And now for some tweets:
And now for some tweets:
Anne Tucker opines:
Fellow BLPB blogers have shared on and off line their coverage scope and strategies for Business Associations/Corporations. In thinking about how to fit in big corporate constitutional questions into a syllabus that is already jam packed with topics, this 2013 article (Teaching Citizens United v. FEC in the Introductory Business Associations Course) by Michael Guttentag at Loyola Los Angeles, provides some great suggestions. Written in a post-Citizens United and pre-Hobby Lobby era, I think his insights are broadly applicable about how corporate constitutional rights illustrate the "costs that may arise from differences between manager interests and shareholder interests, the costs that may arise from following a shareholder primacy norm, and the distinctive nature of the role of the transactional lawyer." This short (8 pages) article is worth reading to identify some opportunities to discuss these important issues in a way that illustrates difficult concepts within your existing syllabus and hopefully keep students engaged throughout the semester.
I agree that you ought to read Mike's paper. But then again I think you ought to read everything Mike writes (as I do). Having said that, however, I affirmatively avoid teaching Citizens United or anything else remotely resembling constitutional law in my Business Associations course. Why?
1. The law school curriculum already over emphasizes constitutional law, elevating it as the highest and best form of law a lawyer can aspire to practice. It is the most extreme example of how all too many law schools privilege public law over private law (especially business law). So why perpetuate the problem in our own courses?
2. At many law schools, the line to teach constitutional law is huge and students fairly get the impression that the professor teaching [fill in the blank] really wants to be teaching constitutional law and that's why they're spending so much time on US Supreme Court cases. I have zero interest in teaching constitutional law and want to give students an example of at least one professor who finds business law (and Delaware Chancery Court cases) far more interesting than constitutional law. Getting students interested in business law as an intellectual exercise is hard enough without ourselves perpetuating the stereotype that business law is boring and con law is fun.
3. Mike suggests that:
One can ask: How would you feel if the managers of a corporation you owned shares in decided to oppose same-sex marriage, even if a majority of the firm's shareholders supported same-sex marriage?
Perish the thought. As a white male conservative Catholic teaching business law courses at a law school whose faculty and student body are overwhelming secular and liberal, spending class time on issues of race, gender, class, politics, religion, culture and so on would inevitably plunge me into a Kobayashi Maru scenario. Call me a wimp, but I get myself into enough trouble on those issues here on the blog without bringing them into the classroom.
4. I have enough trouble keeping up to date with Delaware corporate law without adding the need to steep myself in constitutional law. Granted, as was the case in Hobby Lobby, sometimes I touch on Supreme Court cases in my scholarship. As was also the case in Hobby Lobby, however, I ignored the constitutional issues to focus on what I saw as a potential corporate law twist to the case.
5. As Anne correctly notes, the basic Business Associations course is jam packed. As it stands, I cover most of Chapter 1, all of Chapters 2 to 5, and part of Chapter 6 of the Klein, Ramseyer, & Bainbridge casebook in the basic course. I don't have time to get to Chapters 7 or 8 at all (for which my dear friend Bill Klein periodically repreimands me, as he thinks Chapter - Debt - is essential). What core business law topics should I ditch? Granted, Mike advocates working Citizens United into the mix in three areas that i suspect most of us teach:
(1) the potential for differences between the interests of those who manage the firm and those who own the firm,(2) the costs and benefits of shareholder primacy, and (3) the role of a transactional lawyer in advising on business decisions that involve legal risks.
But I can teach those issues using plain vanilla business law courses. And prefer to do so for the reasons already set out above.
As always, your mileage may vary, but at the very least I would advise my fellow business law professors to think very carefully before following Anne and Mike's advice.
