Power Games

According to the traditional account, Congress has the necessary constitutional means and personal motives to resist encroachments by the president. As commentators have recognized, however, the traditional account does not match reality. Individuals in Washington, D.C., are more interested in fighting for their political party than for their branch of government, and the essentially reactive legislative branch lacks the capacity to respond to a rapidly changing policy environment. But the traditional account suffers from a more basic flaw. The president can decide whether or not to cooperate with Congress on a situation-by-situation basis. By contrast, Congress\u27s tools for disciplining the president, such as impeachment, typically preclude mutually beneficial cooperation between the branches across a broad set of situations. Since a prolonged collapse in cooperation would be costly to Congress, it will often not be worthwhile for Congress to respond to presidential provocations. This Essay uses a simple game to show how a player with the ability to make situation-by-situation decisions can outperform a player with less flexibility. It then uses real world examples to map the game onto the reality of interactions between the president and Congress. Finally, the Essay explores the possible use of unusual institutional arrangements to address this power imbalance

Context-Specific Seminole Rock Reform

Under Bowles v. Seminole Rock, courts will defer to an administrative agency\u27s interpretation of rules that the agency produced. For decades, Seminole Rock deference was an uncontroversial part of the administrative law landscape. But recently, the doctrine has come under siege. Drawing on concerns about the flexible structure of the administrative state, critics of the doctrine have won an increasingly sympathetic ear in the Supreme Court and in Congress. This Essay suggests that any reform of Seminole Rock should be driven by three principles: Fidelity to congressional intent, avoidance of undesirable side effects, and careful targeting of a clear problem. It goes on to argue that these goals can best be satisfied by tailoring deference to the context created by each regulatory regime. For courts, this would mean looking to guideposts in the underlying statutes that authorize agency action. For Congress, this would mean specifying the level of deference on a statute-by-statute basis. The resulting context-specific Seminole Rock regime would avoid many of the pitfalls that have plagued past reform efforts while placing the doctrine on a proper footing

ESG and Securities Litigation: A Basic Contradiction

Companies are increasingly expected to publicly report on not only their traditional financial results, but also environmental, social, and governance (“ESG”) issues. Trillions of dollars are being invested with ESG considerations in mind, and boosters urge that ESG investing can address environmental and social impacts that are normally ignored by managers focused on share prices. This raises the question of how companies should be punished if they lie about ESG matters. How should the traditional elements of securities fraud map onto the novel ESG context? Commentators have vigorously debated ESG’s relationship to the materiality element of securities fraud. But the literature has largely overlooked the reliance element. Securities class action plaintiffs normally show reliance using the presumption introduced by the Supreme Court’s decision in Basic Inc. v. Levinson. If a plaintiff can show that a company’s shares trade in an efficient market, share prices are presumed to reflect all publicly available material information about the company. As a result, a material misstatement operates as a “fraud on the market,” and anyone who traded the company’s shares at the market price is presumed to have relied on the misstatement. This presumption makes securities class actions possible by dispensing with the need to prove that every individual plaintiff actually relied on the false information. As ESG disclosures expand, a new wave of litigation powered by Basic is developing. This Article explores the reliance element of securities fraud and identifies a deep tension between the premises of the ESG movement and the premises of Basic. The advocates who urge corporations to do better on environmental and social matters largely—and justifiably—believe that share prices do not properly reflect corporate performance on those fronts. That belief is difficult to reconcile with Basic’s assumption that material information about a company is reflected in its share price. The Basic presumption could also chill valuable experimentation and voluntary disclosures by companies, and it could absolve institutional investors of the need to actually review and act on ESG disclosures. Counterintuitively, requiring plaintiffs who attack an ESG disclosure to show reliance without using Basic may help advance the goals of the ESG movement, particularly if other enforcers such as the Securities and Exchange Commission step up. These points suggest the need to proactively consider how the Basic presumption should work for ESG misstatements, along with the development of new and creative approaches. By shifting the conversation on ESG disclosures from its current emphasis on materiality to a proper focus on investor reliance and enforcement, this analysis generates fresh and actionable insights

Power Games

According to the traditional account, Congress has the necessary constitutional means and personal motives to resist encroachments by the president. As commentators have recognized, however, the traditional account does not match reality. Individuals in Washington, D.C., are more interested in fighting for their political party than for their branch of government, and the essentially reactive legislative branch lacks the capacity to respond to a rapidly changing policy environment. But the traditional account suffers from a more basic flaw. The president can decide whether or not to cooperate with Congress on a situation-by-situation basis. By contrast, Congress\u27s tools for disciplining the president, such as impeachment, typically preclude mutually beneficial cooperation between the branches across a broad set of situations. Since a prolonged collapse in cooperation would be costly to Congress, it will often not be worthwhile for Congress to respond to presidential provocations. This Essay uses a simple game to show how a player with the ability to make situation-by-situation decisions can outperform a player with less flexibility. It then uses real world examples to map the game onto the reality of interactions between the president and Congress. Finally, the Essay explores the possible use of unusual institutional arrangements to address this power imbalance

