Perspectives on Corporate Governance

Cover......Page 1
Half-title......Page 3
Perspectives on Corporate Governance......Page 5
Copyright......Page 6
Contents......Page 7
Contributors......Page 9
Acknowledgments and Dedication......Page 11
Introduction......Page 15
PART ONE - THE BOARD OF DIRECTORS AND THE CEO......Page 29
1 The Trouble with Boards......Page 31
I. EARLY UNDERSTANDINGS OF THE ROLE OF THE BOARD......Page 36
II. REFORMING THE BOARD......Page 41
III. THE DEVELOPMENT OF THE MONITORING BOARD......Page 45
A. The Monitoring Board as Liability Shield......Page 48
1. The ABA’s Contribution – The Corporate Director’s Guidebook, 1978–2004......Page 49
2. Guidebook II......Page 53
3. Guidebook III......Page 54
4. Business Protects Its Own – The Conference Board and the Business Roundtable......Page 55
5. The ALI – Fear and Loathing in Corporate America......Page 61
IV. DELAWARE SEALS THE DEAL......Page 68
V. CONCLUSION......Page 72
2 Rediscovering Board Expertise: Legal Implications of the Empirical Literature......Page 76
A. Politics......Page 78
B. Economics......Page 81
II. THE EMERGING APPEAL FOR EXPERTISE......Page 83
A. Audit Committees......Page 84
B. Evidence......Page 87
A. Specifications......Page 93
1. Earnings Management......Page 95
2. Conservatism......Page 98
B. Adjustments......Page 103
1. Compatibility......Page 104
2. Incentives......Page 106
V. CONCLUSION......Page 108
I. INTRODUCTION......Page 110
II. SOME OBSERVATIONS ON CEO OVERCONFIDENCE......Page 113
III. DEVIL’S ADVOCATE......Page 121
IV. CONCLUSION......Page 126
PART TWO - THE WHY, WHEN, HOW, AND HOW MUCH OF EXECUTIVE PAY......Page 129
I. INTRODUCTION......Page 131
II. THE STAKES......Page 134
III. THE ARM’S-LENGTH CONTRACTING VIEW......Page 137
A. Incentives to Be Reelected......Page 139
B. CEO Power to Benefit Directors......Page 140
C. Friendship and Loyalty......Page 141
F. The Small Cost of Favoring Executives......Page 142
H. Limits of Market Forces......Page 143
J. Firing of Executives......Page 144
A. Power-Pay Relationships......Page 145
C. Camouflage and Stealth Compensation......Page 148
D. Gratuitous Good-Bye Payments......Page 150
VII. THE DECOUPLING OF PAY FROM PERFORMANCE......Page 151
A. Nonequity Compensation......Page 152
1. Rewards for Marketwide and Industrywide Movements......Page 153
C. Compensation at and after Departure......Page 154
VIII. IMPROVING TRANSPARENCY......Page 155
C. Proposal 3: Limit the Unwinding of Equity Incentives......Page 158
D. Proposal 4: Tie Bonuses to Long-Term Performance......Page 159
F. Proposal 6: Restore Dividend Neutrality......Page 160
H. Proposal 8: Avoid Soft-Landing Arrangements......Page 161
X. IMPROVING BOARD ACCOUNTABILITY......Page 162
5 Supersize Pay, Incentive Compatibility, and the Volatile Shareholder Interest......Page 164
I. MODELING THE SHAREHOLDER......Page 167
A. Speculation versus Investment......Page 168
B. Noise Trading versus Fundamental Value Investment......Page 169
C. Short Term versus Long Term......Page 171
D. Dumb Money versus Smart Money......Page 172
E. Summary: Shareholders and Fundamental Value......Page 173
A. Stock Option Plans: Prevailing Practice and Critique......Page 174
B. Investment Policy......Page 177
C. The Quality of Financial Reports......Page 182
D. Payout Policy......Page 186
1. Performance Bonuses......Page 188
2. Exit Payments......Page 191
F. Summary......Page 192
III. THE VOLATILE SHAREHOLDER INTEREST AND THE DEBATE OVER SUPERSIZE PAY......Page 193
1. The Arm’s-Length Bargain......Page 194
2. Shareholder Empowerment......Page 196
B. Defensive Tactics......Page 197
1. The Fair Deal......Page 198
2. The Free-Lunch Fallacy......Page 199
3. Substantial Performance......Page 201
IV. CONCLUSION......Page 202
I. INTRODUCTION AND OVERVIEW......Page 203