I have been reading with interest David Millon's new paper, Radical Shareholder Primacy (July 28, 2014), available at SSRN http://ssrn.com/abstract=2473189, which argues that:
Abstract: This article, written for a symposium on the history of corporate social responsibility, seeks to make sense of the surprising disagreement within the corporate law academy on the foundational legal question of corporate purpose: does the law require shareholder primacy or not? I argue here that disagreement on this question is due to the unappreciated ambiguity in the shareholder primacy idea. I identify two models, the 'radical' and the 'traditional.' Radical shareholder primacy originated at the University of Chicago in the later 1970s, first in the work of Daniel Fischel and then in his co-authored writings with Frank Easterbrook. The key point is the assertion that corporate management is the agent of the shareholders, charged with maximizing their wealth. There is no legal authority for this claim; Fischel drew it from the financial economists Michael Jensen and William Meckling, who used the agency idea in a non-legal sense. So those who say that this notion of shareholder primacy is not the law are correct. However, a different conception of shareholder primacy is based on the idea that shareholders hold a privileged position within the corporation's governance structure, enjoying a monopoly over voting rights and the right to bring derivative lawsuits and singled out for special mention in the traditional specification of fiduciary duties as being owed to 'the corporation and its shareholders.' In this sense, shareholders enjoy primacy over the corporation's other stakeholders, although there is no maximization mandate and corporate law is largely ineffective in allowing shareholders to insist that management privilege their interests. Nevertheless, this version of shareholder primacy is enshrined in the law, and, if the radical version's agency claim is laid to rest, there is no harm in acknowledging that fact.
I am prepared to associate myself more or less with David's traditional version of shareholder primacy, which he describes as follows:
This model also claims to privilege shareholders, but its commitment to them is significantly weaker than under the radical version. Under the traditional model, which emerged in the last years of the nineteenth century and was embodied in corporate law and widely accepted for much of the twentieth century, management enjoys broad discretion and is largely inunune from shareholder control." While it is assumed that a business corporation is organized in order to generate profit and, as a practical matter, a corporation that regularly loses money cannot survive long-term, there is no expectation that management must maximize current share price to the exclusion of competing objectives. These can include regard for the interests of non-shareholder constituencies under circumstances management deems to be appropriate, as well as long-term investments that reduce current earnings for the sake of future gains. Certainly there is no sense that an agency relalionship exists between management and shareholders.
I say more or less because I would offer a couple of qualifications. First, for reasons I've laid out in various places, but perhaps most comprehensively here, I think that management can and should have "regard for the interests of non-shareholder constituencies under circumstances management deems to be appropriate [only to the extent management reasonably believes doing so will redound to the benefit of shareholders in the long-term and that management should not do so at all in final period situations]."
Second, and this is mostly a semantic quibble, i understand the term shareholder primacy as making two distinct claims. One goes to the ends of corporate governance and claims that managers have a fiduciary duty to sustainably maximize shareholder returns over the long-term. The other goes to the means of corporate governance and claims that shareholders both do and should have ultimate control of the company. I accept the former but reject the latter. Instead, as I have argued ad nauseam, control of the corporation is vested in the board subject to very limited shareholder accountability mechanisms. Hence, I prefer the term director primacy.
I have been reading with interest Lyman Johnson's new paper, Law and the History of Corporate Responsibility: Corporate Governance (2014). 10 University of St. Thomas Law Journal 974 (2014); U of St. Thomas (Minnesota) Legal Studies Research Paper No. 14-21; Washington & Lee Legal Studies Paper. Available at SSRN: http://ssrn.com/abstract=2469979:
Abstract: This article is one part of a multi-article project on the role of law in the history of corporate responsibility in the United States. Key background material for the project is set forth in the introduction to an earlier article addressing corporate personhood. This paper deals with corporate governance while other articles address corporate purpose and corporate regulation.
Corporate responsibility concerns associated with corporate personhood, corporate purpose, and corporate regulation all ultimately relate to a far more basic issue: corporate governance. As the commercial demands of nineteenth century industrialization led to substantial displacement of the partnership form of business enterprise by large corporations with dispersed shareholders, control of these corporations - i.e., their governance - centered in the hands of senior managers, not investors themselves. This phenomenon of “separation of ownership from control” is quite different than in the typical partnership and was seminally described by Adolf Berle and Gardiner Means in their 1932 book, The Modern Corporation and Private Property. It has continued to occupy center stage in corporate law for the past eighty years.
