ProfessorBainbridge.com

Bainbridge & Henderson's Outsourcing the Board in Quartz

Quartz published a long article on my book with Todd Henderson, Outsourcing the Board. Sadly, it's behind a paywall. But you can buy the book!

Video of my talk on corporate purpose in a populist era as the 2019 Pound Lecturer at University of Nebraska Law School

Link

Greetings from Lincoln, Nebraska, where I’ll be giving the Roscoe Pound Lecture

I’m honored to have been asked to give the University of Nebraska School of Law’s Roscoe Pound Lecture, which I’ll be doing tomorrow. My lecture is based on my paper, Corporate Purpose in a Populist Era.

Updated version of Restoring Confidence in the Roman Catholic Church: Corporate Governance Analogies

I have had an updated version of my article posted: Bainbridge, Stephen Mark, Restoring Confidence in the Roman Catholic Church: Corporate Governance Analogies. UCLA School of Law, Public Law Research Paper No. 18-32. Available at SSRN: https://ssrn.com/abstract=3249236 or http://dx.doi.org/10.2139/ssrn.3249236

Events of the Summer 2018 brought the long running sexual abuse crisis in the Roman Catholic Church back onto the front pages, highlighting the role of diocesan bishops in covering up the scandal and enabling abusers. In response to these developments, the Church is again considering reforms to protect victims and punish abusers and enablers. This article proposes that the Church create a system for laity to anonymously report allegations, enact strong protections for whistleblowers, and impose a mandatory whistleblowing requirement on priests. As a 2018 Pennsylvania grand jury report demonstrates, however, the laity was reporting the abuse to the Church but the hierarchy buried those reports in secret files. The ultimate problem thus is not so much the lack of reporting, as it was the lack of action after the report. Accordingly, the article’s principal proposal is the creation of both diocesan and national disciplinary bodies led by expert lay members as the ultimate authorities in sex abuse cases. The proposal draws an analogy between these bodies and corporate audit committees and argues that a number of aspects of how audit committees function can be usefully adapted to the proposed review bodies.

This version of the article has been revised to take into account developments at the February 2019 Vatican summit on the sex abuse scandal. Those developments do not change the recommendations made herein.

Keywords: Roman Catholic Church, corporate governance, compliance, law and economics, credence good

Looking back at 2018: My books, articles, monographs, columns, etc...published last year

Books

Outsourcing the Board: How Board Service Providers Can Improve Corporate Governance (Cambridge University Press 2018) (Coauthor: M. Todd Henderson)

Can Delaware Be Dethroned?: Evaluating Delaware's Dominance of Corporate Law (Cambridge University Press 2018) (Coeditors: Iman Anabtawi, Sung Hui Kim, and James Park)

Business Associations: Cases and Materials on Agency, Partnerships, LLCs, and Corporations , 10th Edition (Foundation Press 2018) (Co-editors: William A. Klein and J. Mark Ramseyer)

Articles and Book Chapters

Introduction, in Can Delaware Be Dethroned?: Evaluating Delaware's Dominance of Corporate Law (Cambridge University Press 2018)

Interest Group Analysis of Delaware Law: The Corporate Opportunity Doctrine as Case Study, in Can Delaware Be Dethroned?: Evaluating Delaware's Dominance of Corporate Law (Cambridge University Press 2018)

Conservative Critiques of Capitalism, American Affairs, Fall 2018, at 113

Parable of the Talents, in Research Handbook on Fiduciary Law 97 (Edward Elgar Publishing; D. Gordon Smith & Andrew S. Gold eds. 2018)

The Board of Directors, in The Oxford Handbook of Corporate Law and Governance 275 (Oxford University Press; Jeffrey N. Gordon & Wolf-Georg Ronge eds. 2018)

Kokesh Footnote Three Notwithstanding: The Future of the Disgorgement Penalty in SEC Cases, 56 Wash. U. J.L. & Policy 17 (2018)

Other

Perpetual Dual Class Stock versus the SEC’s Dubious Raised Eyebrow Power, The WLF Legal Pulse (February 23, 2018)

