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Abstract: Settlements reached in 2005 in securities litigation involving Enron and WorldCom highlighted the financial risks faced by outside directors of public companies. We argue elsewhere that Enron and WorldCom, as instances where directors made damages payments out of their own pockets, are and likely will remain exceptional in the United States (see Bernard Black, Brian Cheffins and Michael Klausner, Outside Director Liability, http://ssrn.com/abstract=894921). In this paper, we show that the risk of out-of-pocket payment is likewise very low on a cross-border basis, in both common law and civil law countries. The largest source of risk is efforts by government agencies to make an example of particular directors, even when the cost of doing so likely exceeds the financial recovery. We study Britain and Germany in depth and offer summaries of the position in Australia, Canada, France, and Japan. We find that while specific laws quite often differ, there is substantial functional convergence. In each country we analyze, due to a combination of substantive law, procedural rules, and market forces, the out-of-pocket liability risk faced by outside directors of public companies is similar - present but very small. We draw upon our cross-border analysis to assess the legal risks outside directors can expect to face going forward, both in the United States and elsewhere. We also briefly consider whether the current approach reflects sensible public policy. Earlier pieces of this overall project are: http://ssrn.com/abstract=382422 (a pre-Enron and WorldCom version of "Outside Director Liability") http://ssrn.com/abstract=878135 (policy analysis) http://ssrn.com/abstract=628223 (study of Korea) http://ssrn.com/abstract=682507 (summary article for a finance audience) http://ssrn.com/abstract=800584 (Germany-centered) http://ssrn.com/abstract=800604 (German language version of Germany-paper) http://ssrn.com/abstract=590913 (summary article for a practitioner audience)
outside directors, director liability, corporate law, securities law, indemnification, D&O insurance, derivative suits, securities class actions
Abstract: This is an EARLY version of our published article, Outside Director Liability, which is also on SSRN at http://ssrn.com/abstract=894921. A companion article, Brian Cheffins & Bernard Black, Outside Director Liability Across Countries, Texas Law Review (forthcoming 2006), http://ssrn.com/abstract=438321), studies six comparison common-law and civil-law countries (Australia, Britain, Canada, France, Germany, and Japan). These two articles are the most fully developed of our articles on outside director liability. This early version was completed before the Enron and WorldCom settlements in 2005. We have left it on SSRN because Parts III and IV were not included in our published work. ABSTRACT FOR THIS PAPER: Outside directors can do a bad job, sometimes spectacularly. Yet outside directors of U.S. public companies who fail to meet what we call their vigilance duties under corporate, securities, environmental, pension, and other laws almost never face actual out-of-pocket liability for good faith conduct. Their nominal liability is almost entirely eliminated by a combination of indemnification, insurance, procedural rules, and the settlement incentives of plaintiffs, defendants, and insurers. The principal risk of actual liability is under securities law, for an insolvent company (which can neither pay damages itself nor indemnify the director) and a seriously rich (hence worth chasing) director, where damages exceed the D&O insurance policy limits and the director does not represent an institution that can indemnify him. The principal sanction against outside directors is harm to reputation, not direct financial loss. Other pieces of our overall research on Outside Director Liability are listed below. http://ssrn.com/abstract=878135 (policy analysis) http://ssrn.com/abstract=628223 (study of Korea) http://ssrn.com/abstract=682507 (summary article for a finance audience) http://ssrn.com/abstract=800584 (Germany-centered) http://ssrn.com/abstract=800604 (German language version of Germany-paper) http://ssrn.com/abstract=590913 (summary for practitioner audience)
directors, corporate goverance, liability, securities law, corporate law
Abstract: Private equity, characterized by firms operating as privately held partnerships organizing the acquisition and "taking private" of public companies, has recently dominated the business news due to deals unprecedented in number and size. If this buyout boom continues unabated, the 1989 prediction by economist Michael Jensen of The Eclipse of the Public Corporation could be proved accurate. This article argues matters will work out much differently, with the current version of private equity being eclipsed. One possibility is that a set of market and legal conditions highly congenial to "public-to-private" transactions could be disrupted. A "credit crunch" commencing in the summer of 2007 stands out as the most immediate threat. The article draws on history to put matters into context, discussing how the spectacular rise of conglomerates in the 1960s was reversed in subsequent decades and how the 1980s buyout boom led by leveraged buyout associations - the private equity firms of the day - collapsed. If legal and market conditions remain favorable for private equity, its eclipse is likely to occur in a different way. Privacy has been a hallmark of private equity, with industry leaders operating as secretive partnerships that negotiate buyouts behind closed doors and restructure portfolio companies outside the public gaze. However, the private equity boom created momentum among market leaders to carry out public offerings and diversify their operations. If this trend proves sustainable, then even if the taking private of publicly quoted companies remains a mainstream pursuit, the exercise will be carried out in the main by broadly based financial groups under the umbrella of public markets.
Abstract: Private equity, characterized by firms operating as privately held partnerships organizing the acquisition and "taking private" of public companies, is currently dominating the business news due to deals growing rapidly in number and size. If the trend continues unabated, the 1989 prediction by economist Michael Jensen of "the eclipse of the public corporation" could be proved accurate soon. This paper argues matters will work out much differently, with private equity being at least partially eclipsed. One possibility is that current market and legal conditions, which are highly congenial to public-to-private transactions, could be disrupted in ways that cause the private equity surge to stall or even go into reverse. The paper draws on history to make this point, discussing how the spectacular rise of conglomerates in the 1960s was reversed in subsequent decades and how the 1980s buyout boom led by LBO associations - the private equity firms of the day - collapsed. Factors that undercut conglomerate mergers and buyouts by LBO associations (e.g. the tightening of debt markets and increased regulation) potentially could do the same with the current wave of private equity buyouts, and cause at least a temporary eclipse of private equity deals. Even if conditions remain favorable to private equity, its eclipse is likely to occur in a different way. Privacy has been a hallmark of private equity, with industry leaders operating as secretive partnerships that negotiate buyouts behind closed doors and restructure portfolio companies outside the public gaze. However, assuming market conditions remain sufficiently favorable, top private equity firms, following the lead of the Blackstone Group, may well carry out public offerings. If this happens, then even if the taking private of publicly quoted companies remains a mainstream pursuit, the exercise will occur largely under the umbrella of public markets.