From a legal history vantage point on corporate responsibility, the stupendous rise in commercial significance of the corporation in the nineteenth century corresponded to the precipitous decline of a regulatory approach to corporations under state corporate law, and instead, the twentieth century “outsourcing” of such regulation to an array of other legal regimes ostensibly designed to protect both investor and noninvestor groups. This meant that corporate law itself developed in such a way as to loosen, not tighten, most constraints on those who govern public corporations. The thesis of this article, developed in Parts I and II, is that corporate governance, both as a body of law and as a field of academic study, has historically had little to say on the important subject of corporate responsibility. Instead, the quest for greater responsibility in the United States largely has come from “external” legal regulation and from ongoing shifts in business and social norms. Recently, corporate law’s long and unsustainable neglect of corporate responsibility concerns has led to the emergence of a new type of business corporation, the “benefit corporation.” Benefit corporations expressly permit the directors to advance both investor and noninvestor interests, in aid of pursuing a larger public benefit. The implications of this development for governance of the regular business corporations are unknown. One potential adverse outcome is the “ghettoization” of corporate responsibility within benefit corporations, leading to even less serious attention to such concerns in the traditional business corporation.
I agree with Lyman that "corporate governance, both as a body of law and as a field of academic study, has historically had little to say on the important subject of corporate responsibility. Instead, the quest for greater responsibility in the United States largely has come from “external” legal regulation and from ongoing shifts in business and social norms."
But I disagree with Lyman's argument that this supposed neglect is unsustainable. Instead, I agree with Gordon Smith's eloquent exposition of the The Dystopian Potential of Corporate Law, available at SSRN: http://ssrn.com/abstract=976742, which argues that:
The community of corporate law scholars in the United States is fragmented. One group, heavily influenced by economic analysis of corporations, is exploring the merits of increasing shareholder power vis-a-vis directors. Another group, animated by concern for social justice, is challenging the traditional, shareholder-centric view of corporate law, arguing instead for a model of stakeholder governance. The current disagreement within corporate law is as fundamental as in any area of law, and the debate is more heated than at any time since the New Deal.
This paper is part of a debate on the audacious question, Can Corporate Law Save the World? In the first part of the debate, Professor Kent Greenfield builds on his book, THE FAILURE OF CORPORATE LAW: FUNDAMENTAL FLAWS AND PROGRESSIVE POSSIBILITIES, offering a provocative critique of the status quo and arguing that corporate law matters to issues like the environment, human rights, and the labor question.
In response, Professor Smith contends that corporate law does not matter in the way Professor Greenfield claims. Corporate law is the set of rules that defines the decision making structure of corporations, and reformers like Professor Greenfield have only two options for changing corporate decision making: changing the decision maker or changing the decision rule. More specifically, he focuses on board composition and shareholder primacy. Professor Smith argues that changes in corporate law cannot eradicate poverty or materially change existing distributions of wealth, except by impairing the creation of wealth. Changes in corporate law will not clean the environment. And changes in corporate law will not solve the labor question. Indeed, the only changes in corporate law that will have a substantial effect on such issues are changes that make the world worse, not better.
Gordon Smith writes:
In Good Faith and Fair Dealing as an Underenforced Legal Norm, Paul MacMahon of the London School of Economics explores the divide between "the rhetoric of good faith and fair dealing and the reality of judicial enforcement." ... This is a well-researched, well-written, thought-provoking article, and I recommend it highly.
I agree and encourage you to check out both Gordon's excellent summary and the paper itself.
The past decade has seen several attempts to bring boards up to date. In America the Sarbanes-Oxley act (2002) and the Dodd-Frank act (2010) forced companies to appoint more independent directors and disclose more information about compensation. Good-governance advocates have pressed companies not just to choose white men as directors, and to publish more data so shareholders can make better informed decisions. But big companies continue to make extraordinary appointments: in 2011 IAC, a media conglomerate chaired by Barry Diller, appointed Chelsea Clinton, then a 31-year-old graduate student, to its board. And some magic bullets have proved to be blanks. Everyone thinks independent directors make better board members but there is no academic evidence to prove it. When Lehman Brothers went bankrupt, eight of its ten directors were independents.
These reforms have left the basic problem untouched. ...
