During today's session of the Lowell Milken Institute for Business Law and Policy conference on competing theories of corporate governance, I will be presenting the above entitled mini-paper. It follows:
All organizations must have some mechanism for aggregating the preferences of the organization’s constituencies and converting them into collective decisions. As Kenneth Arrow explained in work that provided the foundation on which the director primacy model was constructed, such mechanisms fall out on a spectrum between “consensus” and “authority.” Consensus-based structures are designed to allow all of a firm’s stakeholders to participate in decision making. Authority-based decision-making structures are characterized by the existence of a central decision maker to whom all firm employees ultimately report and which is empowered to make decisions unilaterally without approval of other firm constituencies. Such structures are best suited for firms whose constituencies face information asymmetries and have differing interests. It is because the corporation demonstrably satisfies those conditions that vesting the power of fiat in a central decision maker—i.e., the board of directors—is the essential characteristic of its governance.
Shareholders have widely divergent interests and distinctly different access to information. To be sure, most shareholders invest in a corporation expecting financial gains, but once uncertainty is introduced shareholder opinions on which course will maximize share value are likely to vary widely. In addition, shareholder investment time horizons vary from short-term speculation to long-term buy-and-hold strategies, which in turn is likely to result in disagreements about corporate strategy. Likewise, shareholders in different tax brackets are likely to disagree about such matters as dividend policy, as are shareholders who disagree about the merits of allowing management to invest the firm’s free cash flow in new projects.
As to Arrow’s information condition, shareholders lack incentives to gather the information necessary to actively participate in decision making. A rational shareholder will expend the effort necessary to make informed decisions only if the expected benefits outweigh the costs of doing so. Given the length and complexity of corporate disclosure documents, the opportunity cost entailed in making informed decisions is both high and apparent. In contrast, the expected benefits of becoming informed are quite low, as most shareholders’ holdings are too small to have significant effect on the vote’s outcome. Accordingly, corporate shareholders are rationally apathetic.
In sum, it would be surprising if the modern public corporation’s governance arrangements attempted to make use of consensus-based decision making anywhere except perhaps within the central decision-making body at the apex of a branching hierarchy. Given the collective action problems inherent with such a large number of potential decision makers, the differing interests of shareholders, and their varying levels of knowledge about the firm, it is “cheaper and more efficient to transmit all the pieces of information to a central place” and to have the central office “make the collective choice and transmit it rather than retransmit all the information on which the decision is based.” Shareholders therefore will prefer to irrevocably delegate decision-making authority to some smaller group. As we have seen, that group is the board of directors.
Strong limits on shareholder control are essential if that optimal allocation of decision-making authority is to be protected. Any meaningful degree of shareholder control necessarily requires that shareholders review management decisions, step in when management performance falters, and effect a change in policy or personnel. Giving shareholders this power of review differs little from giving them the power to make management decisions in the first place. Even though shareholders probably would not micromanage portfolio corporations, vesting them with the power to review board decisions inevitably shifts some portion of the board’s authority to them. As Arrow explained:
Clearly, a sufficiently strict and continuous organ of [accountability] can easily amount to a denial of authority. If every decision of A is to be reviewed by B, then all we have really is a shift in the locus of authority from A to B and hence no solution to the original problem. 
This remains true even if only major decisions of A are reviewed by B. The separation of ownership and control mandated by U.S. corporate law effects thus has a strong efficiency justification.
On Friday, April 11, and Saturday, April 12, 2014, the Lowell Milken Institute for Business Law and Policy will sponsor a conference on competing theories of corporate governance. The conference, which is organized by Professor Stephen Bainbridge, William D. Warren Distinguished Professor of Law, will provide a venue for distinguished legal scholars to define the competing models, critique them, and explore their implications for various important legal doctrines.
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 will provide a venue for distinguished legal scholars to define the competing models, critique them, and explore their implications for various important legal doctrines.
Thirteen minutes were all it took for Delaware to get a new chancellor.
Seven minutes for a confirmation hearing by the Senate's Executive Committee, another six minutes for consideration by the full Senate for a unanimous 21-0 vote on Wednesday in Legislative Hall in Dover, and that was that.
It put Andy Bouchard a swearing-in ceremony away from the most storied judgeship in the state as the chief of the Court of Chancery, the famed forum for corporate law.