private equity, buyouts, public-to-private transactions, debt markets, regulation, corporate governance
Abstract: This Article analyzes the degree to which outside directors of public companies are exposed to out-of-pocket liability risk - the risk of paying legal expenses or damages pursuant to a judgment or settlement agreement that are not fully paid by the company or another source, or covered by directors' and officers' (D&O) liability insurance. Recent settlements in securities class actions involving WorldCom and Enron, in which lead plaintiffs succeeded in extracting out-of-pocket payments from outside directors, have led to predictions that such payments will become common. We analyze the out-of-pocket liability risk facing outside directors empirically, legally, and conceptually and show that this risk is very low, far lower than many commentators and board members believe, notwithstanding the WorldCom and Enron settlements. Our extensive search for instances in which outside directors of public companies have made out-of-pocket payments turned up thirteen cases in the last twenty-five years. Most involve fact patterns that should not recur today for a company with a state-of-the-art D&O insurance policy. We offer a detailed assessment of the liability risk outside directors face in trials under corporate and securities law, including settlement dynamics. We argue that, going forward, if a company has a D&O policy with appropriate coverage and sensible limits, outside directors will be potentially vulnerable to out-of-pocket liability only when (1) the company is insolvent and the expected damage award exceeds those limits, (2) the case includes a substantial claim under section 11 of the Securities Act or an unusually strong section 10(b) claim, and (3) there is an alignment between outside directors' or other defendants' culpability and their wealth. Absent facts that fit or approach this perfect-storm scenario, directors with state-of-the-art insurance policies face little out-of-pocket liability risk, and even in a perfect storm they may not face out-of-pocket liability. The principal threats to outside directors who perform poorly are the time, aggravation, and potential harm to reputation that a lawsuit can entail, not direct financial loss. A companion article, Brian Cheffins & Bernard Black, Outside Director Liability Across Countries, 84 Texas Law Review 1385-1480 (2006), http://ssrn.com/abstract=438321, studies six comparison common-law and civil-law countries (Australia, Britain, Canada, France, Germany, and Japan). This article and Outside Director Liability Across Countries are the most fully developed of our articles on outside director liability. Earlier pieces of this overall project are listed below. http://ssrn.com/abstract=382422 (a pre-Enron and WorldCom version of this article) http://ssrn.com/abstract=878135 (policy analysis) http://ssrn.com/abstract=628223 (study of Korea) http://ssrn.com/abstract=682507 (summary article for a finance audience) http://ssrn.com/abstract=800584 (Germany-centered) http://ssrn.com/abstract=800604 (German language version of Germany-paper) http://ssrn.com/abstract=590913 (summary for practitioner audience)
outside directors, corporate law, securities law, indemnification, D&O insurance
Abstract: Outside directors constitute a key component of most prescriptions for good governance of public companies. Given that outside directors are important corporate governance players, one is led to wonder what will motivate the individuals serving in this capacity to carry out their responsibilities in an effective manner. An obvious possibility is that concerns about being held personally liable will push them to perform effectively. This chapter correspondingly considers the scope of outside director liability in seven countries (Australia, Britain, Canada, France, Germany, Japan and the United States). The chapter indicates that outside directors of public companies are at some risk when litigants are seeking to send a message to those serving in the boardroom of public companies. Generally, however, such individuals only very rarely pay damages or legal expenses out-of-their own pocket. The chapter offers a brief assessment of the costs and benefits of current arrangements and concludes that, consistent with the current cross-border pattern, out-of-pocket liability should remain a rare outcome.
outside directors, corporate governance, Germany, supervisory board, director liability, securities law, corporate law
Abstract: Influential contributors to debates concerning corporate governance assert that it is impossible to understand key trends without taking politics into account. This proposition has, however, remained largely untested. This paper therefore offers an empirical study of the relation between politics and corporate governance, with the focus being on the determinants of dividend policy in publicly quoted United Kingdom (U.K.) companies between 1950 and the present. The departure point is the well-known partial adjustment model of dividend policy, which we augment to take into account the ideological orientation of the party in power and other potentially salient proxies for politics (e.g. tax policy and dividend controls). The model is tested by reference to aggregate annual data on earnings and dividends. The results indicate that the political placement of the party in office lacks explanatory power. Moreover, even when politics manifests itself in regulation explicitly designed to regulate corporate behaviour, political variables generally do not correlate in the predicted direction with dividend pay-outs. The evidence therefore is inconsistent with the proposition that politics shape corporate governance.
corporate governance, dividend policy, politics, tax rules, dividend controls, unions, labor costs, corporate law
Abstract: Britain has a distinguished pedigree as an exporter of legal concepts and innovations but its influence has diminished in recent years. The pattern with respect to company law has been representative of these broader trends. Still, the possibility exists that the United Kingdom (UK) will become a reference point for other jurisdictions in the corporate governance area. This essay considers whether this is likely to occur. Two sets of initiatives are analysed. First, there is a discussion of the work done by three corporate governance panels which issued reports during the 1990s, these being the Cadbury, Greenbury and Hampel Committees. An innovative feature of the work done by these committees was the use of a "Code of Best Practice" approach. Each committee issued a succinct Code, key elements of which the London Stock Exchange subsequently adopted as part of its listing rules. The "Code of Best Practice" approach is proving to be highly influential outside the UK. In a substantial number of countries, committees studying corporate governance issues have issued best practice codes. Often, stock market officials and securities regulators have followed up by amending rules governing publicly traded companies. Second, proposals designed to advance the cause of "stakeholders" affected by corporate activity are considered. Britain's Department of Trade and Industy is currently undertaking a fundamental review of company law and its work is being co-ordinated by a Steering Group. In a consultation document released in 1999, the Steering Group considered the "pluralist" approach to the company. Under this approach, companies are supposed to serve the interests of a number of groups rather than treat the priorities of shareholders as being overriding. The Steering Group discussed various changes that could be made to align the law with the pluralist conception of the company. These proposals seem unlikely to have a major impact outside the UK. Since stakeholder issues have already been widely debated in continental Europe and in North America, the Steering Group's work is insufficiently novel or innovative to attract much attention.
Abstract: The corporate world today subdivides into rival systems of dispersed and concentrated ownership, with different corporate governance structures characterising each. Various corporate governance experts have argued that ownership concentration is a consequence of poor legal protection of shareholders. The experience in the United Kingdom casts doubt, however, on the extent to which legal regulation matters in the corporate governance context. Developments in the UK suggest that a highly specific set of laws governing companies and financial markets do not have to be in place in order for dispersed share ownership and strong securities markets to develop. Instead, alternative institutional structures can perform the function "law matters" advocates say the legal system needs to play.
Abstract: The corporate world today subdivides into rival systems of dispersed and concentrated ownership, with different corporate governance structures characterising each. The United States and the United Kingdom fall into the former category and other major industrial countries tend to fall into the latter. There is anecdotal evidence that suggests market forces are serving to destabilise traditional structures and cause some form of convergence along American corporate governance lines. According to some corporate governance experts, a variable that will affect how far matters will progress is the law. They argue that because the law "matters", a transition to the US pattern of corporate governance will occur only gradually and tentatively unless there is a legal environment which is hospitable to dispersed share ownership. This paper provides evidence on the extent to which legal regulation does "matter" in the corporate governance context. The approach is historical in orientation and the focus is on the emergence of a separation of ownership and control, characterised by widely dispersed share ownership and strong managers, in the United Kingdom. The experience in Britain is instructive because, with respect to corporate governance, no other major industrial nation has more in common with the United States. Developments in the UK suggest that a highly specific set of laws governing companies and financial markets does not have to be in place to ensure that a separation of ownership and control becomes a central feature of a country's corporate governance system. Instead, alternative institutional structures can perform the function "law matters" advocates say the legal system needs to play. It is an open question, however, whether such alternatives are likely to emerge in countries where a transition to the American pattern of corporate governance could be in progress.
ownership, corporate governance, legal regulation, convergence
Abstract: Market forces allegedly are serving to destabilise traditional business structures and cause some form of convergence along "Anglo-American" lines. While this trend has been the subject of much debate, it has not been widely commented on in Australia. Moreover, those analysing corporate governance from a comparative perspective have had little to say about the country. Since Australia shares much in common with the US and the UK, those interested in a possible Anglo-American convergence trend can potentially benefit from examining Australian developments. This paper identifies various questions that require analysis to place the country's experience in its proper context. Answers are offered for the questions raised but the primary purpose of the paper is to launch a dialogue between Australians interested in corporate governance and their counterparts elsewhere.
Abstract: Much has been said recently about the risky legal environment in which outside directors of public companies operate, especially in the USA, but increasingly elsewhere as well. Our research on outside director liability suggests, however, that directors' fears are largely unjustified. We examine the law and lawsuit outcomes in four common law countries (Australia, Canada, Britain, and the USA) and three civil law countries (France, Germany, and Japan). The legal terrain and the risk of 'nominal liability' (a court finds liability or the defendants agree to a settlement) differ greatly depending on the jurisdiction. But nominal liability rarely turns into 'out-of-pocket liability,' in which the directors pay personally damages or legal fees. Instead, damages and legal fees are paid by the company, directors' and officers' (D&O) insurance, or both. The bottom line: outside directors of public companies face a very low risk of out-of-pocket liability. We sketch the political and market forces that produce functional convergence in outcomes across countries, despite large differences in law, and suggest reasons to think that this outcome might reflect sensible policy.
