A Primer on Corporate Values

{Excerpt} Advertising strong, positive corporate values is à la mode. Why? In a globalizing world, meaningful values can, for example, instill a sense of identity and purpose in organizations; add spirit to the workplace; align and unify people; promote employee ownership; attract newcomers; create consistency; simplify decision making; energize endeavors; raise efficiency; hearten client trust, loyalty, and forgiveness for mistakes; build resilience to shocks; and contribute to society at large. To note, corporate values do not equate with organizational culture: that describes the attitudes, experiences, beliefs, and values of the organization, acquired through social learning, that control the way individuals and groups in the organization interact with one another and with parties outside it. Corporate values are firstorder operating philosophies or principles, to be acted upon, that guide an organization\u27s internal conduct andits relationship with the external world. (To be clear, corporate values do not drive the business; however, if they are imbedded in business processes—and made credible to skeptics—they inspire the people who deliver the business, with a healthy balance between work and life and between the short term and the long term.) The ultimate glue that bonds the best organizations, they are usually formalized in explicit—often espoused,not just embedded—mission statements, tag lines, and branding material. Important elements are content and context

Team Production & the Multinational Enterprise

Margaret Blair and Lynn Stout’s path-breaking article, A Team Production Theory of Corporate Law, advances a dual thesis: first, that team production theory does a better job than its competitors (in particular, principal–agent theory) of explaining the advantages of the public corporation and key features of corporate law; and second, that, as a matter of corporate law, corporate boards are charged with advancing the collective interest of all the contributors to the corporate enterprise rather than the shareholders’ interests alone. Its central insight is that the role of the independent, or insulated, corporate board is to serve as a “mediating hierarch” among the contributors to firm value. As new crises of corporate accountability over the past decade have been met with policies centered on corporate boards and shifts in the balance of power within the corporation, these propositions have moved beyond the academy and into the center of policy debates on the nature and purpose of corporate law. Given these realities, Blair & Stout’s conclusions raise several interesting questions when applied to the MNE and other complex corporate groups. First, where do team production problems arise within the MNE? Even limiting the scope of the inquiry to corporate entities, does team production theory account for governance rules only of parent corporations, or of subsidiaries as well? Does the answer depend on the functional role of the entity? How does team production theory inform firm governance if there are multiple “mediating hierarchs” within a corporation? Which board(s) within the MNE are “mediating hierarchs”? Although Blair and Stout advanced team production theory as the best explanation of the governance of the publicly held Berle–Means firm, might team production dynamics also dominate in non-Berle–Means firms, such as controlled entities within the MNE, where principal–agent theory might be expected to apply most directly? If the public corporation should instead be viewed as a unitary enterprise, which stakeholders should be viewed as the contributors to the corporate enterprise? This Article looks back at Team Production Theory and considers its implications for the governance of global multinational enterprises (MNEs). It argues that team production problems in fact arise at multiple levels within global firms and that, therefore, team production theory, as well as principal–agent theory, is necessary to explain MNE governance. This Article responds by extending Blair and Stout’s work explicitly to the MNE—a project that necessarily involves multiple dimensions. The first, taken up in Part II below, is to unpack findings from strategic management and organizational theory to better understand the organizational structure of these complex global firms. The second, which is the focus of Part III, is to consider how team production theory applies to organizations that exhibit “multiplex” governance, that is, firms with multidimensional, multijurisdictional, and intersecting governance structures. In these firms, there are multiple, overlapping principal–agent relationships and coordination among them may require the cooperation of multiple mediating hierarchs. This complexity suggests that greater attention should be directed toward the role of subsidiary boards and management. A full treatment of the implications of these findings for corporate law, or for the broader regulation of global firms, is beyond the scope of this paper. However, this Article contributes to that effort by laying a foundation for further research. It concludes by suggesting areas in which legal rules might better reflect these organizational changes in global firms and identifying remaining questions regarding MNE structure. The role of active subsidiary boards within the MNE deserves greater attention from scholars of U.S. corporate law, given the number of U.S. firms that are targeted by foreign acquirers or that are undertaking inversion transactions that introduce a foreign parent corporation but retain operational control in a U.S. subsidiary, not to mention the dominant role that many U.S. subsidiaries play within global MNEs