Buying a new pair of shoes has been known to take longer. A lot longer.
When the ABA thought about eliminating tenure as a condition of law school accreditation, folks like me who worried about academic freedom and the few conservatives in legal education being purged were told we were idiots. But it seems increasingly plausible.
First, there was Brendan Eich - purged from his job.
Next there was Ayaan Hirsa Alie - purged from Brandeis' graduation.
And now the "tolerant" left is going after Condoleezza Rice to prevent her from joing Dropbox's board.
It's like somebody decided it was open season on conservatives.
Scrap tenure and you could add conservative academics to the list of targets. After all, the tolerant left at UCLA has already taken one run at yours truly. Without tenure, they might have succeeded.
The Delaware Court of Chancery this week did something that, as far as anyone can tell, it has never done before.
It issued an arrest warrant.
The unusual action by Vice Chancellor Donald Parsons Jr. came in a lawsuit filed by W. L. Gore and Associates against a former employee and research scientist – Huey Shen Wu of Newark – who the company claims is misappropriating Gore trade secrets and property.
Parsons issued the order calling for Wu's arrest after weeks of warning him that he was in contempt of court and faced possible imprisonment if he did not comply with an order to surrender his U.S. passport, Taiwanese passport, Chinese visas and other Chinese travel documents.
Ken Lagowski, office manager for the Register in Chancery, said in his nearly 30 years with the court, it has never been done. As far as anyone can tell, it may never have been done in the 220-year history of the court, known primarily for resolving business disputes.
The Delaware Senate today unanimously confirmed the nomination of Andre G. Bouchard to serve as the new Chancellor of the Delaware Court of Chancery, replacing the Honorable Leo E. Strine, Jr., who was sworn in as Chief Justice of the Delaware Supreme Court in February. Bouchard will be sworn in within the next 30 days. The Governor issued this statement following the confirmation:
“Today’s unanimous vote by the Senate affirms that Andy Bouchard possesses the experience, intellect and character to serve as an excellent Chancellor. His talents and commitment to justice will ensure that Delaware’s Court of Chancery will remain the premier venue for the resolution of business disputes. I’d like to thank the Senate for the consideration and confirmation of Bouchard.”
Everyone can share stories about how they were talked down to by a salesperson in the showroom, treated rudely or like they were ignorant, bullied by salespeople and a slow selling process, overcharged compared to competitors for service, forced into unwanted service purchases under threat of losing warranty coverage – and a slew of other objectionable interactions. Most Americans think the act of negotiating the purchase of a new car is loathsome – and far worse than the proverbial trip to a dentist. It’s no wonder auto salespeople regularly top the list of least trusted occupations! ...
The trends all support Americans wanting to buy directly from manufacturers. At the very least this would force dealers to justify their existence, and profits, if they want to stay in business. But, better yet, it would create greater competition – as happened in the case of Apple’s re-emergence leading to its impact on personal technology for entertainment and productivity.
GRILLING meat gives it great flavour. This taste, though, comes at a price, since the process creates molecules called polycyclic aromatic hydrocarbons (PAHs) which damage DNA and thus increase the eater’s chances of developing colon cancer. For those who think barbecues one of summer’s great delights, that is a shame. But a group of researchers led by Isabel Ferreira of the University of Porto, in Portugal, think they have found a way around the problem. When barbecuing meat, they suggest, you should add beer.
This welcome advice was the result of some serious experiments, as Dr Ferreira explains in a paper in the Journal of Agricultural and Food Chemistry. The PAHs created by grilling form from molecules called free radicals which, in turn, form from fat and protein in the intense heat of this type of cooking. One way of stopping PAH-formation, then, might be to apply chemicals called antioxidants that mop up free radicals. And beer is rich in these, in the shape of melanoidins, which form when barley is roasted.
Go read the whole thing.
The eminently sensible Usha Rodrigues offers up this advice for young faculty trying to find a work/life balance:
I had a mentor give me excellent advice my first year:
Just say no.
At least, your default answer should be "no." To my chagrin, I realized something at the end of my first year of teaching: This job has infinite demands. There are 3 elements to it: teaching, scholarship, and service. You could devote every waking moment to your teaching, and still have more you could do. Ditto for service. Ditto to the nth degree for scholarship: always another talk you could attend, an article you could read. But you can't do those things and write. At least, I can't. You have to get used to always feeling like there's more you can do. You'll feel guilt, but you have to make your peace with it.