Abstract: Much has been said recently about the risky legal environment in which outside directors of public companies operate, especially in theUSA, but increasingly elsewhere as well. Our research on outside director liability suggests, however, that directors' fears are largely unjustified. We examine the law and lawsuit outcomes in four common law countries (Australia, Canada, Britain, and the USA) and three civil law countries (France, Germany, and Japan). The legal terrain and the risk of 'nominal liability' (a court finds liability or the defendants agree to a settlement) differ greatly depending on the jurisdiction. But nominal liability rarely turns into 'out-of-pocket liability,' in which the directors pay personally damages or legal fees. Instead, damages and legal fees are paid by the company, directors' and officers' (D&O) insurance, or both. The bottom line: outside directors of public companies face a very low risk of out-of-pocket liability. We sketch the political and market forces that produce functional convergence in outcomes across countries, despite large differences in law, and suggest reasons to think that this outcome might reflect sensible policy. This article is a condensed version, for a finance audience, of Bernard Black, Brian Cheffins and Michael Klausner, Outside Director Liability, http://ssrn.com/abstract=382422, and Black & Cheffins, Outside Director Liability Across Countries, http://ssrn.com/abstract=438321. For a condensed, practitioner-oriented version of this article, see Black, Cheffins & Klausner, Outside Directors and Lawsuits: What are the Real Risks?, McKinsey Quarterly 70-78 (2004, No. 4), http://ssrn.com/abstract=590913.
corporate governance, outside directors, legal liability, corporate law, securities law
Abstract: Executive pay arrangements in Britain's publicly quoted companies have been subjected to much criticism in recent years. Proposals that shareholders should have a greater direct say over managerial remuneration have been a by-product of the concerns expressed. Debate on this point, however, has been largely speculative. This is because there is little evidence available in the United Kingdom indicating how shareholders would exercise any new powers they might be given. This paper addresses the evidentiary gap by drawing upon the experience in the United States, where empirical work indicates that shareholder voting only operates as a potential check when pay arrangements deviate far from the norm. In a British context, these findings imply that implementing the shareholder-oriented reforms that have been canvassed recently would fail to address fully the concerns raised by critics of executive pay.
Abstract: Executive pay arrangements in Britain's publicly quoted companies have been subjected to much criticism in recent years. Proposals that shareholders should have a greater direct say over managerial remuneration have been a byproduct of the concerns expressed. Debate on this point, however, has been largely speculative. This is because there is little evidence available in the UK indicating how shareholders would exercise any new powers they might be given. This paper addresses the evidentiary gap by drawing upon the experience in the United States, which offers much potentially valuable data. In the United States, the two primary circumstances where shareholders vote on executive pay issues are where a stock option plan is put forward for approval and where a shareholder proposal has been made pursuant to US securities laws. Empirical studies reveal that American investors use the powers they have in a discerning fashion. At the same time, though, shareholder voting probably only operates as a potential check when pay arrangements deviate far from the norm. With respect to Britain, these findings imply that implementing the shareholder-oriented reforms that have been canvassed recently would fail to address fully the concerns raised by critics of executive pay.
Abstract: Market forces allegedly are serving to destabilise traditional business structures and cause a reorientation along "Anglo-American" lines. This paper examines the alleged "convergence" trend from an historical perspective. The focus is on Britain, since it is the only major industrial nation that has undertaken the journey upon which other countries may be embarking. Contemporary developments suggest that Britain's failure to adopt US-style managerial structures more quickly may have contributed to the UK's economic "decline". Comparing the British experience with the German suggests, however, that this inference should be drawn with caution. Company law, financial services regulation and political ideology have been identified as three factors that will determine whether the Anglo-American system of ownership and control becomes dominant in a country. The evolution of corporate governance in Britain indicates, however, that these are probably not decisive variables.
Abstract: The "law matters" thesis posits that a legal regime which allows investors to feel confident about owning a tiny percentage of shares in a firm constitutes the crucial "bedrock" underlying an economy where widely-held public companies dominate. This paper draws attention to and provides a critique of a pivotal assumption embedded within the thesis, this being that a separation of ownership and control offers inherent economic advantages and therefore is the "natural" state of affairs for large business enterprises. The opening sections of the paper identify the essential attributes of the "law matters" argument and discuss how the thesis is related to the proposition that diffuse share ownership is associated with efficiency. The paper then assesses whether a separation of ownership and control is likely to provide a competitive edge. In so doing, due account will be taken of evidence that casts doubt upon the idea that this sort of ownership structure is "natural" in a market economy. The paper concludes with some observations on the circumstances under which the introduction of stronger legal protection for minority shareholders might foster a move towards diffuse share ownership and on certain risks associated with law reform of this character.
Abstract: We often hear that hardly anyone wants to sit on corporate boards these days, largely because they fear personal liability. Our investigation of seven representative countries (Australia, Britain, Canada, France, Germany, Japan, and the United States) suggests that the liability concern is overdone. Although there are good reasons for outside directors to fulfill their duties diligently, fear of liability should not be one of them. Outside directors face only a tiny risk of paying damages or legal fees out of their own pockets. This article is a revised and condensed version of Bernard Black, Brian Cheffins, and Michael Klausner, Liability Risk for Outside Directors: A Cross-Border Analysis, European Financial Management vol. 10 (forthcoming 2004), available at http://ssrn.com/abstract=557070, which in turn is a summary of two longer papers, Bernard S. Black, Brian R. Cheffins, and Michael Klausner, Outside Director Liability (working paper 2004), available at http://ssrn.com/abstract=382422, and Bernard S. Black and Brian R. Cheffins, Outside Director Liability Across Countries (working paper 2003), available at http://ssrn.com/abstract=438321.
corporate governance, director liability, fiduciary duty, securities law, securities class actions, law and finance, director duties
Abstract: Outside directors of public companies play a central role in overseeing management. Nonetheless, they have rarely incurred personal, out-of-pocket liability for failing to carry out their assigned tasks, either in the litigation-prone United States or other countries. Historically, as threats to this near-zero personal liability regime have appeared, market and political forces have responded to restore the status quo. We suggest here reasons to believe that this arrangement is justifiable from a policy perspective, at least in countries where reputation and other extra-legal mechanisms provide reasonable incentives for outside directors to be vigilant.
outside directors, liability, corporate governance
Abstract: The Russian language version of this report is available at http://ssrn.com/abstract=1001991. This Report was prepared, with support by the World Bank, for the Russian Center for Capital Market Development and the Russian Federal Service on the Securities Market (FSFM). We discuss the liability under company law of members of the board of directors, senior managers, and controlling shareholders of public companies in Canada, France, Germany, Korea, the United Kingdom, and the United States (plus a more limited look at Austria, the European Union, Italy, Japan, and Latvia), and apply this comparative analysis to the Russian context. We recommend amendments to the Russian Law on Joint Stock Companies and related legislation. We propose measures to enhance the effectiveness of derivative suits; define the concepts of good faith and conflict of interest; establish duties of disclosure and confidentiality; extend duties under company law to controlling shareholders and de facto directors for conflict of interest transactions; protect directors against liability for business decisions adopted without a conflict of interest. We do not recommend the creation of significant administrative or criminal liability, nor expanded duties of directors for a company in financial distress. This document includes a separate Overview of the Report by Professor Black which provides an overview of Russia's progress in creating a modern company law. The Overview and Chapters 1 and 3 will be published separately as Legal Liability of Directors and Company Officials Part 1: Substantive Grounds for Liability (Report to the Russian Securities Agency), 2007 Columbia Business Law Review 614-799, available at http://ssrn.com/abstract=1010306. Chapters 8-9 and 11-13 will be published separately as Legal Liability of Directors and Company Officials Part 2: Court Procedures, Indemnification and Insurance, and Administrative and Criminal Liability (Report to the Russian Securities Agency), 2008 Columbia Business Law Review (forthcoming), available at http://ssrn.com/abstract=1010307.