In the May edition of the Stanford Law Review Stephen Bainbridge of the University of California, Los Angeles, and Todd Henderson of the University of Chicago offer a proposal for fixing boards that goes beyond tinkering: replace individual directors with professional-services firms. Companies, they point out, would never buy legal services or management advice from people only willing to spare a few hours a month. Why do they put up with the same arrangement from board members? They argue for the creation of a new category of professional firms: BSPs or Board Service Providers. Companies would hire a company to provide it with “board services” in the same way that it hires law firms or management consultants. The BSP would not only supply the company with a full complement of board members. It would also furnish it with its collective expertise, from the ability to process huge quantities of information to specialist advice on things such as mergers.
... Messrs Bainbridge and Henderson have come up with an intriguing idea for keeping companies from straying.
You can read the Stanford article here.
New study by Francis, Bill and Hasan, Iftekhar and Wu, Qiang, Professors in the Boardroom and Their Impact on Corporate Governance and Firm Performance (July 9, 2014). Forthcoming in Financial Management; Bank of Finland Research Discussion Paper No. 15/2014. Available at SSRN: http://ssrn.com/abstract=2474522:
Directors from academia served on the boards of around 40% of S&P 1,500 firms over the 1998-2011 period. This paper investigates the effects of academic directors on corporate governance and firm performance. We find that companies with directors from academia are associated with higher performance and this relation is driven by professors without administrative jobs. We also find that academic directors play an important governance role through their advising and monitoring functions. Specifically, our results show that the presence of academic directors is associated with higher acquisition performance, higher number of patents and citations, higher stock price informativeness, lower discretionary accruals, lower CEO compensation, and higher CEO forced turnover-performance sensitivity. Overall, our results provide supportive evidence that academic directors are valuable advisors and effective monitors and that, in general, firms benefit from having academic directors.
My friend and colleague Steve Bank has coauthored a new and very interesting paper on the competitive federalism debate:
The most enduring and widespread academic disputes in American corporate law concern jurisdictional competition. Scholars have debated, at great length, questions stemming from the ability of corporations to choose what jurisdiction to incorporate in: To what extent do states compete for incorporations? Has the jurisdictional competition between states produced better or worse corporation law (has it been a “race to the bottom”, or one to the top)? To what extent has the Federal government influenced this state competition? Is meaningful state competition still occurring or was the race won or lost long ago?
Debates over these questions have often foundered because of difficulties associated with ascertaining whether the corporation law in question is good or bad, and whether it has gotten better or worse over time. In this Article, we seek to break the scholarly log jams concerning corporate law federalism by undertaking the first systematic attempt to measure how U.S. corporate law has evolved since 1900. Using three indices developed to measure the relative strength of corporation law across nations, we evaluate three vital bodies of U.S. corporate law, those of Delaware and Illinois and the Model Business Corporation Act, from the beginning of the twentieth century to the present day.
Our results are novel in several respects. We find that the protections afforded to shareholders by state corporation law have decreased since 1900 but only modestly so, which implies that state competition has not been very vigorous. When we use measures that count protections provided by federal as well as state law, however, we get a different result. We find that requirements adopted by the federal government since the 1930s have significantly increased shareholder protection, suggesting that federal intervention has played a crucial and perhaps underappreciated role in shaping U.S. corporate law and enhancing shareholder rights. Beyond its specific findings, this study’s methods provide scholars new ways to answer some of the most fundamental questions in corporate law.
Cheffins, Brian R. and Bank, Steven A. and Wells, Harwell, The Race to the Bottom Recalculated: Scoring Corporate Law Over Time (August 1, 2014). UCLA School of Law, Law-Econ Research Paper No. 14-10; Temple University Legal Studies Research Paper ; University of Cambridge Faculty of Law Research Paper . Available at SSRN: http://ssrn.com/abstract=2475242
There's been a fair bit of blawgosphere chatter about Wal-Mart Stores, Inc. v. Indiana Electrical Workers Pension Trust Fund IBEW, Del. Supr., No. 614, 2013 (July 23, 2014).
This Delaware Supreme Court en banc opinion requires Wal-Mart to produce documents about an alleged bribery scandal involving their Mexican subsidiary. The most noteworthy aspect of this decision, about which we will write more later, is that for the first time the Delaware Supreme Court directly addressed and recognized an exception to the rule that documents protected by the attorney/client privilege do not need to be produced. It is referred to as the Garner exception after a case of that name from the Fifth Circuit.
