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Abstract: The efficient market hypothesis is a special case in finance. It explains only tiny fractions of observed phenomena. Perhaps its major contribution is a formal definition of an ideal market world, to which policy formulations may be directed and against which they can be measured. Indeed, it seems unlikely that the infirmities of market action ever will be so minuscule as to render the EMH more than a special case, though it may explain more in the future than it does now. However things evolve, during the evolutionary course the shackles of the EMH should be unloosed from corporate and investing culture. Part I presents behavioral finance as to how prices of stocks are formed?including a theoretical framework, empirical evidence, and psychological explanations. It integrates these materials into a model of market and investor behavior that can be used as a lens through which to analyze a wide variety of legal rules and policies bearing on market regulation and corporate governance. Part II is a series of prescriptions on the implications of this account relating to investor governance. It starts with a proposal to promote and expand investor education concerning the cognitive biases behavioral finance exposes. It proceeds to introduce and propose reforms in three critical areas of law and policy that this model impacts: (1) the market regulatory environment in which investors participate, including suitability and churning rules and policies relating to day trading, margin trading, and circuit breakers; (2) the legal duties of boards of directors in making capital allocation decisions such as equity offerings, dividend distributions and stock acquisitions; and (3) issues in corporate and securities litigation, principally the reliance requirement in securities fraud cases and the stock market exception to the appraisal remedy in cash out mergers. The efficient market idea turns out to be an aspiration worth pursuing, but one never likely to be realized. These proposals and prescriptions therefore operate both to push the reality toward the ideal and to deal with the gap that will persist. The article has a major public policy subtext too, at stake in the discussion of how prices are formed is the overarching question of capital allocation. Society is better off in terms of aggregate wealth when its resources are allocated to those best able to deploy them. Investors allocating capital based on rational calculation will produce that result, while those allocating based on sentiment will not. A word on methodology concludes the piece concerning where the piece fits in the bourgeoning legal literature drawing on behavioral social science. Throughout the intellectual history and genealogy of behavioral finance, legal scholars with a social science inclination have drawn on various strands of thought pioneered in these fields, importing the work of the cognitive psychologists, principally behavioral decision theory (which they call BDT). Concerns of the lead importers center on the usefulness of BDT to legal scholarship and policymaking generally include whether all it will do is furnish criticism of law and economics and fail to offer its own positive theories of law or normative prescriptions. Whatever power BDT has for legal scholarship in general, this Article should leave no doubt that it furnishes a positive theory of market behavior quite different than that of efficiency (imported and promoted by some law and economics devotees) and that this theory carries with it substantial normative implications for law and legal policy in the fields of securities and corporate law.
Author's note: Please ignore the disclaimer against citing or quoting this paper that accompanies the electronic text available here and feel free to cite or quote the article, a final version of which appeared at 59 Washington & Lee Law Review 767-837 (2002).
Abstract: A thorough examination of the much ballyhooed Sarbanes-Oxley Act reveals dominantly a federal codification of extant rules, regulations, practices, and norms. Despite advertising it as "the most far-reaching reforms of American business practices since the time of FDR," a soberly apolitical view sees the Act as more sweep than reform. Important are provisions calling for nine studies; redundant but much publicized were the certification requirements imposed during the summer of 2002; other moves are mere patchwork responses to precise transgressions present in the popularized scandals. The Act is far from trivial, however. A silver bullet relates to the structure and funding of those who set the standards for auditing and accounting in the United States. Stripped of power is the AICPA, and altered in funding structure is the FASB. All parties but Congress are singled out for a wrist-slapping (auditors, accountants, officers, directors and committee members, lawyers, securities analysts, credit rating agencies, investment banks and financial advisors, state corporate lawmakers, the SEC, the Federal Sentencing Commission and even the Supreme Court). No reexamanation of Congressional reforms relating to private securities litigation or the erstwhile barrier between investment and commercial banking appear. In fact there is implicit endorsement of the Congressional approach, rooted in the process and control philosophy of the Foreign Corrupt Practices Act, which the Act follows. This reading of the Act as modest is advanced in three stages of this Article. The first sets the background by summarizing the salient features of the dominant precipitating scandals and their times. The second stage dissects every material provision of the Act in context. The third and final stage suggests why the political rhetoric and substance diverged so widely, with illustrations of what a substantively bold Act might have looked like. Explaining the Act's rhetoric-reality yawn requires speculation but informed hunches readily emerge. On the one hand, Congress may have understood that the visible debacles were not chronic epidemics but discrete pathologies and their root causes were market psychology beyond its regulatory reach (hence a reformless Act). On the other, Congress knew that the public perceived an acute systemic crisis of power abuse they had no responsibility for creating (hence the "sweeping" rhetoric). Another explanation, which also explains the Act's call for so many studies, is that it is too soon to diagnose deep causes or broad shortcomings but that immediate action was politically expedient. The studies bridge the gap between action and knowledge, constituting continuing threats to their targets to abide by the spirit of the Act, a threat to make the "sweeping" rhetoric real "reform."
accounting, auditing, corporate governance, disclosure, securities regulation, Sarbanes-Oxley, financial scandals, market psychology, regulation
Abstract: This Article argues that chaos theory, noise theory and behavioral finance mandate opening a new chapter in a voluminous corporate and securities law debate revolving around the efficient capital market hypothesis (ECMH), which for decades has been the context for debating corporate and securities law and policy. The debate has been defined by interpretations of the semi-strong form of the ECMH - the claim that security prices fully reflect all publicly available information. As such, the debate has assumed as true and built upon the weak form of the ECMH - the claim that security prices fully reflect all information consisting of past security prices. This Article analyzes the historical development of the ECMH, showing that the weak and semi-strong forms of the ECMH are based on linear methodology and thought that have been rendered obsolete by chaos models applying nonlinear techniques. This obsolescence renders the ECMH false in all its forms, rendering it moot for purposes of policy formulation on topics ranging from such basic corporate and securities law doctrines as mandatory disclosure rules and mandatory fiduciary obligation, which neither the ECMH nor noise theory can do to the capital market circuit breakers and relational investing.
