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Abstract:
The Sarbanes-Oxley Act (the Act), signed into law by President Bush in July 2002, creates the need to re-think the way we approach our study of corporate governance in two ways and has the potential (depending upon the results of, and actions taken in response to, various studies that are required to be completed under that Act during the next year) dramatically to change the way we think about, write about and teach corporate law. The Act makes three specific changes in the way we think about corporate governance: first, it brings into the realm of internal governance the gatekeepers that once stood outside the box, including auditors, analysts and lawyers. Second, it significantly enhances the legal status of, and centrality of corporate governance to, the chief executive officer and the audit committee, two constituents that have received very little recognition in the law and its literature. Third, both in doing this and in other respects (like the prohibition of loans to officers and certain other conflict of interest transactions), it federalizes an important dimension of the internal laws of corporate governance, creating a new (albeit arguably narrow) duty of care for the CEO and audit committee and reintroducing serious prohibitions on conflict of interest transactions that have eroded to nothingness in the hands of the Delaware judiciary and legislature.

In Part I, I set the background of the traditional roles of the gatekeepers now to be brought within the gates. Part II explains how the Act and the regulations link up these gatekeepers with aspects of corporate governance traditionally treated as internal to the corporation and their potential effects on corporate governance. The message is that it is finally time for scholars of corporate governance to look inside the corporate box, not just at the structure, in order to understand and evaluate the important linkages between outside parties, corporate structure and actual corporate behavior. Part III concludes with a more detailed examination of the ways in which the Act has the potential to defeat the hegemony of finance over business and, in the process, reverse the ethic of stock price shorttermism to long-run business management, as well as the ways in which this not only will benefit corporations and their shareholders but their constellation of constituents as well.

These insights are necessarily speculative. The Act is new. Regulations are in the process of being adopted. We have hardly begun to sort through the various causes of the corporate crisis of 2002. Moreover, corporate managers, investment bankers, accountants and lawyers have shown themselves to be enormously adept at evading the substance of regulation even as they may comply with its form. In the absence of detailed regulation and vigorous enforcement, the Act could turn out to be so much sound and fury signifying nothing. I therefore present these observations in the spirit of suggesting what the Sarbanes-Oxley Act can be at its best. Whether in practice it achieves these results remains to be seen.

Enron, Corporate Governance, Securities Law, Securities Regulation, Corporate Law, Sarbanes-Oxley

Abstract:
Corporate social responsibility has become an increasingly common topic of academic discourse over the past decade. In this essay, I argue that the typical focus on enhanced disclosure, codes of conduct, statements of principle and the like is misplaced. Indeed history shows that attempts to achieve corporate social responsibility directly are bound to fail. The issue is too important to be left to politics. It should be relocated where it properly lies, in business itself.

The central barriers to achieving corporate social responsibility are the norm of shareholder-valuism and its contemporary manifestation as short-term share price maximization. The most successful way to redress these problems is to employ the tools of corporate governance to achieve the goals of corporate social responsibility by creating incentives for long-term management and diminishing incentives for short-term management. After briefly discussing the history of the rise of shareholder-valuism as a function of 1970s political upheaval leading to the creation of the monitoring board, I make a series of reform suggestions to create long-term managerial incentives and enhance board accountability. These include capital gains tax reform and accounting changes to capitalize certain worker compensation and training expenses. I also propose that each corporate director be required to include with the corporation's annual report a 1,000 word, free-form statement identifying the director's ideas about important corporate issues and her business philosophies as a means of introducing individual director accountability into an environment that traditionally has accepted less-effective group accountability.

corporate social responsibility, CSR, corporations, corporate governance, board of directors, shareholder-valuism, short-termism, shareholders, managers

Abstract:
The Speculation Economy identifies the moment in American history when finance triumphed over industry. It shows how the birth of the giant modern corporation spurred the rise of the stock market and how, by the dawn of the 1920s, the stock market left behind its business origins to become the very reason for the creation of business itself. The consequent widespread distribution of intrinsically speculative common stock embedded speculation into the capital structures of most large American corporations.

The stock market become the driving force of the American economy in the first decade of the 20th century as a result of the birth of the giant modern corporation. The Speculation Economy tells the story of the legal, financial, economic and social transformations that allowed financiers to collect companies and combine them together into huge new corporations for the main purpose of manufacturing stock and dumping it on the market. Businessmen started to make more money from legal and financial manipulation than from practical business improvements like innovations in technology, management, distribution, and marketing.