This FCPA Blog post sought to explain “why the issues before the Delaware Supreme Court are important to all compliance officers and corporate stakeholders, and how the outcome could influence compliance programs globally for decades to come.” Why was the Wal-Mart dispute, according to the FCPA Blog commentator, so important?
“Because at the heart of the appeal is the question of what misconduct by directors so taints them that shareholders are allowed to proceed with a civil complaint. When can directors be absolved from directing an internal FCPA investigation? And when can they ignore red flags of overseas misconduct and conduct business as usual?”
As highlighted below, none of these issues were on appeal to the Delaware Supreme Court.
Further, this FCPA Blog post stated that Wal-Mart’s appeal “could be the right forum for landmark changes to guide executives, directors, and compliance professionals for decades” and the commentator was hoping for the Delaware Supreme Court to “seize the opportunity to paint on the largest canvas possible, to illuminate new roles for those we’ve put in charge of compliance.”
As highlighted below, this did not happen either.
Oral arguments on the appeal were heard on July 10th before the Delaware Supreme Court. The Court will decide, among other issues, if Wal-Mart should release the files of the senior executives who briefed the directors, the Board’s Audit committee, and Maritza Munich, Walmart’s in-house counsel who resigned after the investigation was closed.
Personally, it just doesn't seem that big a deal. Somebody want to explain to me why I should care more?
From the Introduction to the Symposium as published in the UCLA Law Review Discourse:
On Friday, April 11, and Saturday, April 12, 2014, the UCLA School of Law Lowell Milken Institute for Business Law and Policy sponsored a conference on competing theories of corporate governance.
Corporate law and economics scholarship initially relied mainly on agency cost and nexus of contracts models. In recent years, however, various scholars have built on those foundations to construct three competing models of corporate governance: director primacy, shareholder primacy, and team production.
The shareholder primacy model treats the board of directors as agents of the shareholders charged with maximizing shareholder wealth. Scholars such as Lucian Bebchuk working with this model are generally concerned with issues of managerial accountability to shareholders. In recent years, these scholars have been closely identified with federal reforms designed to empower shareholders.
In Stephen Bainbridge’s director primacy model, the board of directors is not a mere agent of the shareholders, but rather is a sui generis body whose powers are “original and undelegated.” To be sure, the directors are obliged to use their powers towards the end of shareholder wealth maximization, but the decisions as to how that end shall be achieved are vested in the board not the shareholders.
Margaret Blair and Lynn Stout’s team production model resembles Bainbridge’s in that it is board-centric, but differs in that it views directors as mediating hierarchs who possess ultimate control over the firm and who are charged with balancing the claims and interests of the many different groups that bear residual risk and have residual claims on the firm. Although team production is not explicitly normative, many commentators regard it as at least being compatible with stakeholder theorists who promote corporate social responsibility.
This conference provided a venue for distinguished legal scholars to define the competing models, critique them, and explore their implications for various important legal doctrines. In addition to an oral presentation, each conference participant was invited to contribute a very brief essay of up to 750 words (inclusive of footnotes) on their topic to this micro-symposium being published by the UCLALaw Review’s online journal, Discourse.
These essays provide a concise but powerful overview of the current state of corporate governance thinking. Our thanks to all the participants.
Mistake # 1 of many in the article:
"The idea of 'corporations as persons' though, all started because of a headnote mistake in the 1886 case of Santa Clara County v. Pacific Railroad Co, 113, U.S. 394
While it is true that Santa Clara is the first time the Supreme Court reports mention corporate personality, the idea of corporate personhood is much older. Blackstone's Commentaries described corporations as "articial [i.e., artificial] persons" and relied on even earlier sources in doing so. Canon law, for example, likewise treated corporations as persons--fictional to be sure, but still persons.
Mistake # 2:
... other nations don't employ this "fiction", yet they've found ways to cope with these challenges.
In fact, corporate personhood is widely recognized in legal systems around the world. "The 20th century has witnessed the evolving role of the corporation as an artificial legal person under international law...." Cynthia Day, 84 Am. J. Int'l L. 799 (1990). "International human rights law provides a basis for corporate legal personality." Lucien J. Dhooge, Human Rights for Transnational Corporations, 16 J. Transnat'l L. & Pol'y 197, 208 (2007).