efficient markets, CAPM, modern porfolio theory, modern finance theory, chaos theory, nonlinear dynamics, intellectual history, capital markets, noise trading, mandatory disclosure, fiduciary duty
Abstract: A familiar pass-the-buck pas de deus in deal meetings occurs when the accountant says, after an impasse, "that's a legal problem" while the lawyer says "that's an accounting problem." The truth is, both are right; the trouble is, as Enron shows, prevailing professional cultures create a crack between law and accounting that resolute fraud artists exploit, not cultures that emphasize the intersection of law and accounting that should foil would-be fraudsters. As policymakers rush to respond to Enron, this perspective on law and accounting should be appreciated, as should Enron's place in soecity's parade of corporate debacles. At Enron's core are accounting chicanery related to off-balance sheet financing and related party transactions, but in its penumbra are also colossal examples of governance, audit, and regulatory failure. Even in its accounting aspects, Enron is both an isolated example of fraud and epitome of systemic failure in the financial reporting and disclosure regime. It is another accounting scandal added to the sum of accounting scandals that evidences a broader dysfunction. While not in the league of the LBO, BCCI, or S&L debacles, Enron as an accounting scandal is the straw that broke the accounting camel's back. Among possible regulatory responses are wresting the standard setting function from the profession of accounting and rendering accounting rules and standards matters of law, as is done in many countries. While such a bold move would surely constitute a huge power shift from accountants to lawyers, the effect on the competent business lawyer's practice would be more modest. Competent business lawyers already treat accounting principles as an important tool in their professional toolbox, even if by virtue of the manner and source of their present promulgation they are better understood as facts rather than law. Despite the increasing role accounting plays in business law practice since the mid-1970s, accounting teaching in law schools has declined. First taught in 1950, professors at top schools rapidly published impressive books and the number teaching the subject gradually increased through 1975, its peak, and has decreased as steadily since. In 1975, 150 full-time law professors taught accounting while today only 96 do, a drop of 36% during a period when the number of law schools increased by 19% and the number of full-time law professors increased by 35%. So beginning when accounting rose in practical importance to lawyers, the academy began to demote its significance in the law school curriculum. Reasons for the decline include the rising intellectual influence of modern finance theory. This theory's efficient market hypothesis discounts the relevance of accounting data in a world where financial analysts pierce the form of accounting reports to discover fundamental values wholly apart from accounting choices. In law schools, modern finance theory became the centerpiece of a rival course, corporate finance. The string of accounting debacles culminating in Enron show the folly and fantasy of ECMH and modern finance theory. When coupled with the practice of business lawyers, questions beyond pedagogy arise, particularly the professional ethics of business lawyers. It suggests that the ethical duty of competence should require knowing some accounting. The professional literature concerning legal ethics offers a more equivocal answer. Yet all lawyers know that just because something is legal doesn't mean it is right. In the area of legal ethics, just because a duty can be technically discharged in a painless way, doesn't mean client interests are served.
ecmh, duty of competence, law and accounting, enron, accounting fraud, teaching accounting, corporate finance, pedagogy, legal ethics
Abstract: Discussions of comparative corporate governance have renewed the old question of corporate social responsibility, for whose benefit is the corporation to be operated? It is customary to think that US and UK law require that corporations be operated primarily for the benefit of shareholders. It is equally customary to think that German and other continental European law require that corporations be operated for the common good?shareholders, workers, creditors, communities and so on. At a general and abstract level both these customary ways of thinking are correct. But the truth of these general statements does not altogether hold up at the level of particular application. The variety of practices within particular countries and across national borders and the range of interests implicated and protected in different ways in both contexts render it difficult to describe national models except at a fairly high level of generality. Generalized descriptions can of course be very useful, but it is also useful when it is possible to conceive of mechanisms that enable more specific comparisons that transcend borders, whether international or intra-national. To do so requires a framework to distinguish types of governance mechanisms corporations use. Corporate governance mechanisms can be divided into three categories, two internal and one external. Internal governance mechanisms that address the relationship between those in control of the corporation on the one hand and all other constituents on the other (including shareholders, workers, lenders and communities) can be called vertical. Internal governance mechanisms that regulate directly the relationship between these various constituencies inter se can be called horizontal. External governance mechanisms are those rules and regulations imposed upon the corporate entity to address concerns beyond the penumbra of interests the corporation impacts directly, and include rules about competition and antitrust, national trade and security and so on. External and horizontal governance mechanisms tend to pose the most striking and specific distinguishing features of comparative corporate governance, while vertical governance mechanisms tend to be more universal and general. All these mechanisms are undergoing change and convergence around the world. Yet sufficient differences remain to enable presentation of generalized pictures of comparative corporate governance. This piece starts off with such pictures, describing in Part I a typical way of thinking about comparative corporate governance. It is a statement of the main characteristics of dominant models of corporate governance and finance: the market model (chiefly US and UK), the European bank model (chiefly Germany and France), and (more briefly) the Japanese bank model. These characteristics are increasingly blurring, however, and many differences have been overdrawn, as the descriptive and theoretical evidence presented in Part II suggests. Governance mechanisms from these models are converging or have been overlapping and market, structural and regulatory forces have contributed to these phenomena. A key insight is that problems of vertical corporate governance?the relation between those in control and others?and the mechanisms to address them transcend much of the underlying differences posed or created by the differing external and horizontal mechanisms of corporate governance. That insight suggests that there is reason to worry around the world as much or more about vertical corporate governance mechanisms than external or horizontal ones. Accordingly, Part III moves to a prescriptive identification and evaluation of key vertical governance issues of importance across borders. These include some of the central topics of corporate governance generally and ones most likely to pose increasing difficulties as globalization proceeds (executive selection and compensation; acquisition policies; and capital allocation and dividend policy) with an emphasis on the role boards of directors must and can play in addressing them. Among the chief mechanisms available to enhance such board action are rules governing or affecting director liability, constituency voice and unimpaired markets. The thesis, in short, is that signposts on the road to global corporate governance must mark such vertical governance issues and the pavement must be laid with such sensible vertical mechanisms to address the common problems facing corporate constituencies worldwide.