The Speculation Economy explains how and why, at the turn of the 20th century, the stock created by the giant modern corporation became dispersed throughout the market. It shows the shift in attitudes of ordinary Americans from cautious bond buyers into eager stock speculators. At the same time, it shows how a federal government wedded to an outdated economic model and struggling to expand its own power failed to regulate finance and thus missed the chance to control corporations. While politicians argued, finance came to dominate industry, and as stock ownership spread widely throughout society, the stock market came to dominate finance.

The Speculation Economy examines this history in detail from the perspectives of the economic history of the growth of the market, the social history of early stockholding, the intellectual history of financial analysis of the era, the federal regulatory attempts to control the giant combinations, and the roots of modern securities regulation that emerged from the antitrust debate of the first decade of the 20th century.

The downloadable paper includes the Table of Comments and Prologue of The Speculation Economy.

stock, stockholders, mergers, shareholders, valuation, antitrust, finance theory, securities, securities regulation,progressive, Roosevelt, Taft, Wilson, Pujo, shareholder valuism, Panics, Sherman Act, federal incorporation, Hughes, Hadley , railroad regulation, ICC, FTC, SEC, corporations, trusts

Abstract:
Trust has become an important area of study not only in law but in the social sciences generally. Most of the work that has been done focuses on the nature of trust and the phenomenon of trusting. This paper looks at the trust relationship from the different perspective of the trusted person. It first examines leading models of trust put forth by Oliver Williamson and Russell Hardin and argues that these models capture neither the experience of being trusted nor the particular virtue of being trusted (as distinguished from being trustworthy.) It then puts forth a different conception of trust. This draws upon the moral psychology of David Hume and Adam Smith, among others, to attempt to understand why the experience of being trusted helps to build social capital not only in the corporate context but in a broader social context as well. The paper concludes with an example drawn from corporate law to illustrate how being trusted both enhances our own trustworthiness and our willingness to trust.

Abstract:
The Delaware Chancery Court's recent decision in the Disney case raises the question of how we've come to accept an institution with such minimal duties as the board of directors as the principal legitimating device of modern corporate governance. In this article I examine the history of the development of the monitoring model of the board of directors, the model clearly dominant today and affirmed in Disney. My conclusion is that the monitoring board was developed by academics as a sincere reform effort. However, in practice it was corrupted, to be used not for governance purposes but as a liability shield. The article lays out and analyzes this history.

The story has significance for corporate governance reform. Most reform suggestions begin with the monitoring model as the accepted starting point. To begin with a model that quickly developed in order not to work is to ensure that reform will fail. Moreover, reform efforts continue to disregard the real seat of corporate power, the CEO and senior management. In order to succeed, reformers either must completely reconceptualize the board or acknowledge and account for the power of the CEO in their governance models.

Disney, boards, monitoring, outside, independent, history, ALI, function, governance, corporations, directors

Abstract:
Recent studies have questioned the desirability of independent boards. This paper presents and examines two principal hypotheses and four subsidiary hypotheses to explain these results. The two principal hypotheses are:

1. Corporations that have inside boards will have weak CEOs.

2. Corporations that have independent boards will have strong CEOs.

The four subsidiary hypotheses are:

1. Corporations that are hierarchically structured and have inside boards will have weak CEOs.

2. Corporations that are hierarchically structured and have independent boards will have moderately weak CEOs.

3. Corporations that are horizontally structured and have inside boards will have moderately strong CEOs.

4. Corporations that are horizontally structured and have independent boards will have strong CEOs.

The hypotheses are examined through the lens of structural hole theory and recommendations for reform and further research are provided.

corporate governance, independent directors, board of directors, structural holes

Abstract:
Data on historical and current corporate finance trends drawn from a variety of sources present a paradox. External equity has never played a significant role in financing industrial enterprises in the United States. The only American industry that has relied heavily upon external financing is the finance industry itself. Yet it is commonly accepted among legal scholars and economists that the stock market plays a valuable role in American economic life, and a recent, large body of macroeconomic work on economic development links the growth of financial institutions (including, in the U.S, the stock market) to growth in real economic output. How can this be the case if external equity as represented by the stock market plays an insignificant role in financing productivity? This paradox has been largely ignored in the legal and economic literature.

This paper surveys the history of American corporate finance, presents original and secondary data demonstrating the paradox, and raises questions regarding the structure of American capital markets, the appropriate rights of stockholders, the desirable regulatory structure (whether the stock market should be regulated by the Securities and Exchange Commission or the Commodities Futures Trading Commission, for example), and the overall relationship between finance and growth.

The answers to these questions are particularly pressing in light of a dramatic increase in stock market volatility since the turn of the century creating distorted incentives for long-term corporate management, especially trenchant in light of the recent global financial collapse.

