JOHAN CASSEL, Harvard Business School, Swedish House of Finance
Email: jcassel@hbs.edu

I examine the relationship between managerial ownership and operational performance for firms acquired in a buyout. I show that high post-buyout CEO ownership stakes are associated with improved firm profitability. This result is economically stronger for changes in ownership stakes, and is solely present when the CEO is retained. Ownership stakes are higher when initial profitability is low and is associated with cost cutting. Overall, the results support the view that improving managerial incentives is an important part of value creation in buyouts.

SAMUEL W. BUELL, Duke University School of Law
Email: buell@law.duke.edu

This essay, for a collection in which authors were asked to “imagine a world without corporate criminal liability,” specifies the material questions that should be addressed if debate about the doctrine is to progress past longstanding, and oft-repeated, assertions. The strongest case for corporate criminal liability is based in the potential for its unique reputational effects to contribute to the prevention and deterrence of crime within corporations. Further research should take up a variety of unanswered questions about those effects having to do with mechanisms and audiences. The relevant inquiries are both theoretical and empirical. Answers will lie in further understanding of organizational and individual behavior more than in familiar models of the firm and deterrence that have largely shaped the literature to date.

PAOLO SAGUATO, George Mason University, Antonin Scalia Law School, Genoa Centre for Law and Finance
Email: psaguato@gmu.edu

Clearinghouses are systemic nodes in financial markets that handle trillions of dollars’ worth of transactions. Yet, these critical market infrastructures stand on fragile foundations. The Dodd-Frank Wall Street Reform Act of 2010, the sweeping financial reform that followed the 2008 financial crisis, embraced clearinghouses as systemic risk managers for the over-the-counter derivatives markets. While policymakers used clearinghouses to remove some counterparty risk from the markets, they ended up concentrating that risk onto them, making them systemically important.

This Article warns that while clearinghouses might have addressed some of the failures of the pre-crisis derivatives markets, they have created new issues that still remain unaddressed. The economic and governance structure set in place by the existing regulatory regime and the private rules adopted by clearinghouses in their self-regulatory capacity have important and as-yet overlooked fragilities that can undermine clearinghouses’ mission as financial stability bastions and transform them into systemic risk spreaders.

Clearinghouses operate in a framework of misaligned incentives. They face unique agency costs that spill from what this Article defines as the “member-shareholder divide” and the “separation of risk and control.” Because of their economic structure, the ultimate risk of the business is passed down to the members (i.e., users) of the clearinghouses and not borne by their shareholders, which creates moral hazard. This dynamic is further exacerbated by the tension between the public policy role bestowed on clearinghouses as systemic risk buffers and the for-profit nature of the financial conglomerates to which they belong. In addition, while clearinghouses were embraced as countercyclical mechanisms to stabilize the markets, the operation of their loss-absorption and mutualization function have procyclical features that put strong pressure on clearing members, while clearinghouses’ shareholders have a small equity at stake.

After offering a political economy explanation of the current regulatory regime for clearinghouses, this Article urges policymakers and the industry to intervene to re-align the incentives of clearinghouse shareholders to those of their members in order to ultimately enhance financial stability. Building on insights from the corporate governance and finance literature, this Article proposes reforms to address the unique agency costs that clearinghouses face, to enhance their governance and resilience, and to ensure their role as private systemic stability infrastructures. Clearinghouses should have more skin in the game in their business and their capital structure should be complemented with hybrid convertible financial instruments to more effectively allocate losses, recapitalize the business, and better align the economic incentives of clearinghouses’ stakeholders. A multi-stakeholder board should be established to enhance the participative governance of these firms and support the legitimacy and accountability of their operations. Finally, a new approach to the recovery and resolution of troubled clearinghouses that could result in their remutualization should be implemented in order to provide certainty in times of distress, as well as an ultimate realignment of members’ and shareholders’ incentives.

LLOYD FREEBURN, University of Melbourne
Email: freeburn@iinet.net.au
IAN RAMSAY, Melbourne Law School - University of Melbourne
Email: i.ramsay@unimelb.edu.au

When should a director or manager of a company be personally liable because their company has committed a criminal offence? The question is both important and controversial because many of the laws that impose this type of liability (called deemed liability provisions) do so without the need to prove that the director or manager was personally at fault. The question has received much attention recently in Australia because of proposals by the Australian Law Reform Commission to significantly expand the circumstances when this type of liability would be imposed on directors and managers. Following much criticism, the Commission withdrew its proposals and instead called for a wide-ranging review of the effectiveness of individual accountability mechanisms for corporate misconduct – in effect calling for another inquiry. This article outlines the Commission’s proposals and their objectives. It describes the criticisms that were made of the proposals and considers the proposals in the context of prior reviews and principles applying to deemed liability provisions. It is argued that the Commission was right to withdraw its proposals as they did not reflect a proper balancing of the advantages and disadvantages of deemed liability provisions, the proposals were not well drafted, and the formulation of the proposals did not appropriately consider earlier research and inquiries on deemed liability provisions.

FATEMEH BAGHERZADEH, F