A. The Complexity of Pay for Performance: WhyWe Leave It to the Board......Page 205
B. Boards and Shareholders......Page 209
II. SHAREHOLDER CONSULTATION AND SAY ON PAY......Page 213
A. Self-Help Say on Pay in the United States......Page 214
B. Legislated Say on Pay in the United Kingdom......Page 216
1. Side Effects of the U.K. System......Page 221
2. Translation of the U.K. Experience to the United States......Page 223
III. CONCLUSION: ON MUDDLING THROUGH......Page 226
PART THREE - CONSTRAINING MANAGERS AND DIRECTORS: Investors, Securities Regulation, and the Media......Page 229
7 Shareholder Activism in the Obama Era......Page 231
I. IN DEFENSE OF THE SEPARATION OF OWNERSHIP AND CONTROL......Page 233
A. The Theory......Page 239
B. In Practice......Page 240
C. Even Institutions are Rationally Apathetic......Page 241
D. Rearranging the Deck Chairs......Page 245
III. CONCLUSION......Page 246
8 After Dura: Causation in Fraud-on-the-Market Actions......Page 249
A. The Origins of the Transaction-Causation and Loss-Causation Framework......Page 255
B. The Transaction-Causation and Loss-Causation Framework Fits Traditional Reliance-Based Actions Reasonably Well......Page 257
A. The Difference in Causal Link......Page 260
B. The Transaction-Causation and Loss-Causation Framework Fits Fraud-on-the-Market Actions Poorly......Page 261
2. Loss Causation......Page 262
1. Transaction Causation......Page 263
2. Decisions Finding That Price Inflation Constitutes Loss Causation......Page 264
3. Pre-Dura Decisions Finding a Showing of Price Inflation Insufficient to Satisfy the Loss-Causation Requirement......Page 265
D. The Supreme Court’s Missed Opportunity in Dura......Page 267
III. THE HISTORY OF DURA AND THE SUPREME COURT’S HOLDING......Page 269
IV. ISSUES REMAINING OPEN......Page 270
A. Sale Price Above Purchase Price......Page 271
B. Sufficient Pleadings and Proofs at Trial That the Misstatement Caused a Loss......Page 272
1. The First Situation: Price Drops Immediately after the Public Announcement of the Truth While Plaintiff Still Holds Shares......Page 273
2. The Second Situation: Price Does Not Drop Immediately after the Public Announcement of the Truth While Plaintiff Still Holds Shares......Page 275
3. The Third Situation: Price Does Not Drop Immediately after Public Announcement of the Truth and Plaintiff Has Sold Shares Earlier......Page 280
4. The Fourth Situation: Price Drops Immediately after the Public Announcement of the Truth but the Plaintiff Sells Earlier......Page 281
5. Changing the Four Situations to Reflect a Later Purchase......Page 282
6. Class Actions Typically Involve a Mix of These Situations......Page 284
1. Revisiting the First Situation......Page 286
2. Revisiting the Second and Third Situations......Page 287
V. THE COURT’S REASONING IN DURA......Page 289
A. An Inflated Price Results in No Loss at Time of Purchase......Page 290
B. No Inevitable Link between an Inflated Share Price and Later Economic Loss......Page 291
C. The Ninth Circuit Holding Lacks Precedent......Page 293
VI. RESOLVING THE OPEN ISSUES......Page 294
1. Case in Which Misstatement Clearly Inflated Plaintiff’s Purchase Price......Page 295
2. Case in Which It Is Not Clearly Established That the Misstatement Inflated the Plaintiff’s Purchase Price......Page 296
B. Sufficient Pleadings and Proofs at Trial That the Misstatement Caused a Loss......Page 297
C. The Relevance of the Private Securities Litigation Reform Act......Page 299
D. Should Fraud-on-the-Market Suits Be Discouraged by a Restrictive Rule of Causation?......Page 301
E. The Assumption of Constant Impact......Page 303
VII. CONCLUSION......Page 305
9 From Boardroom to Courtroom to Newsroom: The Media and the Corporate Governance Scandals......Page 307
A. Mistrial by Media......Page 311
B. Trial without Media......Page 314
