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Abstract:
According to conventional wisdom, a supermajority independent board of directors is the ideal corporate governance structure. Debate nevertheless continues: empirical evidence suggests that independent boards do not improve firm performance. Independence proponents respond that past studies reflect a flawed definition of independence.

Remarkably, neither side in the independence debate has looked to Delaware, the preeminent state source for corporate law. Comparing Delaware's notions of independence with those of Sarbanes-Oxley and its attendant reforms reveals two fundamentally different conceptions of independence. Sarbanes-Oxley equates independence with outsider status: an independent director is one who lacks financial ties to the corporation and is not a close relative of management. Delaware's approach to independence, in contrast, is situational. As different conflicts arise in different contexts, the focus of concern - the influence from which we wish to insulate directors - varies as well.

There are at least two lessons for corporate reformers. First, the definition of independence should be refined to address the conflict at hand. For example, if the area of concern is executive compensation, the question is not merely whether the director lacks financial ties to the corporation and familial ties to corporate executives, but also whether the director lacks financial ties to the executives being compensated. Current independence rules overlook this obvious hole. Second, and more fundamentally, independent directors are useful only in situations where a conflict exists. An independent director - a part-timer whose contact with the corporation is necessarily limited - is not inherently better suited to further the interests of shareholders than is an inside director. Current rules thus over-rely on independence, transforming an essentially negative quality - lack of ties to the corporation - into an end in itself, and thereby fetishizing independence.

Board of Directors, Corporations, Independent director

Abstract:
This Comment briefly describes democracy in the political and corporate world, and goes on to discuss how seemingly similar kinds of democracies exist in both spheres. It then takes the common comparison of shareholder democracy and political democracy in a new direction by exploring the parallels between the Electoral College and the board of directors, examining both institutions in light of the differences between nation and corporation and their contrasting histories. Both are "once removed" representative democracies: both systems only give voters the right to vote for representatives who then select the individuals who actually govern.

The Comment then steps back from this analogy and argues that comparisons between the corporate and civic polities, while intellectually tempting, ultimately falter because participation in a corporation fundamentally differs from participation in a nation. It concludes that the Electoral College/board of directors comparison, like the comparison of the two democracies, is tantalizing but ultimately of limited value given the distinctive roles that each institution, and each polity, play in the modern world.

Democracy, Electroral College, Board of Directors, Corporations, Civic Polities

Abstract:
Although the SEC's main charge is to ensure the disclosure of material information, the SEC has not always consistently defined materiality. We show that acquisitions of privately-held targets classified as "insignificant" by the SEC appreciably affect market prices, and therefore are "material" by the SEC's definition. We find significant returns in transactions with targets as small as 2% -- compared with the SEC's disclosure threshold of 20% -- of the acquirer. Further, an average of 19 undisclosed private acquisitions per year exceed the median IPO value in the same year for our sample period. However, because the SEC deems these transactions insignificant, information like target financial statements remains undisclosed to the market. Disclosure rules regarding target financial statements thus create a regulatory disconnect, in which information that is "material" is "insignificant" and therefore not disclosed.

Takeover, SEC, disclosure, acquisition, merger

Abstract:
Conflicts of interest are the quintessential agency cost-the constant, lurking danger that agents may seek their own personal gain, rather than the good of the corporation. Yet many corporate employees lack knowledge as to exactly what constitutes a conflict of interest. This ignorance facilitated the kind of fraud seen in Enron, WorldCom, and the options backdating scandals, and may help explain the out-sized payouts that many high-level corporate officers received even as the financial institutions they headed verged on self-destruction. Each case required not only affirmative fraudulent behavior on the part of a few, but also the tacit acceptance of individuals throughout the company.

Currently there are no solutions to the core agency problem of conflicts. Corporate law, in both theory and practice, focuses on conflicts of interest only at the board level via the duty of loyalty. It largely ignores the true corporate decision makers - the CEO, CFO, and other corporate officers. To the extent state corporate law does address conflicts at the officer level, it only discusses how to treat conflicts that have been voluntarily disclosed - it is silent about how to identify conflicts ex ante. Federal regulation has likewise failed to prevent rogue agents from taking from their principals. Neither the Organizational Sentencing Guidelines nor Department of Justice memoranda on entity-level prosecution focuses on incentivizing corporations to prevent conflicts. The Sarbanes-Oxley Act mandates disclosure of waivers of a corporation's code of ethics for senior officers, but this rule may have the perverse effect of encouraging corporations to weaken their codes, so that there are fewer waivers to disclose. This Article is the first to examine this question as an empirical problem, analyzing SEC filings and concluding that, indeed, this Sarbanes-Oxley requirement may not lead to any meaningful disclosure.

Because evidence suggests that part of the problem might be a lack of understanding of what constitutes a conflict, this Article advocates education as the best option, and explores implementation mechanisms such as conflicts training, licensing, or certification for high-level corporate officers.

Corporations, Sarbanes-Oxley

Abstract:
While there are innumerable theories on the best remedy for the current financial crisis, there is agreement on one point, at least: increased transparency is good. We look at a provision from the last round of financial regulation, the Sarbanes Oxley Act of 2002 (SOX), which imposed disclosure requirements tailored to prevent some of the kinds of abuses that led to the downfall of Enron. In response to Enron's self-dealing transactions, Section 406 of SOX required a public company to disclose its code of ethics and to disclose immediately any waivers from that code the company grants to its top three executives. These waivers offer a unique window not only into ethical practices at public U.S. companies, but also into how disclosure works on the ground - whether companies are actually complying with disclosure rules and whether these rules prevent self-dealing transactions.

Out of 200 randomly selected firms, we found only one waiver over 4 years disclosed pursuant to Section 406. However, by exploiting an overlap in disclosure regulations, we were able to cross check our sample companies' waiver disclosure. We find 30 instances where companies appear to be violating the law, and another 74 where companies evade illegality by watering down their codes to an arguably impermissible degree - their codes of ethics do not forbid the same Enron-style conflicts of interest that led to the adoption of Section 406 in the first place. Finally we study all waivers filed by all public companies with the SEC in the four years following SOX's passage - and find only 36 total. Event studies reveal that the market generally does not react to these transactions, suggesting that companies only use waivers to disclose innocuous, immaterial information.

We draw two lessons, one specific, one general. First, the current regime is a bad one, long on costly and burdensome disclosure but short on demonstrable benefit. Section 406's disclosure requirement is not functioning as intended. Either by mistake or manipulation, companies are evading its requirements and not providing information to the market. We suggest eliminating the code of ethics waiver disclosure requirements, and substituting a requirement of immediate disclosure of related-party transactions involving the CEO, CFO, and CAO. Second, our study casts light more generally on the limited utility of regulating by means of disclosure alone.

Ethics, disclosure, Enron, Sarbanes-Oxley, directors