The ESG Information System

The mounting focus on ESG has forced internal corporate decision-making into the spotlight. Investors are eager to support companies in innovative “green” technologies and scrutinize companies’ transition plans. Activists are targeting boards whose decisions appear too timid or insufficiently explained. Consumers and employees are incorporating companies sustainability credentials in their purchasing and employment decisions. These actors are asking companies for better information, higher quality reports, and granular data. In response, companies are producing lengthy sustainability reports, adopting ambitious purpose statements, and touting their sustainability credentials. Understandably, concerns about greenwashing and accountability abound, and policymakers are preparing for action. In this Essay, we show how the ESG information system modeled itself after the key corporate governance innovations of the last fifty years. We start with the introduction of the monitoring board in the 1970s, which paved the way for the rise of independent directors in overseeing company activity, providing a counterweight to management, and increasing responsiveness to investor concerns. We argue that ESG’s insistence on board oversight, diversity, and expertise reflects a similar intuition that board members with special expertise can have valuable contributions to decision-making.19 We then turn to the next wave of corporate governance reform, formalized in the Sarbanes-Oxley Act of 2002 (SOX), which made practices already common in the market mandatory and introduced others. With its emphasis on disclosure accuracy, SOX served as the prime archetype for the ESG information system. The global effort to standardize ESG echoes SOX’s emphasis on standardization, either through market-led initiatives like the Sustainability Accounting Standards Board (SASB) or through government-supported bodies. Similarly, SOX’s reliance on auditor certifications of internal controls a measure heavily criticized by many as overly costly is reproduced through market demands and regulatory mandates for assurance. Finally, the buildup of sustainability departments emulates SOX’s efforts to boost the independence of internal controls. Finally, by examining ESG disclosure in practice, we show that it offers managers and directors vital information about the social impact of their decisions. This perspective sheds light on the ESG disclosure debate, highlighting it as a logical evolution of (rather than a threat to) traditional corporate governance systems that enhance information flow to managers and the board

The SEC and the Financial Industry: Evidence from Enforcement Against Broker-Dealers

The Securities and Exchange Commission plays a central part in the U.S. regulatory framework for the supervision of the _financial industry. How has the SEC carried out this mission? Despite recurrent crises, systematic studies of SEC performance data are surprisingly scarce. As the SEC reforms itself to address the shortcomings revealed in 2007-2008, a systematic examination of the agency's past record can help identify priorities and evaluate the agency's renewed efforts. This study takes a first step in studying empirically SEC enforcement against investment banks and brokerage houses, examining the agency's record in the period right before the 2007-2008 crisis. This data suggests that defendants associated with big.firms fared better in SEC enforcement actions as compared to defendants associated with smaller firms in three important dimensions. First, SEC actions against big.firms were more likely to involve corporate liability exclusively, with no individuals subject to any regulatory action. Second, big-firm defendants were more likely to end up in administrative rather than court proceedings, controlling for types of violation and levels of harm to investors. Third, within administrative proceedings, big-firm employees were likely to receive lower sanctions, notably temporary or permanent bars from the industry. These patterns have important implications for major debates concerning corporate liability, regulatory capture, and the public and private enforcement of securities laws.</p

The Politics of Competition in International Financial Regulation

Policy coordination between diverse regulatory regimes in financial services ranks highly on the international political agenda because regulatory differences create impediments to growing financial activity. Efficiency-oriented theories fail to explain why coordination was achieved in some domains but not in others, while arguments linking coordination to similarities or differences in states' substantive policy goals cannot account for coordination progress in spite of vast differences in prior domestic regimes. This Article posits that coordination success or failure depends on the interaction of two variables: whether strong competitors to U.S. firms and markets challenge U.S. dominance and whether activity is centralized at a main facility in a single jurisdiction, such as a stock exchange, or diffused around many separate jurisdictions. Strong U.S. dominance attracts more foreigners to U.S. centralized markets who voluntarily adopt U.S. laws and lobby their governments for policy coordination, yet in dispersed markets, policy coordination offers limited benefits to either the United States or to foreign countries when U.S. dominance is strong. When a competitor challenges U.S. dominance in a centralized market, U.S. policymakers will maintain regulatory barriers to prevent U.S. investors from migrating to competitors. In dispersed markets, on the other hand, the United States will promote policy coordination because it can eliminate its competitors' advantages across all national markets. This Article provides four case studies in areas with varying degrees of U.S. dominance and market centralization to support this theoretical framework. Overall, the Article makes two contributions: it generalizes across cases to draw broad conclusions about the field of finance as a whole, and it highlights the role of politics in financial regulation, refining the concept of power, clarifying mechanisms, and providing a theory of how increased competition might shape diverse fields for regulation. Adapted from the source document.</p