Supreme Court to Once Again Examine Limits of Rule 10b-5 Liability in October Term 2018 Case “Lorenzo v. SEC”,The WLF Legal Pulse (August 6, 2018)

California Corporate-Board Quota Law Unlikely to Survive a Constitutional Challenge, The WLF Legal Pulse (October 2, 2018)

Canon Law Should Be Changed to Make Catholic Bishops Accountable, Public Discourse (December 18, 2018)

 

My new paper, "Rethinking the Board of Directors: Getting Outside the Box," is now online

Bainbridge, Stephen Mark, Rethinking the Board of Directors: Getting Outside the Box (December 17, 2018). UCLA School of Law, Law-Econ Research Paper No. 18-15. Available at SSRN: https://ssrn.com/abstract=3302927

In our new book, Outsourcing the Board: How Board Service Providers Can Improve Corporate Governance, Todd Henderson and I change the conversation about corporate governance by examining the origins, roles, and performance of boards with a simple question in mind: why does the law require governance to be delivered through natural persons? Through tracing the development of boards from quasi-political bodies to the current 'monitoring' role, we find the reasons for this requirement to be wanting. Instead, we propose that corporations be permitted to hire other business associations—known as 'Board Service Providers' or BSPs—to provide governance services. Just as corporations hire law firms, accounting firms, and consulting firms, so too should they be permitted to hire governance firms, a small change that will dramatically increase board accountability and enable governance to be delivered more efficiently.

This essay will serve as the introduction to a forthcoming symposium about our book.

More legal hurdles for outsourcing the board

Regular readers will recall that Todd henderson and my book Outsourcing the Board: How Board Service Providers Can Improve Corporate Governance asks "why does the law require governance to be delivered through individual board members? While tracing the development of boards from quasi-political bodies through the current 'monitoring' role, we find the reasons for this requirement to be wanting. Instead, we propose that corporations be permitted to hire other business associations - known as 'Board Service Providers' or BSPs - to provide governance services. Just as corporations hire law firms, accounting firms, and consulting firms, so too should they be permitted to hire governance firms, a small change that will dramatically increase board accountability and enable governance to be delivered more efficiently.

As we recognize, there are a number of existing legal barriers that would have to be overcome. Keith Paul Bishop just flagged a few more. (A link to our book would have been nice.)

Third edition of my Agency, Partnership, and LLC treatise is available for preorder

You can preorder the new edition of my Agency, Partnerships & LLCs text via @amazon https://t.co/D1XaQ7qpb8

— Professor Bainbridge (@ProfBainbridge) November 7, 2018

Sullivan & Cromwell, Keith Paul Bishop, and Yours Truly on California Board of Director Quota Law

Sullivan & Cromwell:

On September 30, 2018, Governor Brown of California signed into law a bill, SB-826, to require female representation on the boards of directors of publicly traded companies who identify as being headquartered in the state.  SB-826 makes California the first state to attempt to enact female gender quotas for boards of directors.  SB-826 will become effective on January 1, 2019 and will require companies subject to the legislation to comply with the first phase of requirements (requiring boards of directors to have at least one female member) no later than December 31, 2019. ...

The California Secretary of State is required to assess compliance annually and is empowered to impose fines for noncompliance.  Any corporation subject to Section 301.3 that fails to file on a timely basis information about its board members with the Secretary of State may incur a $100,000 fine.  The content and timing of required filings with the Secretary of State will be established through regulations that have not yet been issued.  Separately, a corporation’s first failure to have the requisite number of female directors may result in a $100,000 fine and each subsequent violation may result in a $300,000 fine. ...

Even if SB-826 is ultimately invalidated, the legislation reflects the growing sentiment in favor of diversity for boards of directors.  According to Institutional Shareholder Services (ISS), more than 80% of investors and 60% of non-investors (including corporate directors and other market constituents) who participated in the ISS 2018 governance principles survey believed it would be problematic if a board of directors did not include any female members.  Glass, Lewis & Co. has indicated that beginning in 2019 it will generally recommend against election of the chair of the nominating committee of any Russell 3000 company having an all-male board, and ISS is reported to also be considering adopting a similar policy.  Large institutional investors, including State Street Global Advisors, Inc., BlackRock, Inc. and The Vanguard Group, Inc., have also indicated that gender diversity on the board of directors may influence their voting decisions.