globalization, comparative corporate governance, path dependence, vertical corporate governance, horizontal corporate governance, mergers, stock options, auditing, convergence
Abstract: Congress responded in similar ways to 2001's major national crises: bolstering internal controls in corporate America under the Sarbanes-Oxley Act in response to Enron's debacle and imposing internal controls on its financial services industry under the USA PATRIOT Act in response to 9/11's terrorism. These reflexive legislative responses to national crisis fit a pattern of proliferating controls as a first-order policy option dating to the mid-1970s. Documenting this proliferation and untangling the definition of internal controls, this Article attributes the appeal of internal controls as a policy option to systemic forces including the movements for deregulation and cooperative compliance, resistance to overt federal preemption of state corporate law, the monitoring model of the board of directors in corporate governance and audit committee ascendance, the social responsibility movement and the diversification of auditing services. Manifest appeals include the limited substantive content control directives carry and the increasing harmonization of control types around audit committees, compliance officers, employee training manuals and external audits of controls fitting neatly into the team production theory of corporate practice and law and making even mandatory controls appealing to corporations being implicitly regulated. Illuminating the limits of this policy option is an examination of comparative attitudes towards control risk shown by the auditing and legal professions. Audit approaches control risk with a formal context, definition and measurement apparatus consciously aware of risk's inevitability and that controls may increase or decrease risk. Yet auditors advertise their product as capable of doing more. Legal culture takes the advertisements seriously. The resulting expectations gap can be reinforced when audit's emphasis on systems and controls creates false impressions that these reflect likely achievement of underlying objectives. Proliferation of internal controls in the face of crisis shows social anxieties. Assuaging social anxieties with these tools can create illusions of control and denial of risk. Legal culture is telling managers to take steps to buy absolute control; audit culture is happy to sell it; the truth is, there is no absolute control. No system provides absolute assurance. The gap is significant between (1) what systems can deliver versus (2) what legal culture expects and what auditors advertise they can deliver. When internal controls fail, the policy response is to require audits of controls. This is the story of Sarbanes-Oxley. In the 1970s, the SEC persuaded Congress in response to crisis to pass the Foreign Corrupt Practices Act requiring companies to have internal financial controls. In the early 2000s, in response to crisis perceived to originate in internal control failure, the SEC persuaded Congress to pass Sarbanes-Oxley requiring auditors to audit those internal controls. In this cycle of control mandates followed by audit mandates, pressure builds on audit to create controls that can be audited. But since controls do not automatically reduce audit risk and may increase it, audits of them cannot speak to the effectiveness of underlying substance over which controls offer no reliable assurance. Legislative enthusiasm for controls as crisis-response mechanisms pretends controls can do more than they can and when controls consequently proliferate they can do even less - it becomes hard to assess which controls are effective. Control proliferation and generality complicate foreseeability analysis in tort. If controls applied only in particular settings with defined functions, they could indicate that related risk realization was foreseeable. They might be useful in assessing difficult pragmatic questions of causation when losses arise after controls fail. But when every aspect of corporate affairs is layered with elaborate controls there is no credible basis for drawing such inferences. Control signifies nothing special, so offers no insight concerning foreseeability or causation. This has not, however, prevented using control failures in exactly this mistaken way. When controls fail, the existence of control norms, directives, or practices are relevant to evaluating the standard of care exercised and matters of causation and foreseeability with little or no regard to the particular control at issue or its underlying substantive purpose. But Sarbanes-Oxley and PATRIOT show two polar extremes of control types: internal controls over financial reporting and controls dedicated to fighting terrorism. Two competing models of regulatory theory map onto this range. The deterrence model hypothesizes that target decision-making is conducted by comparing the cost of compliance with the product of enforcement threats and penalty levels. The cooperation model enlarges the framework by recognizing norms of compliance that may be skewed by the simple adjustment of threat and penalty levels. For internal controls the relative purchase of these models varies with the tenor of the control: financial controls link to the deterrence model where penalties for failure should be high and liability likely; externally-oriented controls are congruent with the cooperation model: penalties and liability risk should be zero. This theoretical account of the distinction between control types is consistent with the longer history of corporate law but the current legal environment's ambitions for internal controls threatens to upset this traditional stance. This appears most acute in the case of terrorism and provides an internal-controls-based defense of general compensation schemes such as the 9/11 Victims' Compensation Fund.
internal control, COSO, PCAOB, regulation, liability, fraud, terrorism, PATRIOT Act, Sarbanes-Oxley Act
Abstract: Large audit firms may believe that they are too big to fail. Arthur Andersen's 2002 criminal indictment reduced their number from five to four, and the government decided in 2005 to avoid indicting KPMG for crimes it admitted committing. If audit firms interpret the government's reluctance to indict as signaling aversion to tough action against them, moral hazard arises. This offsets auditing improvements mandated by the Sarbanes-Oxley Act of 2002 that are designed to strengthen auditors' reputations with managers for thoroughness and improve financial statement reliability. Neutralizing this moral hazard requires a credible alternative industry structure so that when a large audit firm faces failure from criminal or other malfeasance, it can be allowed to exit the industry without upsetting the financial system that auditing supports. An alternative industry structure must make auditing at least as effective as it is under the current system and should provide enhancements wherever possible. Examples of enhancements include bolstering auditors' reputations for toughness with client managers and delivering more transparent information to external users of financial information. One way to restructure the industry along these lines is through mandatory financial statement insurance. Such insurance would make it clear that no audit firm is too big to fail, promote strategic detection and deterrence in auditing, produce publicly disclosed indices of financial statement reliability, and reduce barriers to entry that potential competitors to the four large firms currently face.
too big to fail, moral hazard, right-tail risk, auditing, insurance, industry unraveling, barriers to entry, industry concentration, catastrophic risk, complexity theory, audit risk model, reputation, internal control, gatekeeper, worst case scenario analysis, audit reports, liability insurance, fin
Abstract: This Professor Cunningham's Introduction to his edited collection of Warren Buffett's noted letters to shareholders of Berkshire Hathaway Inc. The collection was prepared for a symposium held at Cardozo Law School in New York City in 1997 and originally published in the Cardozo Law Review. The Introduction serves as an encapsulation of the main themes of the resulting collection and locates them in contemporary discourse on matters of corporate governance; corporate finance and investing; mergers and acquisitions; and accounting and taxation. Professor Cunningham subsequently published the edited collection as a book under the title The Essays of Warren Buffett: Lessons for Corporate America, which also contains this Introduction.
value investing, Warren Buffett, margin of safety, circle of competence, modern finance theory, executive compensation, corporate governance
Abstract: Positioned in a lively current debate concerning how to design auditor incentives to optimize financial statement auditing, this Article presents the more ambitious financial statement insurance alternative. This breaks from the existing securities regulation framework to draw directly on insurance markets and law. Based on upon an evaluation of major structural and policy-related features of the concept, the assessment prescribes a framework to permit companies, on an experimental-basis and with investor approval, to use financial statement insurance as an optional alternative to the existing model of financial statement auditing backed by auditor liability. The financial statement insurance concept, pioneered by New York University Accounting Professor Joshua Ronen, promises considerable advantages compared to traditional financial statement auditing. As with any proposal, however, it presents challenges. This Article expands the model first sketched by Dr. Ronen, extending and interpreting it to examine its efficacy, attempting to show how certain limitations can be overcome. A chief challenge is relating state insurance law, the default applicable to insurance policies including FSI, to federal securities regulation. A general method is to develop for financial statement insurance the functional equivalent of the U.S. Trust Indenture Act of 1939 applicable to contracts governing public debt securities. This would allow substantial freedom of contract in policy terms, governed by state law, while mandating certain specific terms and establishing minimum federal parameters for others. Most other hurdles arising from the interplay between state insurance law and federal securities regulation can be overcome using disclosure, while more uncertain are issues associated with preserving insurer solvency if financial statement insurance is placed at the center of the public-company financial reporting system.