A second paper in this series will examine the theoretical justifications for the importance of the stock market as perhaps the central financial institution in the United States.

finance-growth nexus, stock market, corporate finance, stock, debt, securities regulation, corporate governance, financial history, equity, finance theory, external finance, retained earnings

Abstract:
A deeply ingrained, seemingly ineradicable, hostility to plaintiffs' lawyers and especially to plaintiffs' lawyers in stockholder suits seems to have existed for most of the past century. This hostility is manifest not only in the tone of judicial opinions but in law review articles, the popular press, and, often, in legislation. This article analyzes the circumstances under which the first security-for-expense statute was adopted in New York in 1944, including the contemporaneous justification for the statute, focusing on the demographics of the New York bar at the time and the ethnic sociology of New York. In so doing, it concludes that both the statute and the justification were deeply flawed, and finds a pervasive antisemitism as a proximate cause of the statute's adoption. The article further goes on to argue that this antisemitism poisons, albeit subconsciously, our contemporary attitudes towards plaintiffs' lawyers, an attitude which led to excessive and poorly justified restrictions on stockholders' litigation in the Private Securities Litigation Reform Act of 1995. The author concludes that this history should caution us to be careful in examining our motivations for restricting the corporate plaintiffs' bar.

Abstract:
In recent years there has been significant ongoing academic debate over the expansion of public shareholders' participation rights in corporate governance. The debate has accompanied a dramatic increase in institutional shareholder and hedge fund activism attempting to influence the conduct of corporate affairs.

The legitimacy of shareholder participation rights depends upon the actual role public shareholders play in contributing to the corporation's function of providing goods and services and, ultimately, to economic growth and social welfare. Nobody in the debate has stopped to examine this question. This paper presents original empirical evidence that demonstrates that public shareholders do not, on net, contribute capital to finance industrial production, and in fact are net consumers of corporate equity. Moreover, their investment incentives significantly distort the behavior of corporate managers who place strong emphasis on stock price at the expense of long-term business health, a fact that has played some role in the current global financial debacle. The logical conclusion is that public shareholders' rights should, ideally, be eliminated, and certainly not expanded or enhanced.

shareholders, voting, shareholder rights, corporate governance, finance, stock market, finance-growth nexus, stock, shares

Abstract:
This brief essay explores the economic and social legitimacy of modern financial markets, with particular attention to the relationship between risk and responsibility. Using the markets for corporate common stock and mortgaged-backed securities as illustrations, and modern portfolio theory as its theoretical base, it raises questions about the links between capital markets and the real economy, and their effects upon each other. It concludes that capital markets largely have become disconnected from the real economy and have created a context in which finance finances finance rather than production.

This theoretical essay introduces a larger empirical project in progress in which I am attempting to understand in detail and nuance the relationships between capital markets and the formation of productive capital.

finance, capital, stock, CAPM, portfolio theory, responsibility, risk, Graham, Dodd, Markowitz, Sharpe, Lintner, MBOs, CDOs, mortgage backed securities, collateralized debt obligations, stock, common stock, portfolio, securities, corporations, mortgage, real economy, production,

Abstract:
This is a review of the book Raghuram G. Rajan & Luigi Zingales, Saving Capitalism from the Capitalists (2003). In this book, the authors appear as latter-day Adam Smiths to tout the power and beauty of free markets, or more specifically the power of capital markets. Their tale is informed by recent work in psychology as well as two well-functioning hearts and focuses considerable attention on the important role free capital markets can play in the developing world. Despite the story's frequent elegance, in the end, it is more a fairy tale than an accurate description of the liberating powers of finance. The authors remain so committed to the ideal of a free market that they too frequently fail to see the full effect of its deformities, and ignore the many stories of the harm that free markets often bestow.

finance, capitalism, free markets

Abstract:
One of the persistent tropes in the debate over the desirability of private securities class actions is that innocent shareholders pay the damages. The claim that shareholders are indeed innocent has rarely been examined. In this paper, I take the assertion seriously, tracing the use of the concept from its origins as a rhetorical anti-regulatory device from the 1890s through about 1920, its disappearance as the rising New Deal concern with corporate power led to a variety of academic, regulatory, and popular efforts to achieve shareholder empowerment, and its re-emergence in the 1970s as modern finance theory and its application separated the shareholder from the corporation and reconceptualized her as a passive diversified receptacle of profit. The dominant economic thinking has been so widely accepted that rejuvenated claims of shareholder innocence are made at least as often by those in favor of regulation as by those against it.

