Our paper, When Less Is More: The Benefits of Limits on Executive Pay, forthcoming in the Review of Financial Studies, addresses the question of whether limits on executive compensation harm or benefit shareholders. In particular, our model shows that if regulation limits executive compensation, this can make it possible for the board to give the CEO incentives that are both more effective and less costly, and for the two parties to create a relationship that is more collaborative. Among the implications—some of which we are exploring in a companion paper in progress—is this collaborative relationship makes it more attractive for the CEO to pursue long-run strategies (e.g., organic growth) that are more profitable than the short-run strategies (e.g., mergers and acquisitions) they would have pursued if firms had to rely on stock-based compensation for their executives.
Archive for the ‘Academic Research’ Category
This article, The Corporation as Time Machine: Intergenerational Equity, Intergenerational Efficiency, and the Corporate Form, advances an explanation for the rise of the corporate form and an alternative perspective on its economic function. The article argues that the board-controlled corporate entity is a legal innovation that can transfer wealth forward and sometimes backward through time, for the benefit of both present and future generations. The article was written for a symposium organized around the author’s prior work with Margaret Blair.
The corporate form allows natural persons to aggregate and transfer resources to a legal person with the capacity to hold assets in its own name in perpetuity. When the corporate entity is controlled by a board subject to the fiduciary duty of loyalty, corporate assets can be “locked in” and insulated from the demands of natural persons (e.g., the current generation of shareholders) who want to extract and consume them. Asset lock-in thus permits board-controlled corporate entities with perpetual life to invest in and pursue projects that may generate wealth only in later time periods, possibly even after the current cohort of human beings has ceased to exist.
Trust is part of the foundation of public markets. Scandals at firms such as Enron and HealthSouth fractured this foundation and motivated market participants to ask why executives and other employees at these firms misled investors. Some regulators and experts conjecture that the roots of these scandals can be traced to the actions and attitudes of those at the very top of corporate leadership. In the words of Linda Chatman Thomsen (Director, Division of Enforcement, Securities and Exchange Commission) “Corporate character matters—and employees take their cues from the top. In our experience, the character of the CEO and other top officers is generally reflected in the character of the entire company.” In our paper, Suspect CEOs, Unethical Culture, and Corporate Misbehavior, forthcoming in the Journal of Financial Economics, we provide evidence consistent with this perspective by demonstrating an empirical link between CEOs’ revealed character and the misbehaviors of the firms they manage.
Sometimes the remedy is worse than the disease. This, it seems, is the implicit view of the Delaware State Bar Association’s Corporation Law Council (the “Council”) with regard to fee-shifting in shareholder litigation. The Council’s second proposal on fee-shifting, circulated in early March 2015,  is much like their first, circulated in May 2014 in the wake of ATP Tour v. Deutscher Tennis Bund.  Both would prevent corporations from seeking to saddle shareholders with the cost of shareholder litigation by means of a fee-shifting provision, whether adopted in the charter or the bylaws.
The term “accountability” is virtually ubiquitous within literature and debates on organizational governance, and especially within corporate governance. However, as a social phenomenon it is frequently misunderstood, particularly by corporate lawyers.
To a large extent, this is unsurprising. After all, it is to be expected that complex sociological issues posed by the historically peculiar scale and structure of public companies—such as decisional power, accountability and legitimacy—will be received somewhat uneasily within orthodox corporate law discourse. Indeed, with limited exceptions, Anglo-American corporate law scholarship today remains rooted in the traditional conceptual habitat of private law, with its characteristic focus on the discrete relational transaction. A latent but nonetheless significant consequence of this has been the definitional “fudging” by corporate lawyers of some inherently public-governmental phenomena that are relevant to corporate governance, in an attempt to render them consistent with the logic and language of private law. This is true nowhere more than with respect to the difficult concept of accountability.
The recent financial crisis has generated fundamental reforms in the financial regulatory system in the U.S. and internationally. In our paper, Enhancing Prudential Standards in Financial Regulations, which was recently made publicly available on SSRN, we discuss academic research and expert opinions on this vital subject of financial stability and regulatory reforms.