gatekeepers, financial statement insurance, auditor liability, accountants' liability, securities regulation, liability insurance, directors' and officers' insurance, D&O insurance, title insurance, corporate governance, financial reporting, outside auditor
Abstract: This Article considers the interplay between new auditing standards governing audits of internal control over financial reporting and pre-existing legal standards governing auditor liability for audit failure. The interplay produces skewed liability incentives that, if unadjusted, threaten to impair the objective of this new control-audit regime. The regime's objective is, in part, to provide an early warning to financial statement users when current financial statements are reliable but control weaknesses indicate material risk of a company's future inability to produce reliable financial statements. To be meaningful, auditor disclosure of material weaknesses and potential effects is necessary. While liability rules under Section 11 of the Securities Act of 1933 will reinforce auditor incentives to provide this disclosure, liability rules under Section 10(b) of the Securities Exchange Act of 1934 will discourage auditors from providing disclosure because doing so likely makes them primary actors subject to liability rather than secondary actors not subject to liability. To address this skewed interplay between new auditing standards and pre-existing legal liability rules, the Article suggests developing a safe harbor system to protect from Section 10(b) liability auditor disclosure of forward-looking information necessary to give the early warning system meaning. The Article gives a comprehensive account of new auditing standards, noting interpretive questions, and showing a system entirely dependent on extensive auditor disclosure. It then explains how the new system expressly nullifies existing case law under Section 11 by substantially expanding required auditor disclosure of internal control conclusions and how it probably nullifies existing case law under Section 10(b), including the Supreme Court's landmark 1994 case, Central Bank, that generally insulated auditors from Section 10(b) liability. These effects, remarkable on their own, pose limits on the early warning system's promise and the Article suggests using safe harbors to overcome them. The Article also offers broader but brief criticism of current preoccupation with control effectiveness as the key to reliable financial reporting evident in auditing's otherwise appealing new early warning system.
auditing, auditor, safe harbors, early warning system, control disclosure, auditor liability, auditor disclosure, financial reporting, internal controls, financial statements, auditing standards
Abstract: This Article corrects widespread misconception about whether complex regulatory systems can be fairly described as either "rules-based" or "principles-based" (also called "standards-based"). Promiscuous use of these labels has proliferated in the years since the implosion of Enron Corp. While the concepts of rules and principles (or standards) are useful to classify individual provisions, they are not scalable to the level of complex regulatory systems. The Article uses examples from corporate law, securities regulation and accounting to illustrate this problematic phenomenon before turning to a series of possible explanations for the widespread use of these misleading labels. The piece contributes to the substantive fields it uses to animate the inquiry and to more general jurisprudential literature on the rules-standards question.
rules, principles, standards, rhetoric, politics, ethics, Delaware, GAAP, IFRS, regulatory competition
Abstract: The term market timing was little known outside the arcane world of mutual funds until state attorneys general from across the country popularized it. The term's innocuous-sounding ring assumed a more pernicious note when the mysterious ways of mutual funds became more transparent. In its pernicious sense, market timing denominates mutual fund insiders using the inscrutable structures of mutual funds to provide benefits selectively to favored participants at the expense of less favored participants. Mutual fund shares are not like common stocks; investments made using these vehicles are unlike those made through traditional securities markets. While the peculiar features of mutual funds were manifested in the contemporary environment, these peculiarities are inherent in the very structure of mutual funds. Regulatory efforts dating to the 1940s recognize these realities and regulatory reforms of the early 2000s struggle to respond in much the way earlier reforms did. The wide range of reforms that have been adopted and proposed may overlook this reality, however. By correcting this oversight, and unveiling the historical and contemporary landscape, this Article provides more realistic appraisals for increasing the integrity of the mutual fund investment vehicle. Chief among these is a deeper point: critical to sustaining the mutual fund as an important institution in the financial system is a renewed appreciation of concepts of trust and professionalism.
mutual funds, market timing, regulation, external regulation, market reform
Abstract: Intellectual tension between the fields of finance and accounting may help to explain explosion of public company frauds. Finance theory diminishes the relevance of accounting information. Enron exploited this consequence while the SEC bought into it. After widespread frauds were exposed, Congress passed laws that address symptoms of finance's futurism, not disease. Laws essentially prohibit pro forma financial reporting and regulate the selective flow of futuristic information to financial analysts. Untouched is the underlying disease of regulatory mandates requiring extensive disclosure of forward-looking information. Until the 1970s, the SEC prudently prohibited such futuristic disclosure as inherently unreliable; assisted by finance theory, the SEC's stance steadily eroded to require such disclosure. The SEC likely had it right the first time. It is too late to reverse the mandatory futuristic disclosure regime. So reform policies must work within it. After elaborating the foregoing critique, this Essay mentions two: (1) future oriented disclosure should focus on material risks of future adversity and (2) accounting figures should be reported in ranges, not single amounts.
pro form financial reporting, analyst earnings forecast, forward-looking disclosure, financial fraud, efficient market hypothesis, accrual system, reforms
Abstract: This article critically evaluates the major judicial opinions on the law of contracts written by Judges Benjamin N. Cardozo and Richard A. Posner. Respectively, these judges are the first and third most influential judges on the subject measured by the frequency with which contemporary contracts casebooks reproduce their opinions. Exploring dozens of classic opinions of these judicial titans, the piece contrasts the philosophies and methods the two judges employ in wrestling with many fundamental challenges in contract law, from formation to performance to damages. The inquiry suggests that, using Isaiah Berlin's nomenclature, Judge Cardozo is the fox of American contract law while Posner is its hedgehog. Judge Cardozo displayed the thickly-textured doctrinalist, an optimizer of competing objectives; Judge Posner is a maximizer. (Accompanying tables report data on the contributions of the 15 most influential judges contributing to contract law.)
judicial reputation, contracts casebooks, Allegheny College, Lucy Lady Duff Gordon, DeCicco, Sun Printing, Lake River, Wisconsin Knife, Morin, Selmer, good faith, commercial certainty, intention, freedom of contract, liquidated damages
Abstract: Audit committees of corporate boards of directors are central to corporate governance for many corporations. Their effectiveness in supervising financial managers and overseeing the financial reporting process is important to promote reliable financial statements. This centrality suggests that it is likewise important for investors and others to have a basis for justifiable confidence in audit committee effectiveness. At present, there is no such mechanism. This Article explains why, considers a way states can provide it and assesses as low the likelihood that states will do so. In the swirling corporate governance reforms led by SOX, the SEC, SROs and PCAOB, states are playing minor roles at best. State absence leaves missing a potentially critical link in the evolving US corporate governance circle. The circle is drawn as follows: state corporation law charges boards of directors with managing corporations and authorizes board committees; SOX charges audit committees with certain tasks, including supervising external auditors; the SEC and SROs require audit committee characteristics like independence and compel disclosure; and PCAOB now requires external auditors to evaluate audit committee effectiveness. This last step could close the circle except that auditors performing this evaluation generate conflicts with state corporation law, conflicts between auditors and audit committees and face other limitations. These conflicts and limitations can be neutralized in an audit committee evaluation exercise conducted by newly-created state agencies staffed with experts in state corporation law such as retired lawyers and judges or academics. These newly-created state agencies could thus square the newly-forming corporate governance circle. The paper presents and evaluates this concept. It reviews the central role audit committees play in corporate governance; considers existing mechanisms that promote committee effectiveness - state fiduciary duties, SEC-SRO disclosure rules, and traditional auditing - noting the limits of each. It considers PCAOB's new auditing standards requiring auditors to evaluate audit committee effectiveness, showing both the perceived need for such an evaluation and inherent limits on auditor capabilities to render this evaluation effectively. This review leads to state agencies as possible providers of this evaluation and certification. The paper sketches the outlines for creating and running such state agencies. The paper then assesses the likelihood that this concept would be accepted by various corporate constituents. Likely supporters include users and producers of financial information and the auditing and legal professions. More uncertain is SEC support, given a new model of corporate-governance production in which the SEC uses various instrumentalities, like SROs and PCAOB, to federalize corporate governance. State receptivity depends in part upon and is evaluated according to rival corporation law production models (a race to the top or bottom; interest group; or state versus federal). The paper concludes by lamenting that in the evolving corporate-governance production model, missing links like this one are unlikely to be corrected by state or federal law - unless private-sector agents likely to support such concepts lobby for them.
