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Inside-Out Corporate Governance

Journal of Corporation Law, Vol. 37, p. 147, 2011

U of Penn, Inst for Law & Econ Research Paper No. 11-32

56 Pages Posted: 3 Nov 2011 Last revised: 24 Jan 2012

David A. Skeel Jr.

University of Pennsylvania Law School; European Corporate Governance Institute (ECGI)

Vijit Chahar

University of Pennsylvania Law School – Graduate

Alexander Clark

University of Pennsylvania Law School – Graduate

Mia Howard

University of Pennsylvania Law School – Graduate

Bijun Huang

University of Pennsylvania Law School – Graduate

Federico Lasconi

Bank of Italy - Banking and Finance Supervision Department

A.G. Leventhal

University of Pennsylvania Law School – Graduate

Matthew Makover

University of Pennsylvania Law School – Graduate

Randi Milgrim

University of Pennsylvania Law School – Graduate

David Payne

University of Pennsylvania Law School – Graduate

Romy Rahme

University of Pennsylvania Law School – Graduate

Nikki Sachdeva

University of Pennsylvania Law School – Graduate

Zachary Scott

University of Pennsylvania Law School – Graduate

Date Written: January 23, 2012

Abstract

Until late in the twentieth century, internal corporate governance - that is, decision making by the principal constituencies of the firm - was clearly distinct from outside oversight by regulators, auditors and credit rating agencies, and markets. With the 1980s takeover wave and hedge funds’ and equity funds’ more recent involvement in corporate governance, the distinction between inside and outside governance has eroded. The tools of inside governance are now routinely employed by governance outsiders, intertwining the two traditional modes of governance. We argue in this Article that the shift has created a new governance paradigm, which we call inside-out corporate governance.

Using the inside-out model as our lens, and drawing on comparisons to Italian and E.U. governance, we explore three areas of corporate governance that have been pervasively restructured by the Dodd-Frank Act and subsequent regulation: proxy access, credit rating agencies, and derivatives. We begin, in Part I, with proxy access, arguing that the new scheme for minority shareholder access excludes the very outsiders it ostensibly integrates into corporate governance. In Part II, which focuses on auditing and credit rating agencies, we argue that the inside-out relationship - in which the corporation itself chooses its gatekeeper - is deeply problematic but cannot be “cured.” The most realistic strategy is to create more flexibility in the audit relationship, and diminish the importance of credit ratings. Part III analyzes the new derivatives regulation. Here, we argue that Congress’s effort to sharply separate the inside and outside uses of derivatives is incoherent from a corporate governance perspective. We conclude by briefly speculating about the future implications of inside-out governance.

Keywords: Corporate governance, directors, boards, shareholder voting, elections, proxy contests, ballot access, proxy rules, SEC, credit ratings, agencies, regulation, CDOs, audits, credit derivatives, credit quality, credit default swaps, collateralized debt obligations, risk, disclosure, credit ratings

JEL Classification: G20, G28, G32, G34, G38, K22, K23, L13

Suggested Citation

Skeel, David A. and Chahar, Vijit and Clark, Alexander and Howard, Mia and Huang, Bijun and Lasconi, Federico and Leventhal, A.G. and Makover, Matthew and Milgrim, Randi and Payne, David and Rahme, Romy and Sachdeva, Nikki and Scott, Zachary, Inside-Out Corporate Governance (January 23, 2012). Journal of Corporation Law, Vol. 37, p. 147, 2011; U of Penn, Inst for Law & Econ Research Paper No. 11-32. Available at SSRN: https://ssrn.com/abstract=1953343

David A. Skeel Jr. (Contact Author)

University of Pennsylvania Law School ( email )

3501 Sansom Street
Philadelphia, PA 19104
United States
215-573-9859 (Phone)
215-573-2025 (Fax)

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Vijit Chahar

University of Pennsylvania Law School – Graduate

Philadelphia, PA
United States

Alexander Clark

University of Pennsylvania Law School – Graduate

Philadelphia, PA
United States

Mia Howard

University of Pennsylvania Law School – Graduate

Philadelphia, PA
United States

Bijun Huang

University of Pennsylvania Law School – Graduate

Philadelphia, PA
United States

Federico Lasconi

Bank of Italy - Banking and Finance Supervision Department ( email )

Via Nazionale, 187
00184 Roma
Italy

A.G. Leventhal

University of Pennsylvania Law School – Graduate

Philadelphia, PA
United States

Matthew Makover

University of Pennsylvania Law School – Graduate

Philadelphia, PA
United States

Randi Milgrim

University of Pennsylvania Law School – Graduate

Philadelphia, PA
United States

David Payne

University of Pennsylvania Law School – Graduate

Philadelphia, PA
United States

Romy Rahme

University of Pennsylvania Law School – Graduate

Philadelphia, PA
United States

Nikki Sachdeva

University of Pennsylvania Law School – Graduate

Philadelphia, PA
United States

Zachary Scott

University of Pennsylvania Law School – Graduate ( email )

Philadelphia, PA
United States

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