy the same rights and responsibilities as corporations – a world in which an autonomous organization enjoys the legal fiction of personhood. In a new article, Autonomous Corporate Personhood,[1] I … Read more

Cravath Discusses Board and Management Responses to ESG Considerations

Environmental, social and governance, or “ESG”, considerations are seemingly ubiquitous in the current financial, corporate and regulatory landscape. In parallel with the socio-economic upheaval of 2020 and a continuing academic debate around corporate purpose and the efficacy and forms of stakeholder governance,[1] investors are increasingly using ESG factors in decisions about how to allocate their capital.[2] This trend is seen in investors of all varieties, from large institutions (such as BlackRock and State Street, each of which has regularly published annual letters to the companies in which they are invested emphasizing ESG matters, including in 2021[3]), to a growing number … Read more

Sidley Austin Discusses Delaware Chancery’s Latest Guidance on Poison Pills

In a tale of what is old is new again, the Delaware Court of Chancery reviewed the propriety of a poison pill — a bulwark of the 1980s takeover era — but in the context of shareholder activism against the backdrop of the COVID-19 pandemic. Vice Chancellor Kathaleen McCormick’s detailed review of the pertinent case law and fact-specific decision to permanently enjoin The Williams Companies, Inc.’s extraordinary 5% poison pill offers a number of lessons for directors considering the adoption or renewal of a similar device. The Williams Cos. S’holder Litig. (Del. Ch. Feb. 26, 2021).

In March 2020, … Read more

The Shareholder in France and the U.S.: Comparing Corporate Legal Priorities

The fundamental question in the law of business organizations – what is the purpose of the corporation? – contains a related question of constituencies and, therefore, priorities among them: Whom does the corporation serve?  If, for example, the purpose that justifies the existence of the corporation is the maximization of share price, then it follows that the corporation exists to serve the shareholders that are the beneficiaries of share price increases.  The answers to such questions are encoded in the laws governing the decisions of a corporation’s directors and managers and regulating the transactions that allocate the benefits and the … Read more

Prosocial Antitrust

Recent developments have placed antitrust law on a collision course with corporate purpose. In a new paper, I reveal the unforeseen negative impacts of this conflict and provide a roadmap for avoiding them.

Businesses and investors are increasingly embracing an expansive view of corporate purpose – one that looks beyond profit-maximization and addresses systemic risks, such as climate change and income inequality. This broad view of corporate purpose is championed not only by employees, lawmakers, NGOs, and society at large, but also by the world’s largest investors and asset managers, who are urging companies to serve a social purpose. … Read more

Gibson Dunn Discusses Mandatory Corporate Human Rights Due Diligence

In this two-part alert, we examine key global legislative developments and proposals in the bourgeoning field of mandatory corporate human rights due diligence. In Part One (available here), we looked at very recent steps taken by the institutions of the EU towards implementation of legislation at a pan-European level.  In this Part Two, we consider developments within the EU and in the UK, and we also look beyond Europe, to APAC, the US and Canada.

Developments Within Europe

France

In 2017, France introduced a pioneering piece of legislation: the Loi de Vigilance[1]  (the “LDV”), which inserted … Read more