Despite the extensive regulation and supervision of U.S. banking organizations, the U.S. and the world financial systems were shaken by the largest financial crisis since the Great Depression, largely precipitated by events within the U.S. financial system. The new “macroprudential” approach to financial regulations focuses on both the risks arising in financial markets broadly and those risks arising from financial distress at individual financial institutions.
Corporate boards are conscious of the role that executive pay practices play in improving corporate governance and increasing shareholder wealth (Gammeltoft, 2010). Economic theory suggests that the key to aligning managerial compensation with shareholder interest is to increase the sensitivity of executive compensation to firm performance (Core et al., 2005; Jensen and Meckling, 1976). Firms finance their operations, however, with funds from both shareholders and creditors, e.g., bondholders. Thus, agency theory also concerns shareholder-bondholder agency conflict and the difficulty of concurrently aligning the interests of shareholders, bondholders, and managers (Ahmed et al., 2002; Jensen and Meckling, 1976; Ortiz-Molina, 2007). In the past decade, the business press has focused on excessive CEO pay, observed during the 2001 Enron/Worldcom scandals as well as the recent 2007–2008 credit crisis, e.g., AIG. Critics contend that contracting between CEOs and boards has been shadowed by pervasive managerial influence (Bebchuk and Fried, 2005; Crystal, 1992). Consistent with these concerns, shareholders have begun to use the “shareholder proposal rule” (Rule 14a-8) established by the Securities and Exchange Commission (SEC) to defend their interest and have submitted hundreds of proposals to many of the largest U.S. corporations.
Disentangling Mutual Fund Governance from Corporate Governance addresses mutual fund governance, explaining how in recent years it has become entangled with the norms and rules of corporate governance. At one level, it is understandable that mutual funds have been seen simply as a type of ordinary corporation, leading the SEC and the courts to treat mutual fund governance as simply a variation on the theme of corporate governance. Both mutual funds and corporations are separate legal entities, having directors and shareholders. Directors of each are held to fiduciary duties, charged with serving shareholders’ interests, and aspire to best practices. But there are fundamental differences between mutual funds and ordinary corporations, and this article contends that these differences have important implications for the governance of mutual funds, differences that should lead not to further entanglement of fund governance with corporate governance but to disentanglement.
Since World War II, Germany’s stock market has been mostly an after-thought, despite a highly successful economy. Why might this be the case? Explanations have included the power and influence of banks, the stakeholder-oriented nature of Germany’s economy and Germany’s civil law heritage. In Law, Politics and the Rise and Fall of German Stock Market Development, 1870-1938 we argue, based on statistical analysis of a hand-collected dataset of initial public offerings (IPOs), that a combination of law and politics during the late 19th and early 20th centuries played a significant role in the evolution of German equity markets. For most of this period Germany had, contrary to the present-day pattern, a stock market that was sizeable in comparative terms. The law helped to foster this trend but legal reforms during the Nazi era reversed matters in a way that had lasting consequences.
The United States and the United Kingdom are lumped put together as ‘dispersed shareholder’ jurisdictions and contrasted with the concentrated shareholdings found in the rest of the world. This paper, Shareholders in the United Kingdom, argues that it would be better to view the UK, at least over the past half century, as a semi-dispersed rather than as simply a dispersed shareholder jurisdiction, and that there are interesting contrasts between the UK and the US experience.
Whilst the typical company listed on the main market of the London Stock Exchange certainly lacks a single (or even a cohesive small group) of shareholders with legal control, neither does the typical company display atomised shareholdings, for example, where no single shareholder holds more than 1% of the voting rights. Typically, a coalition of six or so of the largest shareholders can put together enough votes to have a fighting chance of carrying a resolution at a shareholder meeting against the wishes of the management. The question thus becomes one of the incentives and disincentives for those shareholders to coordinate their actions.