Abstract: Government increasingly leverages its regulatory function by embodying in law standards that are promulgated and copyrighted by non-governmental organizations. Departures from such standards expose citizens to criminal, civil and administrative sanctions, yet private actors generate, control and limit access to them. Despite governmental ambitions, no one is responsible for evaluating the legitimacy of this approach and no framework exists to facilitate analysis. This Article contributes an analytical framework and, for the federal government, nominates the Director of the Federal Register to implement it. Analysis is animated using among the oldest and broadest examples of this pervasive but stealthy phenomenon: embodiment by Congress and the Securities and Exchange Commission of privately-promulgated accounting standards in public law. With accounting standards as a case study, the framework delineates three routes through which private standards are embodied in public law - denominated as strong, weak and semi-strong - and articulates associated copyright and lawmaking consequences. As to copyright, the framework mediates conflicts between public access to legal materials and private incentives to produce standards. It addresses the effect of copyright protection that biases standard setters to focus on quantity instead of quality and prevents third parties from improving standards through derivative works. As to lawmaking, the Article explains alternative governmental strategies to achieve regulatory leverage while adhering to private non-delegation doctrines and publication requirements. The Article appeals to scholars of administrative law, theorists concerned with intellectual property law and its broader political and public policy contexts, and those interested in informational and standard-setting aspects of accounting. Contributions will be of practical use to governmental officials who look to private standards in their regulatory functions, standard-setters in developing standards to aid those officials, and judges in resolving disputes involving citizens subject to or using these standards. While driving new avenues in three specific legal areas (copyright law, administrative law and securities regulation), the Article's inquiry into contemporary lawmaking is of general significance.
government works, public domain, access, standards, standard-setting,Veeck, compulsory licensing fair use, idea/expression merger doctrine, GAAP, GAAS, PCAOB, FASB, AICPA, GASB, FAF, Sarbanes-Oxley, accounting support fees, regulation, non-delegation, publication, Federal Register, Copyright Office
Abstract: Accounting textbooks for law or business schools invariably provide secondary narrative presentations of materials in the authors' own words. A better approach to learning this subject is to present thematically arranged original accounting pronouncements. The design this innovative book, helps readers appreciate how accounting is a tool that provides conceptual organization to economic exchange. The tool facilitates analyzing legal, business and public policy aspects of the transactions that accounting addresses. The original accounting standards, as well as SEC enforcement actions, presented in this book illuminate why transactions are pursued and related decisions made, economic aspects of transactions, and the conceptual underpinnings of the activities of measuring, classifying and reporting on them. Law and Accounting thus emphasizes the intersection of the two subjects. It is neither accounting for lawyers nor law for accountants. It is both. It is not accounting qua accounting being presented, but a conception of law and accounting bearing an authentic interdisciplinary sense. Material downloadable from this abstract consists of the book's front matter: (1) Preface; (2) Summary, Table and Detail of Contents; (3) Table of Cases; and (4) Annotated Table of Accounting and Auditing Standards.
accounting, law and accounting, accounting standards, original accounting pronouncements, FASB, AICPA, sociology of accounting, economic exchange, accounting theory
Abstract: Cash is king. As countries struggle to develop accounting standards that translate across borders, the cash flow statement is a promising place to look. This essay reviews global accounting practices in several countries, showing how angst expressed in concepts such as semiotics and hermeneutics are both fascinating and unnecessary. In doing so, it considers continuing weaknesses in the US regulatory model, including in the Sarbanes-Oxley Act, and shows ways that markets have been ahead of regulators in developing convergence in financial reporting.
cash flow statement, true and fair view, fairly presents, Sarbanes-Oxley, global accounting, comparative accounting
Abstract: The Sarbanes-Oxley Act shook the corporate world beyond US borders more than Enron shook the corporate world within them. This Article goes beyond the prodigious commentary on the Act itself to understand the nature of its reception outside the US. It first develops a hubs-and-spokes account of global corporate life in which corporate purpose, which varies around the world, forms the hub and radiates spokes constituting governance, finance, accounting, and auditing - all of which also differ around the world. Using this model, the Article suggests that non-US receptions to the Act exhibited unfounded fear that the exportation of US norms concerning the spokes of corporate life could redefine corporate conceptions of the hub, corporate purpose. It also shows the fallacy in the no-scandal-here argument emanating from countries around the world. Although global reactions to the Act may therefore have been somewhat overstated, the Act certainly carried a whiff of exporting US corporate norms around the world by fiat. A key lesson for the US is the next time US corporate scandals erupt and Congress adopts a legislative response, it should automatically exempt non-US issuers pending SEC determinations of the necessity of applying the reforms to them. A related implication of this model and interpretation concerns debate over whether corporate life around the world is converging to a single model or remaining path dependent and varied. Moves like SOX seem to change the character of both the debate and the direction of evolving corporate life. The normative payoff contends that the superior road to harmonious corporate life is in developing comity rather than hoping for convergence.
Abstract: Congress passed the Sarbanes Oxley Act to restore investor confidence, which had been deflated by massive business and audit failures, epitomized by the demise of the Enron Corporation and Arthur Anderson LLP. The Act altered the roles and responsibilities of auditors, corporate officers, audit committee members, as well as other participants in the financial reporting process. We evaluate the potential legal implications of some of the Act's major provisions and anticipate participants' likely responses. Our evaluation suggests that these provisions will significantly change behavior, increase compliance costs and alter the legal landscape. We also identify promising avenues for future research in light of the new landscape.
Sarbanes-Oxley Act, legal implications, future research
Abstract: Unprecedented interest in financial regulation reform accompanies the nearly-unprecedented scale of financial calamity facing the world. Dozens of elaborate reform proposals are in circulation, most determined to revolutionize financial regulation. No doubt, the crisis makes reevaluation essential, but we contribute a cautionary analysis amid the exuberant atmosphere. Reforms should not discount the value of traditional financial regulation, overlook the functional regulatory reform that has already occurred, or overstate ultimate differences between contending reform proposals.