C. Implications for the Future......Page 318
II. THE MEDIA AS PUBLIC RELATIONS MACHINE......Page 319
A. The Demon Card......Page 320
B. The Race and Religion Card......Page 327
III. PRAISE OR BLAME?......Page 337
APPENDIX A: TRADITIONAL PRINT SOURCE COVERAGE......Page 338
APPENDIX B: THE CHANGING FACE OF MEDIA COVERAGE......Page 341
APPENDIX C: POSTSCRIPT ON PERMANENCY......Page 343
PART FOUR - DELAWARE VERSUS CONGRESS: On the Federalization of Corporate Governance......Page 347
10 How Delaware Law Can Support Better Corporate Governance......Page 349
I. THE DUTY-OF-CARE MUDDLE......Page 351
II. THE GOOD-FAITH MUDDLE......Page 357
III. THE BIG MUDDLE – USURPATION OF CORPORATE OPPORTUNITY......Page 360
IV. THE ULTIMATE MUDDLE – DEFENDING CONTROL......Page 361
V. CONCLUSION......Page 363
11 Federalism versus Federalization: Preserving the Division of Responsibility in Corporation Law......Page 365
I. OVERVIEW OF THE INTERNAL AFFAIRS DOCTRINE AND THE FEDERAL-STATE BALANCE......Page 370
II. SHIFTING THE BALANCE: THE SARBANES-OXLEY ACT OF 2002......Page 378
1. Audit Regulation and Oversight......Page 379
2. Executive Certification of Financial Statements......Page 382
3. Prohibition on Insider Trades during Pension-Fund Blackout Period......Page 383
4. Enhanced Criminal Penalties......Page 384
5. Additional Disclosure Requirements......Page 385
1. Regulation of Nonaudit Services......Page 386
2. Audit Committee Composition......Page 387
3. Executive Bonuses......Page 388
4. Executive Loans......Page 389
5. Rules of Lawyer Conduct......Page 390
A. The SEC’s Stockholder Access Proposal......Page 392
B. Recent Amendments to the SROs’ Listing Rules on Corporate Governance......Page 398
C. H.R. 4291 – Federalizing Regulation of Executive Compensation......Page 401
V. PRESERVING THE TRADITIONAL FEDERAL-STATE BALANCE......Page 402
A. Investor Benefits of State Regulation......Page 403
B. The Division of Responsibility......Page 406
VI. CONCLUSION......Page 408
PART FIVE - COMPARATIVE CORPORATE GOVERNANCE......Page 411
I. INTRODUCTION......Page 413
II. COSTS OF REGULATION AND ENFORCEMENT......Page 414
A. The Bank System......Page 415
1. Basic Regulation......Page 417
3. Regulation of Institutions......Page 422
C. The Long-Term Credit Bank System......Page 424
IV. WHICH SYSTEM?......Page 425
V. CONCLUSION......Page 426
A. The EU Commission’s Action Plan......Page 427
B. Europe’s Capital Market Systems......Page 430
3. Outline......Page 432
1. Basic Concepts......Page 434
2. Regulatory Outlook......Page 436
B. International Accounting Aspects......Page 439
A. Transatlantic Messages and Regulatory Choices......Page 442
B. European Securities Regulation......Page 443
1. Initial Public Offerings – The Prospectus Directive......Page 446
2. Disclosure – Transparency on Secondary Markets......Page 447
3. International Accounting Standards for Listed Companies......Page 448
4. Statutory Audit......Page 450
1. Audit Committees......Page 451
2. Amending the Accounting Directives and Collective Board Responsibility......Page 452
3. Independent Directors......Page 454
5. Shareholders’ Rights......Page 455
A. Private Ordering and Externalities – The European Court of Justice on Company Mobility......Page 457
1. Regulatory Entry and Exit under the Freedom of Establishment......Page 458
2. The ECJ’s Major Beneficiaries: Private Companies......Page 460
3. Regulatory Policy Implications......Page 462
B. Information-Forcing Rules......Page 463
1. Action Plans – Enabling to Establish More Transparency?......Page 465
2. Cross-Border Mergers......Page 466
3. The Statute for the European Company (Societas Europaea)......Page 467
D. Decentralized Enforcement in Member States......Page 469
IV. CONCLUSION......Page 470
Epilogue: Three Secular Trends of Corporate Law......Page 473
Index......Page 481