I set boundaries for myself, like trying not to travel more than once a month while classes are in session. But the best piece of advice I got was that your default answer should be "no."
I'll give you a concrete example: These days it's very easy for students to fire off long lists of questions about class by email, especially around exam time. But I am a two-fingered typist with 113 students in Business Associations and 106 in Mergers and Acquisitions. If I tried to answer email questions, it'd be a full time job. (Trust me, I have tried, and it is full time.) So I have a blanket policy in my syllabus stating that I don't answer substantive questions by email. Instead, I make my self available through office hours and a review session in each course.
In a criminal trial, the federal government has long been obliged to promptly turn over to the defense any evidence that could show that the accused did not commit the offense of which he is accused. The Brady rule (announced in the 1963 Supreme Court case, Brady v. Maryland), prevents one-sided prosecutions in which the defendant is kept in the dark about information that might show that he is innocent.
The government's job as criminal prosecutor is not to obtain convictions, but "to do justice," according to the traditional legal maxim. It should be required to follow the Brady rule in civil trials as well. But the SEC does not, even when it accuses a citizen of fraud. Had the agency complied with this simple rule in its recent insider-trading case against one of us, Mark Cuban, it is unlikely that a lawsuit would even have been filed, let alone go to trial. ...
An agency that has the ability to bring the full force of the federal government against a citizen in a fraud case should play by the same fair rules that have governed federal prosecutors for decades. It should be required to turn over, without awaiting a request, any evidence that could exculpate the defendant. It should announce now that it will follow the mandates of the Brady rule in all pending and future cases.
It is curious that the SEC has not done so. The agency's internal rules effectively compel it to disclose exculpatory evidence to defendants in administrative proceedings where it has a huge "home court" advantage. But no such rule applies to its litigation, and the SEC for years has fought imposition of a Brady obligation.
The Brady rule would not simply mean that civil trials instituted by the federal government would be conducted on the basis of the whole truth. The best result would be that weak cases would not be brought in the first place. Not even the most stubborn or ambitious SEC lawyer would pursue a case when he knew, in advance, that evidence disproving his case must be turned over to the other side.
The agency should embrace the concept that "justice be done" in all of its cases, not just some of them, and hold itself to the same principle of "accountability" that is at the core of the agency's promise to investors.
There was a very good student note in the Minnesota Law Review back in 2011 that argued in much greater detail that the SEC and other administrative agencies should adopt the Brady rule:
Abstract: Due process protections for defendants vary greatly between the numerous federal agencies vested with civil enforcement powers. Many of these agencies fail to provide defendants with basic safeguards, including the protections available in the Federal Rules of Criminal Procedure. As federal administrative agencies continue to increase both the scope of their enforcement authority and the penalties they assess, such due process deficiencies become even more apparent. This state of affairs is surprising considering the U.S. Supreme Court’s ruling in Brady v. Maryland, in which it held that the Fifth Amendment binds government prosecutors with a duty to disclose material, exculpatory evidence to a defendant. This duty derives from the Court’s axiom that a government prosecutor must seek justice, not victory, in the courtroom—an axiom that logically extends to civil enforcement actions.
To rectify this due process deficiency, the Note argues that the Brady precedent should apply to all federal administrative agencies’ formal adjudications. The few federal agencies that have adopted the Brady rule for this purpose have employed it successfully and can serve as a model for other federal agencies. Additionally, defendants facing these agencies receive due process protections that are more comparable with Article III civil and criminal defendants than those defendants before agencies that reject Brady.
A great take on the question from a Benedictine priest.
A very useful article from leading corporate governance expert Claudia Allen:
Abstract: In response to the rising tide of strike suits challenging mergers and acquisitions and the adequacy of executive compensation disclosures, more companies are adopting or considering adopting exclusive forum bylaws. These bylaws, which are largely a Delaware phenomenon, require that derivative actions, stockholder class actions, and other intracorporate disputes be litigated exclusively in designated courts. This article examines the increase in the adoption of such bylaws following a June 2013 Delaware Court of Chancery decision upholding their validity. It also examines the language companies are including in such bylaws, their enforceability in litigation and adoption considerations.