Russia, company law, liability of directors and officers
Abstract: Recent reforms to Korean corporate and securities law have included two prominent features: a mandate that boards include a minimum number of outside directors and facilitation of shareholder lawsuits against board members for damages. The strategy of imposing liability risk on outside directors appears to follow U.S. practice. In actuality, however, outside directors in the U.S. rarely face out-of-pocket liability unless they engage in self-dealing. Instead, damages and legal fees are paid by the company, directors' and officers' (D&O) insurance, or both. Outside directors in Australia, Canada, Britain, France, Germany, and Japan similarly enjoy near-immunity from out-of-pocket liability due to shareholder lawsuits. Moreover, when events have occurred in these countries that threaten to impose out-of-pocket liability on outside directors, there is a strong tendency for political or market forces to soon reestablish a minimal level of risk for actions that fall short of self-dealing. This experience suggests that if Korea's new lawsuit-facilitating rules turn out to expose outside directors to a significant risk of out-of-pocket liability, Korea may well experience a similar political and market reaction. Thus, Korea will likely need to look elsewhere for sources of incentives for outside directors to be vigilant watchdogs.
Abstract: Work done by Mark Roe has helped to foster a re-examination of the origins of the paradigm American corporation, with its strong managers and widely dispersed shareholders. Roe has argued that the system of ownership and control which prevails in the United States was politically and historically contingent instead of being the product of market forces. This article builds upon Roe's work by discussing historical developments in the United Kingdom. Examining what occurred in Britain provides a unique opportunity to evaluate his theories because with respect to corporate governance arrangements, the UK has more in common with the US than does any other major industrial nation. Generally speaking, the British experience does not conform with Roe's politically oriented analysis. This paper was presented at the 1999 Tilburg Conference on Convergence and Diversity in Corporate Governance Regimes and Capital Markets.
Abstract: The "law matters" thesis implies countries will not develop a robust stock market or diffuse corporate ownership structures unless laws are in place that curtail the extraction of private benefits of control by large shareholders and address information asymmetries from which outside investors suffer. In Britain, however, the law did not provide extensive protection to shareholders when ownership separated from control, which suggests "investor friendly" corporate and securities law is not a necessary condition for a transition from family capitalism to a corporate economy characterized by widely held firms. If law did not provide the foundation for the unwinding of family ownership what did? This paper argues that the dividend policy of publicly quoted firms played a significant role. Essentially, dividends mimicked the role that the "law matters" thesis attributes to corporate and securities law, namely constraining corporate insiders and supplying information flow to investors. In so doing, dividends helped to provide the platform for ownership to separate from control when law did not provide substantial protection for outside shareholders.
corporate law, securities law, corporate ownership, dividend policy, shareholder protection, ownership and control
Abstract: In 2008, share prices on U.S. stock markets fell further than they had during any one year since the 1930s. Does this mean corporate governance “failed”? This paper argues “no”, based on a study of a sample of companies at “ground zero” of the stock market meltdown, namely the 37 firms removed from the iconic S&P 500 index during 2008. The study, based primarily on searches of the Factiva news database, reveals that institutional shareholders were largely mute as share prices fell and that boardroom practices and executive pay policies at various financial firms were problematic. On the other hand, there apparently were no Enron-style frauds, there was little criticism of the corporate governance of companies that were not under severe financial stress and directors of troubled firms were far from passive, as they orchestrated CEO turnover at a rate far exceeding the norm in public companies. The fact that corporate governance functioned tolerably well in companies removed from the S&P 500 implies that the case is not yet made out for fundamental reform of current arrangements.
corporate governance, financial crisis, board of directors, executive pay, shareholder rights
Abstract: The Law Commission of England and Wales and the Scottish Law Commission published in 1998 a consultation paper dealing with duties which directors owe to their companies (the report is available at http://www.open.gov.uk/lawcomm/library/lib-comp.htm#libcp153). In this document, the Law Commissions assessed whether basic duties found in case law should be put into statutory form and reviewed existing legislative provisions to determine whether they could be simplified and modernised. The publication of the consultation paper acted as the triggering event for the organising of a conference on directors' duties in Cambridge in December 1998 and one of the primary purposes of the event was to debate issues arising from this document. This article places the proceedings of the Cambridge directors' duties conference in context. It does so by describing various trends which are currently helping to make UK company law an intellectually stimulating subject and by explaining how these are relevant to the work done by the Law Commissions and to the various published contributions made by conference participants.
Abstract: Berle and Means famously declared in 1932 that a separation of ownership and control was a hallmark of large U.S. corporations and their characterization of matters quickly became received wisdom. A series of recent papers (Hannah, 2007; Santos and Rumble, 2006, Holderness, forthcoming) has called the Berle-Means orthodoxy into question. This paper surveys the relevant historical literature on point, acknowledging in so doing that the pattern of ownership and control in U.S. public companies has been anything but monolithic but saying a separation between ownership and control remains an appropriate reference point for analysis of U.S. corporate governance.
Berle-Means, ownership, control of U.S. public companies
Abstract: This paper analyzes the question of whether there is a U.S.-oriented convergence trend in international executive pay. After surveying the essential elements of the American pay paradigm, we consider market-oriented dynamics that could constitute a global compensation imperative. We find that it is difficult to predict how decisive these forces will be, in part because market factors do not tell the whole story. Rather, it is necessary to take into account several other variables, such as legal regulation and business culture. These may stop convergence from occurring at any point in the near future. The primary purpose of this paper is to identify and analyze the variables that will determine whether executive pay convergence will occur along American lines; therefore, we do not assess in detail whether such a shift would be a "good thing." However, we do recognize the tension between the useful function of U.S.-style pay packages in aligning the interests of shareholders and executives, while also acknowledging that they can in certain circumstances constitute self-serving managerial "rent extraction." Also, the paper makes a significant normative contribution by identifying obstacles regulators will need to address if they want to promote convergence and by drawing attention to rules that could be invoked to hinder the Americanization of executive pay if this was thought to be the better way to proceed.
Abstract: IIt is often assumed that strong securities markets require good legal protection of minority shareholders. This implies both "good" law -- principally corporate and securities law -- and enforcement, yet there has been little empirical analysis of enforcement. We study private enforcement of corporate law in two common law jurisdictions with highly developed stock markets, the United Kingdom and the United States, examining how often directors of publicly traded companies are sued, and the nature and outcomes of those suits.
We find, based a comprehensive search for filings over 2004-2006, that lawsuits against directors of public companies alleging breach of duty are nearly nonexistent in the UK. The US is more litigious, but we still find, based on a nationwide search of decisions between 2000-2007, that only a small percentage of public companies face a lawsuit against directors alleging a breach of duty that is sufficiently contentious to result in a reported judicial opinion, and a substantial fraction of these cases are dismissed.
We examine possible substitutes in the UK for formal private enforcement of corporate law and find some evidence of substitutes, especially for takeover litigation. Nonetheless, our results suggest that formal private enforcement of corporate law is less central to strong securities markets than might be anticipated.