Despite proliferation of dozens of reform proposals, our analysis leads us to conclude that there are ultimately only three or four principal alternatives: (1) the traditional fragmented model that divides power and presided over the generation of substantial wealth, yet signally failed to prevent the crisis of 2008; (2) the on-the-fly reforms effected by Treasury and Fed’s massive and unorthodox intervention into and extensive renovation of all financial services industries; and (3) seemingly radical proposals, one by Republicans at the onset of crisis (Treasury Secretary Paulson’s Blueprint), the other by Democrats after financial markets imploded (former Fed Chair Volcker’s Group of Thirty reports).
These three or four alternative approaches pose tests of our relative commitments to markets, organization, globalization and political control. Although each was developed in different circumstances by architects with different purposes, they cannot co-exist. One of them will provide the approach we take into the next crisis - and perhaps to pull us out of the current one. We provide a framework to consider each alternative and evaluate their respective advantages and disadvantages. Our analysis leads us to conclude that limited reform is best, recognizing the quasi-centralization that has occurred and the need to add protective regulation to particular areas that manifestly contributed to the global economic crisis that began in 2008.
financial regulation, regulatory reform, financial crisis, regulatory competition, regulatory conentration, Treasury blueprint, Volcker reports
Abstract: Building on companion work investigating the efficacy of financial statement insurance (FSI) as an alternative to traditional auditor liability (ssrn.com/abstract=554863), this Article presents the terms of a national enabling statute to implement this concept. The Model Financial Statement Insurance Act uses the architecture of the U.S. Trust Indenture Act of 1939. It authorizes issuer application for qualification, in connection with annual proxy statement filings, of policies of financial statement insurance. The Model FSI Act deems a series of provisions necessary to achieve securities law objectives to be part of all financial statement insurance policies so proposed, and requires insurers to possess characteristics relating to financial capacity, independence from issuers and adequate regulatory supervision. It empowers the U.S. Securities and Exchange Commission to issue stop orders against such applications in cases where insurers lack such qualifications. Qualifying policies are put to security holder vote and become effective when a registered public accounting firm engaged by the insurer issues an unqualified opinion that the financial statements provide a fair presentation in accordance with generally accepted accounting principles. Later-discovered material misstatements result in covered losses under the policy, administered in accordance with terms the Model FSI Act deems included, along with other tailored policy terms not in contravention of the Act. While using a United States template, the Model FSI Act is designed to be adaptable for use in other countries and jurisdictions of the world.
Abstract: For several decades, policy analysts have debated whether to establish ex ante caps on damages that audit firms face for violating state or federal law in their audits of public companies. A common argument supporting caps is a claimed inability of audit firms to obtain requisite external liability insurance and need to resort to self-insurance programs. This Article evaluates this claim by assessing existing insurance resources and inquiring into potential additional insurance devices. The assessment suggests that, for auditors, self-insurance is better than external insurance so that the claim does not necessarily support damages caps. Even if the claim were valid, the inquiry concerning additional insurance suggests superior alternatives by using previously-discussed financial statement insurance, to tailor coverage to risks of ordinary audit failure, and the novel innovation of insurance securitization to pool and distribute risks of catastrophic audit failure through capital markets.
audit, capital markets, damages caps, insurance securitization
Abstract: eXtensible Markup Language (XML) structures information in documentary systems ranging from financial reports to medical records and business contracts. XML standards for specific applications are developed spontaneously by self-appointed technologists or entrepreneurs. XML's social and economic stakes are considerable, especially when developed for the private law of contracts. XML can reduce transaction costs but also limit the range of contractual expression and redefine the nature of law practice. So reliance on spontaneous development may be sub-optimal and identification of a more formal public standard setting model necessary. To exploit XML's advantages while minimizing risks, this Article envisions creating a publicly oriented foundation to set XML-based standards for the private law of corporate contracts. The Article's specific inquiry concerning corporate contracts illuminates XML's broader implications, making the standard-setting model it contributes adaptable to other contexts.
eXtensible Markup Languag (XML), contract law, spontaneous development, corporate contracts, private law, public-private standard setting, corporate law, technological innovation
Abstract: The Securities Exchange Commission has introduced a Roadmap that describes a process leading to mandatory use of IFRS by domestic issuers by 2014. The SEC justifies this initiative on the grounds that global standardization yields cost savings and an ultimate gain in comparability, facilitating the search for global opportunities by U.S. investors and making U.S. capital markets more attractive to foreign issuers. This paper enters an objection, noting that the stakes include more than the choice of the framework for standard setting. The accounting treatments themselves are at issue, treatments that for the most part concern domestic reporting firms and domestic users of financial statements. We present a treatment by treatment comparison of GAAP and IFRS and go on to discuss the differences' implications. FASB maintained its independence during its 35 year history in the teeth of opposition from corporate management, which experienced a steady diminution of its zone of financial reporting discretion. A switch to IFRS would allow management to reclaim some of the lost territory. Meanwhile, the interest group alignment that protected FASB, comprised of auditing firms, actors in the financial markets, and the SEC, has disintegrated as U.S. capital market power has waned in the face of international competition. Management is the shift's incidental beneficiary, with possible negative effects for reporting quality in domestic markets.
GAAP, IFRS, FASB, Securities Exchange Commission
Abstract: In the most revolutionary securities law development since the New Deal, the SEC is poised to jettison rules requiring companies to apply recognized US accounting standards by inviting use of a new set of international ones created by a private London-based organization. This radical shift follows decades of gradual movement towards international standards that has gained momentum since 2005 when all listed companies in the European Union were required to use them. For the US, the SEC could give companies the option to use either or establish a medium-term plan to move US companies to international standards within a decade. Analysis of the SEC's vision for this quest reveals that it contains contradictions, paradoxes and ironies that suggest quixotic thinking. A contradiction: the SEC touts its vision as promoting comparability, yet proposes injecting choice and competition into accounting standards that would reduce it. A paradox: the SEC celebrates a single set of global standards while advocating changes that would create a double set within the US and overlooks factors that justify skepticism about the possibility of a single set of written standards translating into uniform application. An irony: the SEC acknowledges that pursuing global standards is very complex while its Chairman says the SEC has declared a war on complexity in accounting. A more realistic vision of the quest appreciates that, under either an optional or mandatory route, the shift amounts to a leap of faith posing both large costs for the US and potentially large gains for it and the world. This realistic appraisal lowers expectations about actual comparability; highlights serious risks that competing standards would impair comparability; recognizes needs the SEC has scantly examined to render elaborate infrastructural changes; and, above all, faces the realization that the abrupt shift is less about the SEC's historical mandate to protect investors than about a newly undertaken mission to expand global capitalism.
