Dark Side of Shareholder Influence: Managerial Autonomy and Stakeholder Orientation in Comparative Corporate Governance

This article proposes a new, functional explanation of the different roles of non-shareholder groups (particularly labor) in different corporate governance systems. The argument depends on the analysis of a factor that has so far received relatively little attention in corporate governance research: the level of shareholder influence on managerial decision making. Pro-employee laws mitigate holdup problems- opportunism from which shareholders benefit ex post, but which will deter firm-specific investment in human capital ex ante. Since holdup takes place within what is considered legitimate managerial business judgment and all shareholders (both majority and minority) are its financial beneficiaries, the degree of managerial autonomy from shareholders is an important factor. In the United States, proponents of a stakeholder view of corporate law have argued that the insulation that U.S. boards of directors have from shareholders mitigates the risk of holdup of non shareholder constituencies by shareholders, thus encouraging firm-specific investment such as investment in human capital. However, the large degree of autonomy of U.S. boards is unusual. This autonomy is eliminated, for example, by concentrated ownership, which prevails in Continental Europe. This article therefore suggests that, given their costs, laws aiming at the protection of stakeholders-such as codetermination and restrictive employment laws-may be normatively more desirable in the presence of stronger shareholder influence, particularly under concentrated ownership. The theory is corroborated by the observation that such laws tend to be more strongly developed in corporate governance systems with stronger shareholder influence. The United Kingdom, which has both stronger shareholder influence and stronger employment law than the United States, is classified as an intermediate case

Lift Not the Painted Veil! To Whom Are Directors’ Duties Really Owed?

In this article, we identify a fundamental contradiction in the law of fiduciary duty of corporate directors across jurisdictions, namely the tension between the uniformity of directors’ duties and the heterogeneity of directors themselves. American scholars tend to think of the board as a group of individuals elected by shareholders, even though it is widely acknowledged (and criticized) that the board is often a largely self-perpetuating body whose inside members dominate the selection of their future colleagues and eventual successors. However, this characterization is far from universally true internationally, and it tends to be increasingly less true even in the United States. Directors are often formally or informally selected by specific shareholders (such as a venture capitalist or an important shareholder) or other stakeholders of the corporation (such as creditors or employees), or they are elected to represent specific types of shareholders (e.g. minority investors). The law thus sometimes facilitates the nomination of what has been called “constituency” directors. Once in office, legal rules tend nevertheless to treat directors as a homogeneous group that is expected to pursue a uniform goal. We explore this tension and suggest that it almost seems to rise to the level of hypocrisy: Why do some jurisdictions require employee representatives that are then seemingly not allowed to strongly advocate employee interests? Why can a director representing a specific shareholder not advance this shareholder’s interests on the board? Behavioral research indicates that directors are likely beholden to those who appointed them and will seek to pursue their interests in order to maintain their position in office. We argue that for many decision-making processes, it does not matter all that much what specific interest directors are expected to pursue by the law, given that across jurisdictions, enforcement of the corporate purpose is highly curtailed

Whose Trojan Horse? The Dynamics of Resistance Against IFRS

The introduction of International Financial Reporting Standards (“IFRS”) has been debated in the United States since at least the accounting scandals of the early 2000s. While publicly traded firms around the world are increasingly switching to IFRS, often because they are required to do so by law or by their stock exchange, the Securities Exchange Com-mission (“SEC”) seems to have become more reticent in recent years. Only foreign issuers have been permitted to use IFRS in the United States since 2007. By contrast, the EU has mandated the use of IFRS in the consolidated financial statements of publicly traded firms since 2005. In the United States, IFRS, which are promulgated by the London-based Inter-national Accounting Standards Board (“IASB”), are often seen as an at-tempt by Europeans to colonize U.S. accounting standard setting, and as an element of a foreign legal system alien to U.S. capital markets and securities law. In this article, we suggest that this perception is actually a myth, which we attempt to debunk. In fact, the introduction of IFRS in Europe, particularly Continental Europe, was far from controversial. IFRS were promoted by Anglo-Saxon jurisdictions and strongly support-ed by the United States, particularly when capital markets internationalized in the 1990s. They were—and still are—in many ways at odds with the Continental European accounting cultures of countries such as France and Germany, on whose examples we draw. In spite of the EU mandate for publicly traded firms, accounting law in these jurisdictions has still not fully absorbed IFRS; nevertheless, for now a solution that reconciles traditional and international accounting has been found. In this article, we explore the problems and resistance of IFRS in Continental Europe and seek to draw lessons for the United States. We argue that given the shared heritage of U.S. Generally Accepted Accounting Principles (“GAAP”) and IFRS as investor-oriented accounting standards, their introduction in the United States should be considerably easier than it was on the other side of the Atlantic

The Transatlantic Divergence in Legal Thought: American Law and Economics vs. German Doctrinalism, The

Law and economics has become an integral part of U.S. legal scholarship and the law school curriculum. Ever since the legal realist movement, scholars mostly view the law from an external perspective. It may be surprising to many in the United States that European legal scholarship has been largely resistant to this development. Law is typically viewed from the inside, that is as an autonomous discipline independent from the other social sciences. Most legal scholarship is doctrinal, meaning that legal scholars employ interpretative methods in order to systematically expose the law and to find out what the law is, frequently even before it is tackled by a court. U.S.-style legal scholarship is often considered very alien, and law and economics in particular often meets outright rejection. In this paper, we attempt to explain this divergence in the academic legal discourse using the reception of law and economics in legal scholarship in German-speaking countries as a case in point. However, we suspect that our approach can be generalized to other parts of Europe because of common roots and similar historical factors that can be identified in many parts of Europe. We propose a two-pronged explanation for why law and economics play an insignificant role in German-speaking countries while the United States has become a stronghold for it. We proceed as follows: Section II describes the rejection of the economic analysis of law in German-speaking countries and gives an overview on explanations that we found in the existing literature. Section III outlines our own hypothesis. Section IV traces the development in the United States, based on the existing literature. It starts with the classical legal thought of the late 19th century and subsequently surveys legal realism and the early development of law and economics since the 1960s. Section V describes the development of legal theory in German-speaking countries. As both legal realism and the Free Law School have pointed out, a doctrinal approach to law is equally prone to exploitation to achieve certain political ends. The current state of the discussion on legal philosophy is relevant to us insofar as it influences the ordinary legal discourse, in particular the predominant forms of legal scholarship. Section VI summarizes the above discussion

Subordination of Shareholder Loans from a Legal and Economic Perspective

Gesellschafterdarlehen, Volkswirtschaft, Recht, Bewertung, Shareholder loan, Economy, Law, Evaluation