Private enforcement, corporate law, derivative actions, public enforcement, comparative corporate law
Abstract: A great merger wave occurring in the United States between 1897 and 1903 was the single most important event in a process that yielded the pattern of managerial control and dispersed share ownership which currently distinguishes America's corporate economy from arrangements in most other countries. This paper examines the turn-of-the-century consolidation movement in order to offer lessons on how patterns of ownership and control become configured. The United States constitutes the central reference point for analysis but the paper also considers events occurring in Germany. One theme the paper develops is that mergers matter with respect to the evolution of systems of ownership and control. Events occurring in the U.S. and Germany indicate that different patterns of acquisition activity in the two countries had important consequences for the evolution of business forms that persist to the present day. A second topic the paper deals with is the process by which a country's investors become sufficiently comfortable owning publicly traded shares to permit a transition from concentrated to dispersed share ownership. The merger wave of 1897 to 1903 illustrates that surges in demand for shares founded upon optimistic investor sentiment is a potentially important variable. A third theme the paper emphasizes is antitrust law's significance. The experience in the U.S. and Germany suggests that the legal status of anti-competitive alliances is a potentially important determinant of corporate ownership structures.
Abstract: In the field of comparative corporate governance, a thesis that is currently influential is that the 'law matters' The thinking is that laws which allow investors to feel confident about owning a tiny percentage of shares in a firm constitute the crucial 'bedrock' that underpins a US-style economy where widely held public companies dominate. The paper outlines the normative implications which the 'law matters' thesis has for countries where diffuse share ownership is not the norm. It also draws upon the historical experience in the US and the UK to cast doubt on whether law is as pivotal as the thesis implies. Finally, the paper considers the dynamics that are likely to affect the pace of legislative change when reforms designed to foster the confidence of minority shareholders are on the agenda.
Abstract: In the field of comparative corporate governance, a thesis that currently is influential is that the law "matters". The thinking is that laws which allow investors to feel confident about owning a tiny percentage of shares in a firm constitute the crucial "bedrock" that underpins a US-style economy where widely held public dominate. The "law matters" thesis has potentially significant normative implications. With respect to countries where the widely held company does not currently play a central role, it can be used to justify reforms designed to protect outside investors. Still, the underlying reasoning should not simply be accepted at face value. Instead, in both the United States and the United Kingdom companies having widely dispersed share ownership moved to the forefront without great assistance from the legal system. The manner in which corporate governance evolved in the US and the UK does not foreclose the possibility that the law could play a significant role in other countries. Instead, offering new legal protection to outside investors theoretically could foster a move towards an economy where widely held companies dominate. It cannot be taken for granted, however, that reform of this type will be politically feasible since influential interest groups may lobby in favour of the status quo. Events taking place in the US and the UK shed light on the dynamics that are likely to affect the pace of legislative change. The experience in these two countries indicates that a significant growth in the number of people investing in shares can provide a suitable platform for the introduction of reforms designed to assist minority shareholders.
Abstract: An intense academic debate has arisen recently concerning the crucial bedrock that underpins a corporate governance regime where widely-held public companies dominate. In the discourse, little has been said about the contribution of merger activity. The paper seeks to address this gap by considering developments in the United Kingdom during the 20th century. The British experience suggests that mergers matter with respect to the evolution of systems of ownership and control and that the manner in which anti-competitive behaviour is regulated influences the extent to which transformative merger activity takes place. The paper acknowledges that the competitive advantages associated with operating on a large scale and the buoyancy of the stock market can influence the pace of corporate amalgamation but argues that in the UK neither factor had a decisive influence on the evolution of share ownership arrangements.
ownership structure, mergers, acquisitions, antitrust law, corporate law
Abstract: An intense academic debate has arisen recently concerning the crucial "bedrock" that underpins a corporate governance regime where widely-held public companies dominate. In the discourse, little has been said about the contribution of merger activity. The paper seeks to address this gap by considering developments in the United Kingdom during the 20th century. The British experience suggests that mergers matter with respect to the evolution of systems of ownership and control and that the manner in which anti-competitive behaviour is regulated influences the extent to which "transformative" merger activity takes place. The paper acknowledges that the competitive advantages associated with operating on a large scale and the buoyancy of the stock market can influence the pace of corporate amalgamation but argues that in the UK neither factor had a decisive influence on the evolution of share ownership arrangements.
Abstract: For diffuse ownership to become the norm in large business enterprises investors need to be sufficiently confident to buy shares. Will investors follow through if serious doubts exist concerning the competence of those managing companies? This paper addresses this question, primarily by examining historical events in Britain. In the UK, ownership separated from control in large business enterprises at some point between the 1950s and the 1980s, a period during which the country's corporate executives were allegedly amateurish and complacent. The paper acknowledges that the managerial capabilities of British companies improved as the 20th century drew to a close. Nevertheless, legitimate doubts would have existed about the quality of management as share ownership patterns were reconfigured. The paper explains what occurred in the UK by focusing on financial intermediaries such as pension funds and insurance companies. In the decades immediately following World War II, a "wall of money", a "cult of the equity" and a "trapped capital" effect caused by exchange controls fostered institutional demand for shares that outweighed whatever doubts might have existed about the quality of management. Correspondingly, there was a suitable platform for diffuse share ownership to become the norm in the UK's largest companies.
Abstract: Logically, in a corporate governance system where big companies are widely held and control over corporate policymaking is delegated to a cohort of full-time executives, there needs to be "good" managers. Still, the relevant literature has had little to say about this variable. This paper seeks to remove the quality of management variable from its relative obscurity, primarily by examining historical events in Britain. In the U.K., ownership separated from control in large business enterprises at some point between the 1950s and the 1980s, a period during which the country's corporate executives were allegedly amateurish and complacent. Correspondingly, Britain provides a robust test for the proposition that there needs to be "good" managers in order for a corporate economy to be dominated by companies where decision making is carried out by full-time executives and share ownership is highly diffuse. The paper acknowledges that the criticisms levelled against those managing U.K. companies may not have been fully justified. Still, there is sufficient ground for doubt about the capabilities of those running large business enterprises to wonder how demand for corporate equity could have been sufficiently robust to foster diffuse share ownership. The paper resolves this British paradox by focusing on the role played by financial intermediaries such as pension funds and insurance companies. In the decades following World War II, there was a readjustment in investment priorities by institutional investors in favour of shares. The momentum involved apparently outweighed whatever doubts might have existed about the quality of management. Correspondingly, there was a suitable platform for a separation of ownership from control.
Abstract: This Article contains chapters 8-9, 11-13, and the Conclusion of a World Bank-sponsored Report, prepared in December 2006, to the Russian Federal Service on the Securities Market. We discuss the liability under company law of directors, senior company officials, and controlling shareholders of public companies in Canada, France, Germany, Korea, Russia, the United Kingdom, and the United States (with a more limited look at Austria, the European Union, Italy, Japan, and Latvia), and recommend amendments to Russian Company Law. We propose measures to define the concepts of good faith and conflict of interest; establish duties of disclosure and confidentiality, extend duties under company law to controlling shareholders and de facto directors for conflict of interest transactions; and protect directors against liability for business decisions adopted without a conflict of interest.
A related article includes chapters 1 and 3 of the Report, and an introduction to the overall project by Prof. Black. These chapters address the substantive bases for liability of directors and company officials for breach of duty. See Legal Liability of Directors and Company Officials Part 1: Substantive Grounds for Liability (Report to the Russian Securities Agency), 2007 Columbia Business Law Review, pages 614-799, available at http://ssrn.com/abstract=1010306.
The full Report is available at http://ssrn.com/abstract=1001990 (English version) and http://ssrn.com/abstract=1001991 (Russian version). It also addresses duties of directors for a company in financial distress, duties of a managing organization, the role of labor law in governing the relationship between a company and its directors and officials, whether this relationship is contractual or legal in nature, and differences between public and nonpublic companies.