Keith Paul Bishop on what female means for purposes of the new statute:

Given the substantial penalties that may be assessed for failure to have the prescribed minimum number of female directors, who counts as a female director could be an important question.  The legislature provides a Delphic answer ("γνῶθι ἑαυτόν") by defining a "female" for purposes of the gender quota requirements as "an individual who self-identifies her gender as a woman, without regard to the individual’s designated sex at birth".  Cal. Corp. Code § 301.3(f)(1).  

Keith Paul Bishop on the tasks assigned to the California Secretary of State's tasks under the statute:

One of the first tasks will be for the Secretary of State's office to publish a report on its web site "documenting the number of domestic and foreign corporations whose principal executive offices, according to the corporation’s SEC 10-K form, are located in California and who have at least one female director".  Cal. Corp. Code § 301.3(c).  The deadline for this report is July 1, 2019.  One difficulty that the Secretary of State will be to determine the gender of directors inasmuch as the Securities and Exchange Commission has no gender disclosure requirements.  Although many first names are traditionally associated with a gender, many (such as Kim) are not.  Implementing this requirement also will likely require the Secretary of State to promulgate rules interpreting the statute and adopting forms.  See Cal. Corp. Code § 301.3(e).  Rulemaking under California's Administrative Procedure Act is a time consuming process that requires public notice and comment.  While the Secretary of State may choose to adopt emergency regulations, this would require a finding that immediate action is required to avoid serious harm to the "public peace, health, safety, or general welfare".  Cal. Gov't Code § 11342.5.

The Secretary of State is also charged with enforcing the new law and is authorized to impose fines on violators.  Although the Secretary of State does have some existing investigative and enforcement powers with respect to notaries and elections, it has not have substantial experience as a civil prosecutor.  The office will undoubtedly need to add staff and adopt regulations to carry out these new tasks.

Lastly, yours truly on whether the bill will survive constitutional scrutiny under the dormant commerce clause.

Replacing the Board: Henderson and Bainbridge's "New Book Explores the Benefits of Outsourcing Corporate Governance"

From the University of Chicago Law School:

In his new book, Outsourcing the Board: How Board Service Providers Can Improve Corporate Governance (Cambridge University Press), he and UCLA School of Law Professor Stephen M. Bainbridge propose giving corporations the option of hiring a new kind of firm, a Board Service Provider (BSP), to serve as their boards. Today, corporations hire law firms, accounting firms, and consulting firms to give them the expertise needed to run their highly complicated businesses. So why not a corporate governance firm?

“There is a whole literature that precedes us advocating for professional board members with standards and education,” Henderson said. “But even that plan has shortcomings because it focuses on the individual rather than on the entity. If there were firms that provided board services and that had employees with expertise in all the areas these corporations need, that would be much more efficient than 12 part-time people. The firm could hire all the experts they need and have them down the hall when information is needed.”

...

“Right now, all that most boards have time for is oversight, but a BSP could spend time on other things because it would be a deeper entity, it would employ all the people it needs, and therefore, could be in compliance at a lower cost,” Henderson observed.

He also explained that BSPs, with their teams of experts, could overcome other corporate problems, such as having to make decisions without full information from management.

Scholarship alert

FYI: A very substantially revised and expanded version of my paper, Restoring Confidence in the Roman Catholic Church: Corporate Governance Analogies, is now available at SSRN: https://t.co/ph0pQ6VGQb pic.twitter.com/GJ7OyAAj1L

— Professor Bainbridge (@ProfBainbridge) October 9, 2018

SEC Commissioner Hester Pierce says corporate law is public interest law, which is true, but I said it first!