IFRS, SEC, IASB, FASB, principles-based, rules-based, regulatory competition, comparative corporate governance, corporate finance, international financial regulation
Abstract: This is a short review of Gatekeepers by John C. Coffee, Jr.
corporate governance, boards, accounting standards, regulatory reform
Abstract: This Article seeks to analyze and understand Paramount Communications, Inc. v. QVC Network, Inc. and Cede & Co. v. Technicolor, Inc. as part of a movement in Delaware fiduciary law toward a single, more unified standard, away from doctrinal fragmentation. In addition, the Article considers Delaware law leading up to QVC and Technicolor, tracing both the growing fragmentation of Delaware law in the 1980s and the growing judicial concern about fragmentation. This Article will argue that the concern over fragmentation and the desire for a unified standard were not the result of external pressures or policy concerns, but of internal judicial concerns about potential inequity, manipulability and lack of coherence in Delaware law. Finally, this Article will look at the practical significance of these new cases and the seeming trend toward a more unified conception of fiduciary law.
QVC Network, Paramount Communications, Technicolor, Incorporated, Cede and Company, Delaware state law, fiduciary law, doctrinal fragmentation, Revlon duty
Abstract: Controversy surrounding scholastic rankings arises, in part, because of complexities associated with measuring academic contributions. Legal researchers use various methodologies to assess scholarly production and impact but all suffer from inherent limitations and none provides data useful to scholarly self-reflection. The 10-year old Legal Scholarship Network (LSN) offers potential to improve considerably on both scores of public and personal assessment. This Essay critically evaluates approaches to conceptualizing scholarly profit margins, explores how LSN can enhance these conceptions, and opens new frontiers for this innovative Web-based repository of legal writing.
legal education, legal scholarship, legal studies, scholarly impact, scholarly influence, rankings, scholarly reflection, Legal Scholarship Network
Abstract: This Article contributes a novel idea to the literature on capital market gatekeepers: positive incentive systems for gatekeepers to perform functions not required of them in exchange for rewards if they perform the functions successfully. Capital market gatekeeping theory relies upon the reputations that gatekeepers are assumed to command and protect backstopped by negative threats of legal liability for failure to perform legally mandated functions. The ineffectiveness of many gatekeepers during the late 1990s and early 2000s revealed practical limitations of the reputational constraint and the reforms that responded to the failures continue to emphasize the legal duties and legal liability that gatekeepers face. Adversely, that emphasis discourages gatekeepers from willingness to perform desired functions - such as to detect for fraud - whereas the positive approach induces performance of such functions. Without necessarily displacing existing reputation constraints and liability strategies, adding an incentive system as a public policy lever could promote gatekeeper effectiveness and poses little downside risk.
gatekeepers, auditors, lawyers, incentive compensation, reputation, liability
Abstract: This paper reviews and draws insights from recent empirical research in financial accounting on the value of director expertise for financial reporting quality. Among important consequences of Sarbanes-Oxley is an increase in the percentage of accounting experts on boards of directors, particularly on audit committees. The research reviewed here documents the value of this expertise in promoting financial reporting quality measured in terms of "accounting earnings management" (artificial bookkeeping manipulations). These findings contrast with well-known evidence showing little value arising from director independence. The research holds numerous implications and raises important questions, including the following: 1. It shows that accounting expertise is more valuable than other kinds of financial expertise, suggesting that the SEC should reconsider its definition of this concept. 2. Although accounting earnings management has declined since SOX, real earnings management (substantive business decisions taken to achieve accounting results, like delaying or accelerating investment in a new plant) may be rising. Do audit committee financial experts have a role to play in policing the latter? 3. What role do such experts have in determining the degree of conservatism that a firm uses in its financial reporting, demand for which may differ as among shareholders, bondholders, employees and others? 4. It is customary to see independence and expertise as trade offs. This may be correct when expertise arises from insider status, but incorrect when the expertise is substantive knowledge in a discipline, such as accounting. 5. Law has traditionally encouraged director independence and discouraged expertise but, this research suggests, that may be backwards and certainly requires reconsideration.
boards of director, director independence, director expertise, audit committee financial expert, ACFE, audit committees
Abstract: This Article adds to the emerging literature on rewards to promote effective capital market gatekeeping. Capital market gatekeeping theory traditionally relies heavily on threats of legal liability for failure to perform legally mandated functions (along with a presumed constraint imposed by reputation effects). The ineffectiveness of many gatekeepers in the past decade revealed limitations of the liability strategy and yet reforms continue to emphasize legal duties and liability for gatekeepers. This emphasis also has the negative side-effect of discouraging gatekeepers from willingness to perform desired functions - such as to detect for fraud. Using rewards can induce gatekeepers to perform desired functions and add positive incentives to encourage them to be more effective in vetting enterprises seeking access to capital.
Abstract: The common law often is casually referred to as an iterative process without much attention given to the detailed attributes such processes exhibit. This Article explores this characterization, uncovering how common law as an iterative process is one of endless repetition that is simultaneously stable and dynamic, self-similar but evolving, complex yet simple. These attributes constrain the systemic significance of judicial discretion and also confirm the wisdom of traditional approaches to studying and learning law. As an iterative system, common law exhibits what physicists call sensitive dependence on initial conditions. This generates a path dependency from which it may be hard to escape. Escape occurs through a second attribute of iterative processes, called self-similarity. Self-similarity in an iterative process exists when the output of one operation closely resembles the output in the next operation. Applications of an existing rule to new disputes bear that quality when disputes generated by the rule's initial conditions continue to be resolved in the same way. Non-self-similar applications of a rule involve departures from earlier formulations. When self-similarity dominates, the population of disputes cognizable under a rule is stable. Evolution and articulation of social norms promotes growth of non-self-similarity which threatens stability in the population of disputes. Such threats and path dependency created by initial conditions are overcome by what this Article calls judicial bifurcation, meaning a splintering of the input rule in a later dispute so that the population of disputes attracted by the population of rules regains stability. This produces a dominant systemic tendency towards stability in the population of disputes attracted by the population of rules. This systemic tendency puts limits on the systemic significance of judicial discretion. The fabric of the common law absorbs social norms, more than any idiosyncratic prejudices or tastes of particular judges. Importance of facts captured by sensitive dependence on initial conditions entails a substantial complexity in law that demands a close and careful reading of individual cases to understand law. Yet resulting systemic stability and influence of bifurcations reveal a systemic simplicity in the common law process, entailing also a need to study rhythms of case law dispute resolution.