Russia, company law, liability of directors and officers, indemnification, insurance, derivative suits
Abstract: This Article is an excerpt from a World Bank-sponsored Report, prepared in December 2006, to the Russian Federal Service on the Securities Market. We discuss the liability under company law of directors, senior company officials, and controlling shareholders of public companies in Canada, France, Germany, Korea, Russia, the United Kingdom, and the United States (with a more limited look at Austria, the European Union, Italy, Japan, and Latvia), and recommend amendments to Russian Company Law. We propose measures to define the concepts of good faith and conflict of interest; establish duties of disclosure and confidentiality, extend duties under company law to controlling shareholders and de facto directors for conflict of interest transactions; and protect directors against liability for business decisions adopted without a conflict of interest. It includes an Introduction by Prof. Black which provides an overview of Russia's progress in creating a modern company law.
A related Article, also excerpted from this Report, addresses procedural rules for shareholder lawsuits and administrative and criminal liability of directors and company officials. See Legal Liability of Directors and Company Officials Part 2: Court Procedures, Indemnification and Insurance, and Administrative and Criminal Liability (Report to the Russian Securities Agency), COLUM. BUS. L. REV. (forthcoming 2008), available at http://ssrn.com/abstract=1010307.
Abstract: While considerable attention is devoted to legal scholarship, little has been written on the process by which academic writing on law evolves. This paper departs from the existing pattern and examines five potential trajectories for legal scholarship. One is based on the idea that knowledge "accumulates" as part of "progress" towards a better understanding of the matters under study. The second is the concept of the "paradigm", derived from work done on the history and sociology of science. The third focuses on the idea that academic endeavor concerning law yields useful ideas since market forces are at work. The fourth is a "cyclical" thesis, based on the assumption that themes legal scholars write about arise on a reoccurring basis. Finally, legal scholarship can potentially be characterized in terms of fads and fashions. It appears that scholarly trends in law develop in a manner that is at least partially consistent with each of the five potential trajectories identified. At the same time, none captures fully the dynamics at work and indeed there is some conflict between the various paths available. The paper tests these conjectures by focusing on a particular topic, namely corporate law. The survey offered does not identify one of the five potential trajectories as being dominant. Still, each does help to explain how corporate law scholarship has developed. Correspondingly, for those who are interested in why some ideas prosper whereas other claims "burn out", this paper offers a "test-driven" analytical framework that can be applied to discern how academic writing on law evolves over time.
Abstract: While generally the impact tax has on patterns of corporate ownership and control has received little attention, this paper argues that tax is potentially an important determinant of ownership patterns in large companies. The paper focuses mainly on historical developments in Britain, where an outsider/arm's-length system of corporate governance began to take shape after World War I and became fully entrenched by the end of the 1970s. Taxes imposed on corporate profits, taxation of managerial and investment income and inheritance taxes do much to explain why during this period blockholders sought to exit and why there was sufficient demand for shares among investors to permit ownership to separate from control. The paper also discusses developments in the United States and argues that tax helped to foster the separation of ownership and control that reportedly occurred in larger American companies after World War I.
corporate ownership, taxation, separation of ownership and control, historical tax developments in Britain and the U.S.
Abstract: This is the Russian language version of the Report. The English version is available at http://ssrn.com/abstract=1001990
This Report was prepared, with support by the World Bank, for the Russian Center for Capital Market Development and the Russian Federal Service on the Securities Market. We discuss the liability under company law of members of the board of directors, senior managers, and controlling shareholders of public companies in Canada, France, Germany, Korea, the United Kingdom, and the United States (plus a more limited look at Austria, the European Union, Italy, Japan, and Latvia), and apply this comparative analysis to the Russian context. We recommend amendments to the Russian Law on Joint Stock Companies and related legislation. We propose measures to enhance the effectiveness of derivative suits; define the concepts of good faith and conflict of interest; establish duties of disclosure and confidentiality, extend duties under company law to controlling shareholders and de facto directors for conflict of interest transactions; protect directors against liability for business decisions adopted without a conflict of interest. We do not recommend the creation of significant administrative or criminal liability, nor expanded duties of directors for a company in financial distress.
Abstract: Shareholder activism by hedge funds has over the past few years become a major corporate governance phenomenon. This paper puts the trend into context. The paper begins by distinguishing the “offensive” form of activism hedge funds engage in from “defensive” interventions “mainstream” institutional investors (e.g. pension funds or mutual funds) undertake. Variables influencing the prevalence of offensive shareholder activism are then identified using a heuristic device we call “the market for corporate influence”. The rise of hedge funds as practitioners of offensive shareholder activism is traced by reference to the “supply” and “demand” sides of this market, with the basic chronology being that, while there were direct antecedents of hedge fund activists as far back as the 1980s, hedge funds did not move to the activism forefront until the 2000s. The paper brings matters up-to-date by discussing the impact of the recent financial crisis on hedge fund-driven shareholder activism and draws upon the market for corporate influence heuristic to predict future trends.
Shareholder activism, hedge funds, financial crisis
Abstract: While generally the impact tax has on patterns of corporate ownership and control has received little attention in the relevant academic literature, this paper argues that tax is potentially an important determinant of ownership patterns in large companies. The paper focuses on historical developments in Britain, where an outsider/arm's-length system of corporate governance took shape during the twentieth century and became fully entrenched by the end of the 1970s. Taxes imposed on corporate profits, taxation of managerial and investment income and inheritance taxes help to explain why during this period blockholders sought to exit and why there was sufficient demand for shares among investors to permit ownership to separate from control.
corporate ownership, tax developments in Britain, corporate profits, taxation of managerial and investment income, inheritance taxes
Abstract: While generally the impact tax has on patterns of corporate ownership and control has received little attention in the relevant academic literature, this paper argues that tax is potentially an important determinant of ownership patterns in large companies. The paper focuses on historical developments in Britain, where an 'outsider/arm's-length' system of corporate governance took shape during the twentieth century and became fully entrenched by the end of the 1970s. Taxes imposed on corporate profits, taxation of managerial and investment income and inheritance taxes help to explain why during this period blockholders sought to exit and why there was sufficient demand for shares among investors to permit ownership to separate from control.
Abstract: In the United States, the remuneration packages of top executives are characterised by a strong emphasis on pay-for-performance and by a highly lucrative "upside". There is much discussion of the possibility that executive pay practices will globalise in accordance with this pattern. This paper assesses whether such convergence is likely to occur. It does so by considering market-oriented dynamics that could constitute a "global compensation imperative". It also takes into account possible obstacles to the Americanisation of executive pay, such as legal regulation, "soft law" and "culture". The paper concludes with a brief series of normative observations.
Abstract: Adolf Berle and Gardiner Means famously declared in 1932 that a separation of ownership and control was a hallmark of large U.S. corporations, and their characterization of matters quickly became received wisdom. A series of recent papers has called the Berle-Means orthodoxy into question. This survey of the relevant historical literature acknowledges that the pattern of ownership and control in U.S. public companies is not monolithic. Nevertheless, a separation between ownership and control remains an appropriate reference point for analysis of U.S. corporate governance.
