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Nanny statism run amok

Obama Administration: Times Square Must Remove Iconic Billboards « CBS New York http://t.co/JV0QQlIOyE Czar Obama's #nannystate run amok

— Stephen Bainbridge (@ProfBainbridge) May 6, 2015

United Kingdom to ban board service providers

A while back, Todd Henderson and I came up with the idea of "board service providers." As the abstract to our article explains:

State corporate law requires director services be provided by “natural persons.” This Article puts this obligation to scrutiny, and concludes that there are significant gains that could be realized by permitting firms (be they partnerships, corporations, or other business entities) to provide board services. We call these firms “board service providers” (BSPs). We argue that hiring a BSP to provide board services instead of a loose group of sole proprietorships will increase board accountability, both from markets and judicial supervision. The potential economies of scale and scope in the board services industry (including vertical integration of consultants and other board member support functions), as well as the benefits of risk pooling and talent allocation, mean that large professional director services firms may arise, and thereby create a market for corporate governance distinct from the market for corporate control. More transparency about board performance, including better pricing of governance by the market, as well as increased reputational assets at stake in board decisions, means improved corporate governance, all else being equal. But our goal in this Article is not necessarily to increase shareholder control over firms – we show how a firm providing board services could be used to increase managerial power as well. This shows the neutrality of our proposed reform, which can therefore be thought of as a reconceptualization of what a board is rather than a claim about the optimal locus of corporate power.

Boards-R-Us: Reconceptualizing Corporate Boards (July 10, 2013). University of Chicago Coase-Sandor Institute for Law & Economics Research Paper No. 646; UCLA School of Law, Law-Econ Research Paper No. 13-11. Available at SSRN: http://ssrn.com/abstract=2291065.

Interestingly, under current U.K. law:

It is ... possible to appoint a company or similar corporate body that has its own legal identity as a director of another company.  As partnerships and trusts do not have their own legal identity they, however, cannot be appointed as directors.  The corporate body can be a company incorporated in the United Kingdom or anywhere else in the world.

The roles and responsibilities of a corporate director are exactly the same as for individual directors.

Sadly, however, the United Kingdom is now acting to ban BSPs:

The Act will also prohibit the use of corporate directors and require all directors of a UK company to be natural persons, with limited exceptions. The exceptions are due to be to be set out in regulations and, according to guidance issued by the UK Government in support of the Act, corporate directors may be permitted to continue to be appointed where their use “presents a low risk of illicit activity and is of high value to the running of the company.”

The explanation for this change strikes me as grossly inadequate:

... corporate directors can be used to help criminals that are looking to misuse companies. Where a corporate director of a UK company is a company incorporated offshore it can become difficult to identify who are the directors and shareholders of that offshore corporate director.  Making the company’s ownership structure as opaque and complex as possible can serve to hide the true beneficial owners from law enforcement agencies. Nominee directors, corporate or individual, can also be used to conceal corporate control. Where individuals want to use a company to facilitate criminal activity they are unlikely to want to register themselves as a director and therefore may appoint a nominee director and/or an offshore corporate director.

Lots of good things can be abused. That doesn't mean we should ban them. Instead, we should regulate the potential abuses.

Louis Brandeis famously remarked that "Sunlight is said to be the best of disinfectants; electric light the most efficient policeman." Instead of banning BSPs, the UK should take Brandeis' advice, and require transparency through an appropriate disclosure regime. (Assuming the evidence shows that market forces do not lead to adequate voluntary disclosure.)

Fee shifting moves forward in Delaware

The annual comprehensive corporation law amendment bill has been introduced in the Delaware Senate. As expected it contains the ban on fee shifting bylaws. 

The US Chamber of Commerce sent along this comment by email:

"This proposed fee-shifting bill does little to address the well-documented, longstanding problem of abusive merger-and-acquisition litigation in Delaware. In addition, it removes a useful tool for protecting innocent shareholders against these frivolous lawsuits with no new protections. 

“Helping trial lawyers instead of shareholders calls into question Delaware’s commitment to maintaining the balanced legal system that until now has been the hallmark of its corporate franchise.”

I'm in complete agreement, as detailed in may prior posts:

The case for allowing fee shifting bylaws as a privately ordered ...

 

Nov 17, 2014 ... I had been planning on writing a law review article on fee shifting bylaws, but I suspect that events will overtake the inevitably lengthy ...

www.professorbainbridge.com/.../the-case-for-allowing-fee-shifting-bylaws- as-a-privately-ordered-solution-to-the-shareholder-litigat.html

 

Delaware's Decision: Viewing fee shifting bylaws through a public ...   Nov 18, 2014 ... (2) What's in the best interest of the key interest group that would be affected by fee shifting bylaws? As we'll see, I think those questions have ... www.professorbainbridge.com/.../delawares-decision-viewing-fee-shifting- bylaws-through-a-public-choice-lens.html

A nuanced look at shareholder activism

Adam J. Epstein advises the boards of pre-IPO and small-cap companies through his firm, Third Creek Advisors, LLC. He recently offered an assessment of the pros and cons of shareholder activism. Recommended.

WTF is "private law"?

There's a new blog out there called New Private Law. Its editors apparently define "private law" as including  "the areas of torts, property, contracts, intellectual property, commercial law, wills & trusts, and remedies."

I'm afraid I have to agree with Matt Bodie (which does't happen every day), who observed:

... what’s the source for your definition of private law? I understand the exclusion of employment law (though I would disagree substantively), but what about corporate and securities law? I thought those were pretty firmly ensconced as private law.

Does religious piety reduce agency costs?

This looks interesting:

Because religious piety induces individuals to be more honest and risk-averse, it makes managers less likely to exploit shareholders, thereby mitigating the agency conflict and potentially influencing governance arrangements. We exploit the variation in religious piety across U.S. counties and investigate the effect of religious piety on anti-takeover provisions. Our results show that religious piety substitutes for corporate governance in alleviating the agency conflict. Effective governance is less necessary for firm with strong religious piety. As a result, religious piety leads to weaker governance, as indicated by more anti-takeover defenses. We exploit historical religious piety as far back as 1952 as our instrumental variable. Religious piety from the distant past is unlikely correlated with current corporate governance directly, except through contemporaneous religious piety. Further analysis shows that religious piety is not merely associated with, but rather brings about, more anti-takeover provisions.

Chintrakarn, Pandej and Jiraporn, Pornsit and Tong, Shenghui and Kitsabunnarat-Chatjuthamard, Pattanaporn, Exploring the Causal Effect of Religious Piety on Corporate Governance: Evidence from Anti-Takeover Defenses and Historical Religious Identification (April 21, 2015). Available at SSRN: http://ssrn.com/abstract=2597338

Because anti-takeover defenses are generally regarded as adverse to shareholders, many might question their logic, but the paper offers a slightly more detailed explanation of their hypothesis:

... religious piety induces managers to be more honest and less likely to expropriate from shareholders. As a result, managers are less inclined to exploit shareholders for private benefits. In such firms, strong governance is less necessary because managers are already honest and well-behaved. In other words, religious piety substitutes for strong governance. In addition, anti-takeover devices are less likely to be abused by religious managers. Therefore, they are less harmful in religious firms and are more likely to be adopted. This hypothesis predicts that religious piety is associated with more anti-takeover devices. We label this view “the substitution hypothesis”. 

I'm not convinced by the abbreviated analysis in the paper. but it looks like a good project for a number cruncher.

Harvard Law is an intellectual monoculture

Report:

There are almost no Republican donors teaching at Harvard Law School. Ninety-eight percent of the political donations from faculty go to Democrats. 

So much for diversity.