self-similarity, sensitive dependence, judicial bifurcation, judicial discretion, common law, iterative process, input rules, output rules
Abstract: The most provocative debate in contemporary contract law scholarship concerns default rule analysis or the manner in which courts fill gaps in incomplete contracts. The nineteenth-century scholar Francis Lieber elaborated a comprehensive solution to the default rules puzzle by first distinguishing the judicial acts of contract interpretation and construction, and then by developing principles of construction with which to choose default rules. Arthur Corbin knew about Lieber's enterprise, but, in his treatise on contracts, dismissed Lieber's distinction and never explored the rest of Lieber's hermeneutics. Had Corbin addressed Lieber, much of the professorial energy expended in the prevailing default rules debate might have been conserved. Although Lieber's work was rather limited with respect to the law of contracts, his principles of construction provide an analytical framework with which to understand and guide the way judges choose rules that conflict with the intentions of parties in contract disputes. Because Lieber's principles constitute foundational ideas, a return to them may be both efficient in conserving intellectual energy and profitable in providing fresh insights into the problems to which the ideas apply. By reviewing the distinction between interpretation and construction as Corbin adapted it from Lieber in Part I and then showing how Lieber's principles of construction bear directly on the prevailing default rules debate in Part II, this Essay invites a return to those foundational ideas and the addition of hermeneutics to the default rules debate. This essay's discussion of Lieber's hermeneutics - adapted for contract law according to Corbin's distinction between interpretation and construction - is tentative and general. It recognizes a potential intellectual debt owed to Lieber, who has been a neglected figure in contemporary American legal thought. And while Corbin has been treated as the legal academy's equivalent of royalty, even his distinction between interpretation and construction has been underappreciated.
contract law, default rule analysis, Francis Lieber, Arthur Corbin, hermeneutics, principles of construction
Abstract: Since the New York Court of Appeals banned nonrefundable retainers, numerous other courts have joined in prohibiting this widespread practice of lawyers charging a fee for services in advance and keeping the fee even if the services are not performed. This may reflect increased judicial recognition of the effect of egregious fee practices on the image of the bar and the role such practices play in the declining esteem in which the legal profession is held. Among the more provocative contributors to this ongoing debate, Professor Steven Lubet recently reviewed our work advocating the ban against nonrefundable retainers and posed a number of questions about the per se prohibition against them. In this Article, we respond to Professor Lubet's questions as well as to those posed by other scholars. In Part I, we discuss the client discharge right, the cornerstone upon which the absolute ban on nonrefundable retainers rests, and respond to a series of arguments concerning its meaning, how it may be impaired, and whether it may be waived. In Part II, we show that legitimate purposes that may be served by nonrefundable retainers cannot avoid impairing the client discharge right, but that other fee arrangements that do not impair that right can easily be designed to serve some of those ends. In Part III, we extend an invitation to address the issues we have identified to all those who believe that a per se ban against nonrefundable retainers is unnecessary to prevent the abuses they generate. We have previously extended this invitation to devise a less inclusive rule that would in a practical and self-effectuating way prohibit the abuses while permitting the attainment of legitimate purposes. Unfortunately for the debate, however, none of the participants have accepted this invitation. We therefore think it bears repeating.
nonrefundable retainers, attorney-client relationship, attorneys fees, client discharge
Abstract: In this book, Boston College Law School's Academic Dean, Lawrence Cunningham, arranges selected contributions of his faculty's scholarship into a meditation upon justice. The book weaves a combination of theory and practice to articulate moral and ethical values that facilitate rational application of law. It envisions legal arrangements imbued with commitments of the Jesuit tradition, including the dignity of persons, the common good and compassion for the poor. This reflective collection of inquiry evokes a signature motif of the BC Law faculty in dozens of different legal subjects. Materials downloadable from this abstract consist of: Table of Contents, Acknowledgements, Introduction and Index of Contributions.
justice, Jesuit tradition, Jesuit values, legal ethics, professional responsibility, legal education, dignity of persons, poverty law, care for the poor, advancement of the common good, discrimination law, rational application of law
Abstract: The most influential judicial voices on the parol evidence rule are Roger Traynor and Richard Posner. Traynor pieced together aspects of positions championed by the antipodal titans of contracts, Arthur Corbin and Samuel Williston. Posner cuts through tangled doctrinal webs to show how the unifying talisman of the doctrine is credibility. Everything in parol evidence rule doctrine, in this formulation, can be understood in terms of two categories of evidence: subjective and objective. While the Traynor composite blended aspects of the titans of contracts into an incoherent stew, the Posner composite unites the central theme of the titans' positions, holding some promise of at last bringing clarity to a seemingly intractable body of contract law. Costs associated with various formulations of the parol evidence rule and tradeoffs they entail include costs of perfect drafting compared to costs of judicial error from imperfect drafting. While such a comparative cost approach to thinking about the parol evidence rule may be sound in theory, it is impractical and paradoxical in operation. It requires a judge to evaluate simultaneously costs of perfect drafting and the risk that she or he will commit an error in applying the parol evidence rule. A credibility-centered parol evidence rule can enhance judicial understanding of both sides of this calculus while sidestepping the paradox.
parol evidence rule doctrine, Roger Traynor, Richard Posner, Arthur Corbin, Samuel Williston, subjective evidence, objective evidence, contract law, drafting
Abstract: This commentary will be published in the volume 81, issue 1 of the Indiana Law Journal. The commentary was submitted for the Symposium on the Next Generation of Law School Rankings. From the commentary: "This Commentary outlines a proposal to create a Legal Teaching Network (LTN) to disseminate law school teaching materials. This proposal was inspired as commentary upon the work of Professor Bernard Black and Paul Caron in this Symposium volume."
Legal Teaching, Legal Education, Law School, Legal Scholarship Network, U.S. News & World Report
Abstract: Could a preemptive federal incorporation law today assume the enabling character of traditional state corporation law, instead of the mandatory flavor typical of much federal securities regulation? Does global competition mean that the US should both preempt state corporation law and adopt a flexible, principles-oriented approach to business regulation? This essay, commenting on Robert Ahdieh’s Trapped in a Metaphor: The Limited Implications of Federalism for Corporate Governance, shows how this surprising approach is plausible and may be desirable but also that it is not politically likely in the current environment. The intellectual basis for a preemptive, enabling, and flexible federal corporation law appears in the Treasury Department’s March 2008 blueprint for financial regulation reform. The blueprint would consolidate regulatory power in Washington over securities, futures, banking and insurance, then delegate that power to self-regulatory organizations. The logic extends readily to traditional corporation law. That means federal preemption plus delegation to stock exchanges, who take over the role that US law traditionally gives to states. US stock exchanges then compete with stock exchanges elsewhere, wielding a broad range of tools, including jurisdiction to resolve disputes, usually handled by states. The result would promote US competiveness in global capital markets. Intellectually, the domestic corporate law competition debate gets replayed as an international securities law debate which, of course, already is underway, highlighted by issuer choice proposals. Market forces dominate the form and content of resulting corporate law and governance. Political realities likely put these developments out into the future however. Instead, there is a good chance that federal preemption of state corporation law may soon come, covering corporations of systemic significance and imposing on them strict, mandatory corporation law rules, ranging from board composition, executive compensation, shareholder voting procedures, and interests of other constituencies.
regulatory competition, mandatory/enabling, corporation law, securities law
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