Adolf Berle, Gardiner Means, coporate governance, ownership and control
Abstract: The typical British publicly traded company has widely dispersed share ownership and is run by professionally trained managers who collectively own an insufficiently large percentage of shares to dictate the outcome when shareholders vote. This separation of ownership and control has not only dictated the tenor of corporate governance debate in Britain but serves to distinguish the UK from most other countries. Existing theories fail to account adequately for arrangements in the UK. Corporate Ownership and Control: British Business Transformed accordingly seeks to explain why ownership became divorced from control in major British companies, examining how matters evolved from the 17th century through to today. The opening four chapters of Corporate Ownership and Control: British Business Transformed provide the theoretical context for the historical analysis set out in the remaining chapters. As Chapter One indicates, ownership and control has attracted considerable attention in debates on comparative corporate governance but no single theory accounts satisfactorily for differences in ownership patterns across borders. Chapter One correspondingly argues that to understand what occurred in Britain the focus should be on three questions 1) Why might those owning large blocks of shares want to exit or accept dilution of their stake? 2) Will there be demand for shares available for sale? 3) Will the new investors be inclined to exercise control themselves? The book explains how ownership became divorced from control in large U.K. business enterprises by addressing each of these questions in historical terms. Chapters Two to Four of Corporate Ownership and Control: British Business Transformed discuss in general terms the factors affecting the evolution of corporate ownership and control. Chapter Two outlines theories that have been advanced in the comparative corporate governance literature to explain why patterns of ownership and control differ across countries and indicate they do not account for what occurred in Britain. Chapter Three focuses on the first of the three questions that needs to be answered to explain why ownership might separate from control. Using the term the "sell side" as shorthand, the chapter surveys the factors that can prompt blockholders to dilute their ownership stake or sell their shares outright. Chapter Four, using the term "buy side" to encompass the other two questions that need to be answered to account for a separation of ownership and control, describes in general terms why UK investors bought shares in sufficient volume for control to unwind and explains why the new shareholders refrained from taking a "hands on" role. Fully untangling the interrelationship of the determinants of ownership structure in the U.K. is intractable without some form of chronological sub-division. As a result, the remainder of Corporate Ownership and Control: British Business Transformed examines in detail for various periods particular trends that influenced patterns of ownership and control. As Chapter Five discusses, England experienced its first flurry of public offerings of company shares in the 1690s, followed by a series of promotion "waves" that caused corporate enterprise to grow in importance over time. Still, while by the mid-19th century large railway companies had emerged as pioneers of 20th century-style dispersed share ownership, progress overall was erratic, with periodic waves of enthusiasm for shares being followed by market reversals that swept away many of the new businesses. As Chapter Six describes, during the late 19th and early 20th centuries there were various potential deterrents to buying shares in U.K. companies, such as companies legislation that offered little protection to outside investors, promising overseas investment options and company "promoters" of varying ethical standards. Nevertheless, the strong performance of shares relative to obvious investment alternatives, the inferences investors were able to draw from dividend policies companies adopted and periodic surges in investor optimism underpinned demand for shares. With the resistance of industrialists to unwinding control diminishing, numerous industrial and commercial companies made the move to the stock market. Still, while by the eve of World War I ownership had become separated from control in large banks as well as in railway companies, as Chapter Seven explains, a modern-style divorce of ownership and control otherwise remained the exception to the rule. Chapter Eight of Corporate Ownership and Control: British Business Transformed indicates that during the interwar years changes to tax law provided fresh incentives for companies to carry out public offerings of shares and helped to foster significant growth in the number of people investing in shares. Regulatory and market factors deterring investment in foreign assets and improved quality control by intermediaries organizing public offerings of shares fortified demand for equity. In this milieu, the number of industrial and commercial companies quoted on the London Stock Exchange rose substantially and various contemporaries began referring to the widening divorce between ownership and management. Nevertheless, the available evidence suggests blockholding remained prevalent in large industrial and commercial enterprises on the eve of World War II. In the decades following World War II, the U.K.'s ownership and control arrangements coalesced in accordance with the outsider/arm's-length pattern that currently predominates. As Chapter Nine discusses, on the sell side, tax, declining profits and tighter regulation of companies provided blockholders with incentives to exit. Chapter Ten shows that on the buy side the rise of institutional investors - particularly pension funds and insurance companies - was crucial. Personal investors, who dominated share registers prior to World War II, were net sellers of corporate equity thereafter. Robust institutional demand, fostered partly by the tax environment, filled the gap. This trend created an intriguing hypothetical opportunity for the re-concentration of share ownership around an institutional axis, but the potential for intervention went largely unfulfilled, meaning that corporate governance arrangements were firmly "outsider/arm's-length". Various trends emerging over the past few years suggest the future of the U.K.'s outsider/arm's-length system of ownership and control is not guaranteed. These are: 1) unprecedented assertiveness by traditionally dominant institutional shareholders 2) the appearance of a new breed of intervention-minded shareholder, inclined to accumulate "offensively" sizeable stakes in publicly traded companies with the express intention of agitating for changes in corporate policy 3) high-profile private equity buyouts involving the acquisition and taking private of publicly traded enterprises. Chapter Eleven of Corporate Ownership and Control: British Business Transformed argues none of these trends is likely to disrupt existing arrangements fundamentally and maintains they may even fortify the status quo by helping to keep agency costs in check. Thus, for the foreseeable future a separation of ownership and control will remain a hallmark of U.K. corporate governance.
ownership and control, stock markets, corporate law, investor protection, business history, blockholders, institutional shareholders, shareholder activism, private equity
Abstract: This chapter provides a survey of corporate law's key theoretical themes. There is discussion of debates about "corporate personality", Berle and Means' separation of ownership and control thesis and the economically-oriented contractarian model of the company that has dominated theoretical analysis of corporate law from the 1980s onwards. Interdisciplinary work that takes economic analysis as a point of departure will also be outlined. The chapter concludes with an assessment of four potential trajectories for corporate law scholarship.
Corporate law
Abstract: Market forces allegedly are serving to destabilise traditional business structures and cause some form of convergence along "Anglo-American" lines. While this trend has been the subject of much debate, it has not been widely commented on in Australia. Moreover, those analysing corporate governance from a comparative perspective have had little to say about the country. Since Australia shares much in common with the United States and the United Kingdom, those interested in a possible Anglo-American convergence trend can potentially benefit from examining Australian developments. This paper identifies various questions that require analysis to place the country's experience in its proper context. Answers are offered for the questions raised but the primary purpose of the paper is to launch a dialogue between Australians interested in corporate governance and their counterparts elsewhere. For the working version of this article, see Brian Cheffins, "Comparative Corporate Governance and the Australian Experience: A Research Agenda", available at: http://ssrn.com/abstract_id=268935
Abstract: The German system of corporate governance differs considerably from its counterparts in the United States and the United Kingdom. There is anecdotal evidence, however, that suggests market forces are serving to destabilize traditional structures in Germany and are causing some form of convergence along "Anglo-American" lines. One by-product of this trend could be that German companies will adopt an increasingly Anglo-American approach when they deal with managerial remuneration issues. This paper examines the implications of such a trend. If shareholder-oriented Anglo-American corporate governance patterns become well-established in Germany, German executives will likely earn more than they do at present, though future increases in pay will be partly conditional upon corporate performance. An increasingly globalized market for executive talent will reinforce the momentum for change. Various factors could delay the process (e.g., tax policy, interest group hostility, regulation) but these seem to be diminishing in importance. If the Anglo-American approach to executive pay becomes influential in German companies, issues that have been controversial in the US and the UK likely will capture attention in Germany. For instance, there will be debate about disclosure regulation and the role that board committees and shareholders should play in the setting of managerial remuneration policy. It remains an open question, though, whether it will be beneficial for German companies to change radically their approach to executive pay.
Abstract: Share ownership in the United States is widely dispersed instead of being concentrated in the hands of families, banks or other firms. Most of the country's major companies have publicly traded shares and a minority of these have a shareholder that owns enough equity to have any sort of "inside" influence. The result, as Berle and Means argued in their famous 1932 book, is a separation of ownership and control. American academics have offered various theories to explain why US corporate governance evolved in the manner it did. Examining historical developments in the United Kingdom provides a good way to evaluate these theories since, with respect to corporate governance, the US has more in common with Britain than it does with other major industrial nations. This paper provides an overview of the lessons that can be derived from the British experience. In so doing, it draws attention to the implications for countries that may be experiencing some form of convergence towards the Anglo-American pattern.