Countercyclical Corporate Governance

The American economy has lurched from crisis to crisis for over a decade, enduring long stretches of high unemployment, market dysfunction, and ineffective government policy. Despite the enormous scale of this suffering and disruption, the full implications of the experience have not been absorbed by the corporate governance literature. Corporate law’s focus on delivering financial returns to shareholders works reasonably well in a robust economy, when markets function effectively and align shareholder incentives with the goal of maximizing social wealth. But these tidy mechanisms fail in periods of macroeconomic stress, when markets send faulty signals and firms pursuing short-term shareholder profits can destroy social wealth. The layoffs or price increases often desired by shareholders can be useful in a healthy economic environment, as they cause resources to be allocated more efficiently to higher-value uses, and competitive markets prevent harm from falling on workers or consumers. But the same maneuvers can be destructive when the economy is afflicted by unemployment or inflation. Revising corporate governance arrangements so that companies focus less on maximizing short term shareholder profits during crises can thus be a useful tool for managing economic problems and improving outcomes. This Article begins the theoretical and practical work of adapting corporate governance to periods of economic crisis. After demonstrating that the assumptions that have driven corporate law debates depend on macroeconomic context, the Article shows that correcting those assumptions could make corporate governance a powerful tool for managing crises. These insights offer a useful framework for evaluating measures undertaken by businesses, investors, and the government in response to the COVID-19 crisis, while suggesting new avenues for action

Stakeholderism Silo Busting

The fields of antitrust, bankruptcy, corporate, and securities law are undergoing tumultuous debates. On one side in each field is the dominant view that each field should focus exclusively on a specific constituency—antitrust on consumers, bankruptcy on creditors, corporate law on shareholders, and securities regulation on financial investors. On the other side is a growing insurgency that seeks to broaden the focus to a larger set of stakeholders, including workers, the environment, and political communities. But these conversations have largely proceeded in parallel, with each debate unfolding within the framework and literature of a single field. Studying these debates together reveals deep commonalities and unlocks useful insights. It can also suggest new theoretical and policy directions while avoiding the dangers of a blinkered approach

Valuing ESG

Corporate environmental, social, and governance (ESG) commitments promise to make capitalism better. Unfortunately, ESG has become a hotbed of hype and controversy. The core problem is that ESG mixes vague environmental and social goals with a profit maximization goal and does not provide a framework for resolving the conflicts that exist between them. The result is confusion that invites deception and cynicism. This Article proposes a mechanism for resolving conflicts between goals by translating them into the common language of money. Once nonpecuniary environmental or social goals are translated into dollar values, they can provide clear and actionable guidance for firms and investors, enabling ESG to fulfill its promise. To achieve this, corporations and institutional investors that claim to be ESG-friendly should publicly commit to specific valuations for ESG issues. For example, a company or mutual fund concerned with both climate change and profit might commit to valuing a metric ton of carbon emissions at $100 in its charter. The company would use that valuation as a metric in its assessment of projects, pursuing only those projects that would remain “profitable” after adjusting its forecasted cashflows by subtracting$100 for every ton of additional carbon emitted. A mutual fund would use the valuation when voting on climate-related governance issues or investment decisions. For example, the fund would back a shareholder resolution supporting lower corporate carbon emissions so long as the resolution would not reduce profits by more than $100 per ton of carbon saved. Similarly, the fund might pick stocks for investment based on potential profitability at a carbon price of$100. In effect, companies and investors would bid on their valuation of ESG impacts relative to ordinary profit maximization, sending clear and actionable signals on actual and desired behavior. By providing concrete standards and a sorting mechanism for making sense of competing goals, valuation would help realize the potential of ESG investing

Hidden Value Transfers in Public Utilities

Many electric utilities in the United States own rate regulated and non-rate regulated subsidiaries. The rate regulated subsidiaries enjoy legal monopolies and a right to a return on their capital investments but are only allowed to charge regulatorily authorized rates. The non-rate regulated subsidiaries participate in competitive markets and are generally free to earn whatever profits they can but are subject to the threat of displacement by other enterprises. Many electric utilities in the United States own rate regulated and non-rate regulated subsidiaries. The rate regulated subsidiaries enjoy legal monopolies and a right to a return on their capital investments but are only allowed to charge regulatorily authorized rates. The non-rate regulated subsidiaries participate in competitive markets and are generally free to earn whatever profits they can but are subject to the threat of displacement by other enterprises. This Essay describes some strategies vertically integrated electric utilities use to transfer value from rate regulated affiliates to non-rate regulated affiliates. First, regulated utilities directly subsidize non-regulated affiliates by entering into favorable contracts with affiliates that participate in competitive markets. These contractual value transfers include favorable purchase agreements such as long-term contracts to buy coal at above-market prices and cross-affiliate debt guarantees that allow non-rate regulated affiliates to borrow at a discount. Second, utilities receive regulatory authorization to pass costs incurred by their non-rate regulated affiliates onto captive ratepayers. Examples of regulatorily approved value transfers are fuel adjustment clauses that authorize recovery of fuel costs from captive ratepayers and self-insurance that forces ratepayers to bear wildfire risk and transmission outages (even when insurance requirements are supposed to protect them from those risks). Third, utilities make investment decisions in rate regulated markets that favor their non-rate regulated affiliates. For example, utilities may invest (or refuse to invest) in transmission capacity to protect the market power of their generation assets—not to reduce energy prices, improve grid reliability, or connect to low-carbon energy sources. Utility value transfers thus make the grid less efficient, less reliable, more difficult to supervise, and more resistant to policy instruments that should encourage decarbonization