Following my presentation of this history, I argue that the contemporary innocent shareholder argument ignores both the reality and emerging theory of shareholder empowerment, and make some suggestions as to why and how shareholders can and should be expected to take a share of responsibility for market integrity. Damages awards in class actions help to create the proper incentives.

class actions, damages, compensation, deterrence, corporate responsibility, shareholder activism, proxies, finance theory, finance, history, Roosevelt, Brandeis, Douglas, Berle, Means, Wilson, Progressive Era, antitrust, securities, reform, disclosure, corporations, enterprise liability

Abstract:
In this essay I address the question posed by Bill Klein that formed the basis for the symposium in which this piece appears: What are the criteria for good corporate law? I begin with the presumption that has dominated American thinking about corporations almost from the inception - corporate law should seek to promote efficiency. But there is a second dimension of equal importance that helps to legitimate this first goal. Corporate law should seek to protect those who are vulnerable to the corporation.

Efficiency is almost always taken to mean efficiency to the end of wealth maximization. I question this assumption and argue that it is both an undesirable goal from the corporation's perspective as well as an incoherent goal. The proper metric for efficiency is, instead, efficiency in the production of goods and the provision of services. Production of goods and the provision of services is why, after all, we permit corporations to exist. Once the undesirability and incoherence of wealth maximization and the virtues of this new metric become clear, the protection of those vulnerable to the corporation becomes easier to conceptualize and make operational.

In the end, however, to be good corporate law, as to be good law generally, we must be honest both about what law is doing and what it is capable of accomplishing. I conclude that law has little if any role to play in creating rules or incentives for corporations to maximize the efficiency of their production of goods and services. The best law can do in this regard is to get out of the way. I further conclude that we have been dishonest in our assertions that corporate law protects shareholders.

corporations, governance, wealth, products, efficiency, vulnerability, shareholder, corporate purpose, fiduciary

Abstract:
The recent frontrunning by specialists on the New York Stock Exchange call for an explanation of why an institution thought to be efficient has flaws that permit this activity. The conclusion is that not only the NYSE, but the entire American securities market, is structured in a way that virtually automatically diverts rents to outsiders. Institutional theory and economic sociology reveal that market structure alone ensures rent transfers from retail investors to market professionals, regardless of the motivations of behavior of the latter. The theory is explained and additional uses suggested.

securities, finance

Abstract:
This chapter is a preliminary exploration of the interdependence of finance and the rules of corporate governance. The authors argue that the surviving rules and norms of corporate governance, among many that jurists articulated throughout the twentieth century, were primarily those that reflected the financial realities of their times. Finance drove the reconceptualization of New Jersey corporate law at the turn of the twentieth century, which in turn facilitated the great merger wave that catalyzed the intertwined movements for federal incorporation and antitrust reform. Finance made the 1920s’ and 1930s’ attempts to restrain corporate power ineffective. Finance shaped our understanding of the form and function of the board of directors during the mid-century age of managerialism; and finance led to the broad acceptance of the monitoring board and the norm of shareholder valuism in the last decades of the twentieth century. The current financial crisis illustrates some of the consequences of law’s deference to finance.

finance, corporate law, stock, stock markets, shareholders, shareholder proposals, corporate history, shareholder valuism, managerialism

Abstract:
The article is a sympathetic critique of the new jurisprudence of norms as developed principally by law and economics scholars. While the article applauds the intuition that has led such scholars to examine the role of non-legal norms in cooperative human conduct and the relationship of such norms to law, it concludes that the narrowly behavioral understanding of normativity that dominates this scholarship and the limited understanding both of obligation and of the nature of law reflected in this work diminishes its utility in developing a realistic understanding of norms and normativity. In particular, the article argues that the retention of basic neo-classical assumptions in this endeavour is self-defeating, that the new norms jurisprudes misunderstand the moral psychology that helps to create and sustain obligation, that the narrow Austinian understanding of law implicit in much of this work leads it to distort the relationship of law and norms, and that the nominalism of the approach leads the new norms jurisprudes away from a complex understanding of the interrelationship of the various norms systems in which we all function. The article suggests some directions for further research and thought in order to enrich a project that has much promise but has yet to make significant progress.

Abstract:
While economic relations are highly motivated by self-interest, successful team production requires trust and cannot be understood in economic terms alone. Drawing upon scholarship in social psychology, organizational behavior, economics, and philosophy, this article investigates the role of trust at three levels: inter-firm cooperation, the governance of a single corporation, and the management of production within a single corporation. The author argues that trust is important in team production at all these levels and that the degree of trust at each level is interdependent on the degree of trust at the other levels.