Abstract: Events taking place in Britain deserve the attention of those interested in corporate governance. The topic has generated much public debate in the United Kingdom (UK) over the past few years. Moreover, the work done in Britain has spurred reviews of corporate governance in markets around the world and has provided a yardstick against which standards in other countries are being measured. This article introduces the reader to the corporate governance debate that has been taking place in the UK. More specifically, it discusses the problems that are said to afflict the management and control of British public companies and describes the work done by various committees appointed to study corporate governance. Corporate governance arrangements in any one country are, to a significant extent, a product of the local economic and social environment. In the UK, it is uncommon for larger firms to have a dominant shareholder. This pattern of ownership is prevalent, however, in most other countries. The existence of a concentrated ownership structure has a profound impact on corporate governance. While enhancing managerial accountability is the issue which attracts most of the attention when public companies are widely held, if there is a controlling shareholder the position of the minority probably deserves to be treated as a higher priority. This article demonstrates this point by discussing developments affecting public companies in Italy and Canada.
Abstract: "Company Law: Theory, Structure and Operation" is the first United Kingdom law text to use economic theory to provide insights into corporate law, an approach widely adopted in the United States. In this book, Brian Cheffins discusses the inner workings of companies, examines the impact of the legal system on corporate activities and evaluates the merits of governmental regulatory strategies. Topics which are discussed in the book include: 1) limited liability of shareholders 2) shareholders' remedies 3) corporate governance 4) executive pay 5) employee participation in corporate decision-making 6) the European Union's company law harmonisation program. Brian Cheffins also examines in detail important policy questions not explored in detail in other texts on corporate law. Such questions include: ? What are the justifications for legal regulation of company affairs? ? What are the drawbacks associated with government intervention? ? How can one ascertain the optimal format for company law rules? This book was named as co-winner of the 1998 prize for Outstanding Legal Scholarship awarded by the Society of Public Teachers of Law.
Abstract: At present, only three "major league" sports franchises ? baseball?s Cleveland Indians, the Boston Celtics of the NBA and Vancouver Canucks of the NHL -- qualify as "stock market" teams, in the sense that they constitute the primary source of revenue and profits for a business firm with publicly traded shares. Nevertheless, it has been suggested that "going public" is becoming a trend in North American major league sports. There has already been a move towards the stock market elsewhere in the sports world, with a noteworthy example being British soccer. With a professional sports team, its owners might want to sell stock to the public to raise cash to finance activities that could not be readily financed by other means (e.g. constructing new playing facilities or acquiring playing staff). Also, they might want to move to the stock market in order to create an "exit option" and cash in their investment. To this point, however, owners of North American major league professional sports teams have not felt compelled to rely on equity markets as a source of finance, in part because they play in stadiums or arenas paid for by taxpayers. Also, since most team owners have the luxury of not being forced by financial circumstances to sell, creating an exit option has not been a high priority. If owners of major league professional sports franchises do begin to contemplate selling stock to the public, various drawbacks associated with the process may serve to deter them. For instance, a move to the stock market is time-consuming and costly. Also, there is likely to be "culture shock" since those running a public company must comply with wide-ranging disclosure obligations and can discover that their ability to dictate corporate policy has been compromised in important ways. Regardless of the attitude that owners of privately controlled North American sports teams might have about going public, an initial public offering of shares (IPO) will not succeed unless there is sufficient demand for the shares. In North America, sports team IPOs have generally proved to be highly popular. Still, professional sports franchises which are at or near the bottom of the economic hierarchy will likely struggle if they try to convince investors that buying shares in an IPO is a sensible financial proposition. Also, the track record of franchises that have made the move to the stock market could discourage potential buyers of shares because the investment return has been disappointing. The poor financial performance of publicly quoted sports franchises suggests that fans should think carefully before they buy shares in a stock market team. Also, they are unlikely to receive "fan-friendly" perks or have a meaningful say in company affairs. Generally speaking, however, fans have little to fear if going public becomes a trend in the sports business in North America. While British soccer?s move to the stock market has given rise to deep misgivings in some circles, it is unlikely that fans of North American teams with shares traded on a stock market will suffer in comparison with those who support franchises that are privately owned.
Abstract: The United States, Canada and Australia are members of the "common law family", which means that they share legal traditions which can be traced back to eleventh-century England. While English legal traditions have been highly influential in the past, the common law heritage is diminishing in importance. In both Australia and Canada, lawmakers and judges do not rely on English legal materials as heavily as they once did. In the United States, the divergence from the English legal heritage has become sufficiently substantial for doubts to be raised as to whether any sort of unified "Anglo-American" vision of the law continues to prevail. Also, Britain?s membership in the European Union has isolated England in some measure from the rest of the common law world. Though the common law heritage which originated in England has diminished in importance, trends in legal scholarship are beginning to strengthen links between the legal cultures influenced by the common law. In the United States, much legal research is now interdisciplinary and theoretical in nature. This pattern has been slower to develop in England, Australia and Canada but theoretical paradigms that have proved to be influential in the US are now having a substantial impact in these three countries. The upshot is that the interdisciplinary movement in legal thought has fostered new connections between countries that are part of the common law family. The diminished significance of the common law tradition and the growing importance of legal theory are two factors law libraries should take into account when determining their collection policies. The fact that there has been a drift away from England?s legal heritage suggests that law libraries located outside the UK need not assign as high a priority to acquiring English legal materials as they might have done in the past. On the other hand, the emergence of the interdisciplinary movement in legal thought indicates that law librarians in England, Australia and Canada should take steps to ensure that theoretical legal scholarship from the US is readily available. Similarly, since there may well be an audience in the US for interdisciplinary work carried out by English, Australian and Canadian academics, American law school libraries should ideally strive to make such literature as accessible as possible.
Abstract: In the United States, theorising about law has flourished. There has been an increase in the "market share" of theoretically oriented articles in leading law reviews, a proliferation of specialised journals devoted to interdisciplinary approaches to law and much more frequent citation of theoretical scholarship in legal literature. The interdisciplinary movement in legal thought has prompted a strong backlash. Fears have been expressed that "impractical" scholars are doing the legal profession and law students a disservice by pursuing "abstract" theory at the expense of engaging in analysis of legal doctrine. Interdisciplinary scholarship is growing in prominence in Britain. If this trend continues, the experience in the United States suggests that concerns could arise about the practical value of academic law, both inside and outside the classroom. As a result, this is a suitable occasion to assess whether theoretical analysis can make a valuable contribution both with respect to research and teaching. This essay advances the thesis that thinking about law in interdisciplinary terms has a beneficial influence on academic writing and should lead to improvements in the classroom. The case in favour of the use of theory is set out in general terms and is then illustrated by considering a field often thought to be primarily technical and "vocational" in nature, namely company law.
Abstract: Trust, loyalty and cooperation are concepts which have been discussed in highly favourable terms. Management theorists implore executives to engage the hearts and minds of workers with assurances of continued employment and promises to develop existing skills and capabilities. Customers and suppliers are similarly urged to develop alliances and tighter links so as to foster flexible responses to changing circumstances. British Prime Minister Tony Blair has stressed that it is imperative to build relationships of trust in society via a "stakeholder" economy in which a say is available to all. While trust, loyalty and related norms may have a crucial economic role to play, it does not follow that regulation should be used to foster their development. Since it is sensible business practice to act in a cooperative manner, laws of this character will often be redundant and could in fact serve to reduce reliance on trust and loyalty. Also, using the legal system to try to ensure that trust and related concepts are crucial elements in a country's business culture will provide a platform for opportunistic litigation and might lead to the introduction of a bureaucratic enforcement regime. The book can be ordered on the Kluwer Law International website: http://www.kluwerlaw.com
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