Corporate Governance by Index Exclusion

51 Pages Posted: 12 Jun 2019 Last revised: 10 Sep 2019

See all articles by Scott Hirst

Scott Hirst

Boston University - School of Law; Harvard Law School Program on Corporate Governance

Kobi Kastiel

Tel Aviv University - Buchmann Faculty of Law; Harvard Law School, Program on Corporate Governance

Date Written: May 11, 2019

Abstract

Investors have long been unhappy with certain governance arrangements adopted by companies undertaking initial public offerings, such as dual-class voting structures. Traditional sources of corporate governance rules—the Securities and Exchange Commission, state law, and exchange listing rules—do not constrain these arrangements. As a result, investors have turned to a new source of governance rules: index providers.

This Article provides a comprehensive analysis of index exclusion rules and their likely effects on insiders’ decision-making. We show that efforts to portray index providers as the new sheriffs of the U.S. capital markets are overstated. Index providers face complex and conflicting interests, which make them reluctant regulators, at best. We put forward an analysis of insider incentives in light of index exclusions and apply it to one of the most important applications of index exclusion rules to date, the recent decision by index providers to exclude from their indexes certain companies with dual-class share structures. We conclude that the efficacy of index exclusions in preventing disfavored arrangements such as dual-class structures is likely to be limited, but not zero.

Index exclusions are a corporate governance experiment, one that has important lessons. We examine these lessons, and the way forward for corporate governance. These lessons are all the more important because of the central place of index funds, and therefore index providers, in our capital markets.

Keywords: Corporate Governance, Index Funds, Index Providers, Dual-Class Shares, Institutional Investors

JEL Classification: G23, G34, K22

Suggested Citation

Hirst, Scott and Kastiel, Kobi, Corporate Governance by Index Exclusion (May 11, 2019). Boston University Law Review, Vol. 99, 2019, 1229-1278; Boston Univ. School of Law, Law and Economics Research Paper No. 19-12. Available at SSRN: https://ssrn.com/abstract=3398578

Scott Hirst (Contact Author)

Boston University - School of Law ( email )

765 Commonwealth Avenue
Boston, MA 02215
United States

Harvard Law School Program on Corporate Governance ( email )

1575 Massachusetts
Hauser 406
Cambridge, MA 02138
United States

Kobi Kastiel

Tel Aviv University - Buchmann Faculty of Law ( email )

Ramat Aviv
Tel Aviv 69978, IL
Israel

HOME PAGE: http://https://en-law.tau.ac.il/profile/kastiel

Harvard Law School, Program on Corporate Governance ( email )

1575 Massachusetts
Cambridge, MA 02138
United States

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