Unintended Agency Problems: How International Bureaucracies are Built and Empowered

The ground underneath the entire liberal international order is rapidly shifting. Institutions as diverse as the European Union, International Monetary Fund, United Nations, and World Trade Organization are under major threat. These institutions reflect decades of political investments in a world order where institutionalized cooperation was considered an essential cornerstone for peace and prosperity. Going beyond the politics of the day, this Article argues that the seeds of today’s discontent with the international order were in fact sown back when these institutions were first created. We show how states initially design international institutions with features that later haunt them in unexpected ways. In the worst cases, states become so dissatisfied with the institutions they build that they threaten to abandon or dissolve them, shaking the foundations of the international order. Our central argument is that two cooperation problems intersect in unanticipated ways. The first problem – the horizontal conflict – involves the distribution of benefits among states. When states first create an international organization, they seek to capture a big share of the benefits and protect their interests vis-à-vis other states. They do this by demanding voting rules that allow them to block unfavorable decisions, requiring leadership positions for their own nationals, and lobbying to include their priority issues on the organization’s agenda. We argue that this initial effort to resolve distributional conflicts is short-sighted, ultimately leaving states dissatisfied with the international organizations they build. The second problem – the vertical conflict among states collectively, on the one hand, and international organization bureaucracies and tribunals, on the other – is worsened by the compromises reached to resolve the horizontal conflict. For example, when states agree that key decisions must be reached by consensus, it becomes difficult to roll back the actions of a wayward secretariat or tribunal down the line. Or, when states place their own nationals in key positions, a multi-national body with an international agenda emerges. Such an international organization can become detached from the national concerns of its creators. Moreover, when states put their key issues on the organization’s agenda, a broad mandate results. In turn, a broad mandate empowers the organization’s staff to set its own priorities, making state control difficult. Contrary to prior isolated studies on horizontal and vertical conflicts, we are the first to identify how the two conflicts intersect in important and unexpected ways. To find possible solutions, we draw on analogous intersections in corporate law literature, which have been examined more thoroughly

From Independence to Politics in Financial Regulation

Independent agencies have long dominated the institutional structure of financial regulation. But after the 2007-08 crisis, this Article argues, the independent agency paradigm is under attack. To monitor financial institutions more thoroughly and address future failures more effectively, the U.S. and other industrialized nations redesigned the framework of financial regulation. Post-2008 laws allocate new powers not to independent bureaucrats, but to elected politicians and their direct appointees.To document this global paradigm shift, the Article examines the laws of fifteen key jurisdictions for international banking: the U.S., the U.K., France, Germany, Japan, Spain, Switzerland, Belgium, Ireland, Italy, Denmark, Canada, Australia, Mexico, and South Korea. This analysis points to a marked increase in the influence of elected politicians over banking. Politicians' new powers extend not only over emergencies, but also over financial institutions' regular operations. Politicians are now at the helm of innovative institutional arrangements, typically in the form of regulatory councils that encompass pre-existing independent agencies. In these councils, supermajority requirements and veto rights designate politicians as the ultimate decision-makers.The Article shows how this paradigm shift resulted from the interplay of factors unique to the 2008 crisis and long run trends. The collapse of institutions in diverse areas of financial activity, including investment banks, insurance companies, and thrifts, created a sense that independent regulators as a class had failed. Concerns about regulatory capture, combined with disillusionment with the markets' potential to self-correct, further undermined confidence in past paradigms. Developments in financial markets attracted great interest from ordinary Americans, who over the last two decades have increasingly relied on the financial system for their pension savings, housing credit, and other investments. Politicians could not remain as distant from financial regulation as in the past.From a normative standpoint, politicians' greater involvement in financial regulation is in line with calls for enhanced presidential control over independent agencies. Scholars have argued that the President's stamp of approval will increase accountability and boost the legitimacy of hard choices, such as bank bailouts. However, greater political involvement might endanger financial stability, this Article argues. Electoral strategizing can influence politicians' bailout choices, as incumbents might be particularly sensitive to upheavals as elections approach. Politicians are also under pressure from groups at ideological extremes, which often express a deep distrust to the financial system. In this climate, financial institutions are likely to lobby politicians more intensely. Thus, the risk of a financial catastrophe may now hinge upon considerations that have little to do with the health of the financial system.</p