From her address to the Michigan Law School:

I want to urge you to expand your vision of how one can serve the public as a lawyer. Representing corporations also can be a form of public interest law because companies contribute so much to the well-being of society. I am not referring to corporate sponsorship of the local minor league baseball team, food bank, or youth orchestra. These charitable activities are laudable, but, to find something good, we need not look beyond the core profit-making activities of the corporation.

The hunt for profit drives companies to strive to identify and meet people’s needs using as few resources as possible. Companies communicate with their customers and suppliers through the price system. People tell companies what they value when they pay for the products and services those companies offer. Suppliers, by raising or lowering prices, tell companies how valuable the resources are that the companies use. Companies respond to what their customers and suppliers tell them. In this way, companies help to ensure that people spend their time wisely and that resources are used for the things society values most. Companies combine the diverse and complementary talents of their employees to research, develop, explore, produce, sell, and provide services to willing customers. In these activities, corporations play an important role in expanding scientific and technological knowledge, enabling people to profit from their hard work, and ensuring that society’s resources are allocated to the uses we most value.

As a lawyer representing companies in the courtroom, the boardroom, or the contract negotiating room, you are helping to build mutually beneficial relationships between companies and their creditors, shareholders, employees, suppliers, and communities. You are part of the process for ensuring that resources and human ingenuity are being put to their best use. It is easy to lose sight of the importance of your role particularly when you are an overtired attorney mired in a document-intense business dispute or interminable contract negotiation.

I couldn't agree more. Especially because I said the very same thing over a decade ago, in my article Reflections on Twenty Years of Law Teaching, 56 UCLA Law Review Discourse 1 (2008):

Legal education pervasively sends law students the message that corporate lawyering is a less moral and socially desirable career path than so-called “public interest” lawyering.[1]The corporate world is viewed as essentially corrupting and alienating, while true self-actualization is possible only in a Legal Aid office.

Our students get these messages not only in law school, of course, but also in the media. Films like “A Civil Action” or “Erin Brockovich” illustrate the general ill repute in which corporations—and corporate lawyers—are held, at least here in Hollywood.

In my teaching, I have chosen to unabashedly embrace a competing view. I tell my students about Nicholas Murray Butler, president of Columbia University and winner of the Nobel Peace Prize, who wrote that: “The limited liability corporation is the greatest single discovery of modern times. Even steam and electricity are less important than the limited liability company.”

I tell them about journalists John Micklethwait and Adrian Wooldridge, whose magnificent history, The Company, contends that the corporation is “the basis of the prosperity of the West and the best hope for the future of the rest of the world.”[2]

There is no doubt that the corporation is now the key economic institution in Western nations. In the United States, for example, the corporation is the predominant form of business organization by every measure except sheer number of firms. According to recent census data, although corporations account for only about one fifth of all business organizations, they bring in almost 90% of all business receipts.

The corporation also has proven to be a powerful engine for focusing the efforts of individuals to maintain economic liberty. Because tyranny is far more likely to come from the public sector than the private, those who for selfish reasons strive to maintain both a democratic capitalist society and, of particular relevance to the present argument, a substantial sphere of economic liberty therein serve the public interest.  Put another way, private property and freedom of contract were “indispensable if private business corporations were to come into existence.”[3]In turn, by providing centers of power separate from government, corporations give “liberty economic substance over and against the state.”[4]

Yet, two centuries ago, leading business and economic thinkers – including the great Adam Smith – derided the joint stock company. Few businesses were organized as chartered companies. Each company’s charter required a special legislative act. In many places, legislatures granted charters only to quasi-public entities, such as railroads and canals. In most, legislatures rarely resisted the temptation to revise or even repeal existing charters arbitrarily. Even in the United States, where the Supreme Court’s famous Dartmouth Collegedecision gave corporations substantial constitutional protections at a relatively early date, such legislative meddling remained commonplace.

And so I ask my students: What explains the relatively rapid development in the mid-19th century of a recognizably modern corporation and, in turn, that entity’s emergence as the dominant form of economic organization?