Corporate legal personality is well-established in national legal systems outside of the United States. For example, corporate personality is accepted throughout common law systems. Corporate personality dates back to the late nineteenth century in the United Kingdom. In Salomon v. Salomon & Company, the House of Lords established the principle that a company was a separate legal person from its creator and controlling shareholder and was not merely such person's agent. ... Other common law jurisdictions have followed the holding in Salomon in their legislation and judicial precedents.
Recognition of separate corporate personality is not restricted to the common law tradition. European law also recognizes separate corporate personality. ...
Separate personality is also a principal feature of Asian legal systems. Corporations have separate legal personality and resultant rights in the People's Republic of China and the Republic of China. ...
Latin and South American legal systems also recognize corporate personality....
Lucien J. Dhooge, Human Rights for Transnational Corporations, 16 J. Transnat'l L. & Pol'y 197 (2007).
Back to Dvorsky for another misstatement:
By living in a world of make-believe, courts have extended other rights to corporations beyond those necessary.
Says who? That's opinion, not fact.
Mistake # 3:
Here's what Judge O'Dell-Seneca said last year in the Hallowich v Range case:
Corporations, companies and partnership have no spiritual nature, feelings, intellect, beliefs, thoughts, emotions or sensations because they do not exist in the manner that humankind exists...They cannot be 'let alone' by government because businesses are but grapes, ripe upon the vine of the law, that the people of this Commonwealth raise, tend and prune at their pleasure and need.
Sigh. Once again the concession theory raises its damnably ugly head. The concession theory is commonly traced to Chief Justice Marshall’s opinion in Trustees of Dartmouth College v. Woodward, 17 U.S. (4 Wheat.) 518 (1819), which held that “[a] corporation is an artificial being, invisible, intangible, and existing only in contemplation of law.” Id. at 636. Subsequent commentators understood Dartmouth College as establishing “the idea that corporations are created and empowered as a ‘concession’ from the state political authority.” Eric W. Orts, Beyond Shareholders: Interpreting Corporate Constituency Statutes, 61 Geo. Wash. L. Rev. 14, 68 (1992). But it has been over half-a-century since corporate legal theory, of any political or economic stripe, took the concession theory seriously. William W. Bratton, Jr., The “Nexus of Contracts” Corporation: A Critical Appraisal, 74 Cornell L. Rev. 407, 433-36 (1989).
Back to Dvorsky for a sleight of hand:
Similarly, solicitor general Elena Kagan has warned against expanding the notion of corporate personhood. In 2009 she said: "Few of us are only our economic interests. We have beliefs. We have convictions. [Corporations] engage the political process in an entirely different way, and this is what makes them so much more damaging."
But we know that what has Dvorsky up in arms is the Hobby Lobby decision, in which the Court recognized a corporation's personhood in order to vindicate the rights of its owners to believe the way they choose rather than as the government tells them. So he's invoking Kagan to justify punishing people for exercising their beliefs, which seems odd at best.
Back to Dvorsky for another oddity:
I asked MacDonald Glenn if the concept of corporate personhood is demeaning or damaging to bona fide persons, particularly women.
"It's about sentience — the ability to feel pleasure and pain," she responded. "Corporate personhood emphasizes profits, property, assets. It should be noted that corporations were given legal status as persons before women were."
You will have guessed where he's going with that move. Right, to say that women should have the right to abort unborn persons (he dismissed fetal personhood as "crazy").
In sum, this is a series of factual misrepresentations, misstatements, sleights of hand, and so on deployed to advance a political cause. And a pretty awful one at that, as it's a political world view that is statist, secularist, and anti-life.
One of the semi-annual highlights of the corporate law year is Francis Pileggi's roundup of the most significant Delaware corporate (and commercial) decisions in the prior six months. He's announced that:
Ten decisions with the most far-reaching application and importance during the first half of 2014 will be highlighted and discussed during an audio conference led by an Eckert Seamans’ team of corporate and commercial attorneys. Participants can dial-in on Thursday, July 24, 2014 at 3:00 p.m. EST.
Register and obtain a dial-in number by sending an email to: firstname.lastname@example.org
Sadly, I have a conflict, but I hope he'll post notes.
Useful WLF Legal Backgrounder on these critical corporate law developments.