The answer has to do with new technologies – especially the railroad – requiring vast amounts of capital, the advantages such large firms derived from economies of scale, the emergence of limited liability that made it practicable to raise large sums from numerous passive investors, and the rise of professional management.

For the most part, these advantages remain true today. The corporation remains the engine of economic growth, both at the level of giants like Microsoft and garage-based start-ups.

The rise of the corporate form thus has “improved the living standards of millions of ordinary people, putting the luxuries of the rich within the reach of the man in the street.”[5]The rising prosperity made possible by the tremendous new wealth created by industrial corporations was a major factor in destroying arbitrary class distinctions, enhancing personal and social mobility. Many of the wealthiest businessmen of the latter half of the 19th Century and the 20th Century began their careers as laborers rather than as scions of coupon-clipping plutocrats.

And so I put it to my students this way: You want to help make society a better place? You want to eliminate poverty? Become a corporate lawyer. Help businesses grow, so that they can create jobs and provide goods and services that make people’s lives better.

The goal isn’t just to make my students feel better about themselves. I firmly believe that too many of our students, when they get out in practice, may be more willing to act in ways that are ethically gray—to act as facilitators rather than gatekeepers—if they’ve been told repeatedly that they’ve already “sold out.”[6]If more legal academics were to celebrate the pro-social aspects of corporate practice, perhaps our students would be better gatekeepers once they get out in practice.

Henderson and Bainbridge Podcast on Outsourcing the Board of Directors

Law and Liberty's Symposium on the Crisis in the Catholic Church

From the Law & Liberty blog:

... we have put together a symposium by Paul Seaton, Richard Garnett, and Ed Condon to think about the legal, institutional, and reform issues the Catholic Church’s abuses puts to the law and to itself.

Paul Seaton – The Archbishop and the Pope

To begin with the obvious is a good place to start. In this case it is also quite dramatic. Archbishop Viganò’s recent J’accuse of the Pope and many high-up church men is not just another salvo in the ongoing civil war in the Catholic church, it changes the battlefield in a dramatic way. Its impact was immediately felt, while its full impact and significance remain to be seen, as responses and reactions unfold. Such is the nature of history with human agency involved. Since it is a battlefield with armed camps and live-fire, there will be casualties, including reputations and, to some extent, truth, and smoke aplenty. In the fog of battle, it helps to have some understanding of the state of the Church and who the combatants are.

Richard W. Garnett – The Catholic Church’s Accountability and Autonomy

[T]he recent horrifying and heartbreaking revelations, reports, and rumors of sexual abuse in the Catholic Church have supplied additional evidence that, reasonable people could well conclude, cuts against my positions. As Damon Linker put it, writing in The Week, the “monstrous, grotesque ugliness” of alleged and confirmed abuses reveals the Catholic Church “as a repulsive institution.” Respecting the rights of the “repulsive” is, for all of us, a challenge.

Ed Condon – Flouting the Canon Law, Once More

The recent series of scandals to engulf the Church in the United States, first around Archbishop Theodore McCarrick and then following the publication of the Pennsylvania grand jury report, have left the hierarchy in a difficult position. On the one hand, the evidence seems to be that previous reforms are working, albeit with now obvious gaps in its applicability—most notably for addressing allegations made against bishops. On the other, the presence of so many unresolved cases, even if they are historical, in many dioceses suggests a continued reticence to go “looking for trouble” in one’s own filing cabinet.

Predictably, of course, let me use that as a jumping off point for a little self-promotion:

Bainbridge, Stephen M., Restoring Confidence in the Roman Catholic Church: Corporate Governance Analogies. UCLA School of Law, Public Law Research Paper No. 18-32. Available at SSRN: https://ssrn.com/abstract=3249236

New article: Restoring Confidence in the Roman Catholic Church: Corporate Governance Analogies

Bainbridge, Stephen M., Restoring Confidence in the Roman Catholic Church: Corporate Governance Analogies. UCLA School of Law, Public Law Research Paper No. 18-32. Available at SSRN: https://ssrn.com/abstract=3249236