Team Production & the Multinational Enterprise

Margaret Blair and Lynn Stout’s path-breaking article, A Team Production Theory of Corporate Law, advances a dual thesis: first, that team production theory does a better job than its competitors (in particular, principal–agent theory) of explaining the advantages of the public corporation and key features of corporate law; and second, that, as a matter of corporate law, corporate boards are charged with advancing the collective interest of all the contributors to the corporate enterprise rather than the shareholders’ interests alone. Its central insight is that the role of the independent, or insulated, corporate board is to serve as a “mediating hierarch” among the contributors to firm value. As new crises of corporate accountability over the past decade have been met with policies centered on corporate boards and shifts in the balance of power within the corporation, these propositions have moved beyond the academy and into the center of policy debates on the nature and purpose of corporate law. Given these realities, Blair & Stout’s conclusions raise several interesting questions when applied to the MNE and other complex corporate groups. First, where do team production problems arise within the MNE? Even limiting the scope of the inquiry to corporate entities, does team production theory account for governance rules only of parent corporations, or of subsidiaries as well? Does the answer depend on the functional role of the entity? How does team production theory inform firm governance if there are multiple “mediating hierarchs” within a corporation? Which board(s) within the MNE are “mediating hierarchs”? Although Blair and Stout advanced team production theory as the best explanation of the governance of the publicly held Berle–Means firm, might team production dynamics also dominate in non-Berle–Means firms, such as controlled entities within the MNE, where principal–agent theory might be expected to apply most directly? If the public corporation should instead be viewed as a unitary enterprise, which stakeholders should be viewed as the contributors to the corporate enterprise? This Article looks back at Team Production Theory and considers its implications for the governance of global multinational enterprises (MNEs). It argues that team production problems in fact arise at multiple levels within global firms and that, therefore, team production theory, as well as principal–agent theory, is necessary to explain MNE governance. This Article responds by extending Blair and Stout’s work explicitly to the MNE—a project that necessarily involves multiple dimensions. The first, taken up in Part II below, is to unpack findings from strategic management and organizational theory to better understand the organizational structure of these complex global firms. The second, which is the focus of Part III, is to consider how team production theory applies to organizations that exhibit “multiplex” governance, that is, firms with multidimensional, multijurisdictional, and intersecting governance structures. In these firms, there are multiple, overlapping principal–agent relationships and coordination among them may require the cooperation of multiple mediating hierarchs. This complexity suggests that greater attention should be directed toward the role of subsidiary boards and management. A full treatment of the implications of these findings for corporate law, or for the broader regulation of global firms, is beyond the scope of this paper. However, this Article contributes to that effort by laying a foundation for further research. It concludes by suggesting areas in which legal rules might better reflect these organizational changes in global firms and identifying remaining questions regarding MNE structure. The role of active subsidiary boards within the MNE deserves greater attention from scholars of U.S. corporate law, given the number of U.S. firms that are targeted by foreign acquirers or that are undertaking inversion transactions that introduce a foreign parent corporation but retain operational control in a U.S. subsidiary, not to mention the dominant role that many U.S. subsidiaries play within global MNEs

Shedding Some Light on the Dark Matter of Competition: Insights from the Strategic Management and Organizational Science Literature for the Consideration of Diversity Aspects in Merger Review

A merger between two innovation competitors is often suspected to reduce the variety of heterogeneous entities which are currently undertaking R+D or which are well situated to undertake R+D in a certain field. The consequential reduction of “diversity” can be detrimental to innovation because it reduces the number of independent sources for possible future innovations and might furthermore lead to an alignment of formerly different R+D programs. However, if “diversity” indeed benefits innovative performance, even merged firms should have an incentive to maintain it in-house. Therefore, this article aims to bring to light whether firms can indeed be expected to create or maintain “diversity” post-merger. By focusing on the strategic management and organizational science literature we will demonstrate that the creation/maintenance of independent entities is indeed considered as an important determinant for the innovativeness and general performance of firms. Nevertheless, we will also show that this strategy has several grave implementation problems and might be hampered by certain trade-offs. As a consequence, competition authorities cannot presume that a reduced “inter-firm diversity” will get substituted by an increased “intra-firm diversity” without fail

Extended shareholder liability for systematically important financial institutions

Regulators generally have tried to address the problems posed by the excessive risk-taking of Systemically Important Financial Institutions (SIFIs) by placing restrictions on the activities in which SIFIs engage. However, the complexity of these institutions makes such attempts necessarily imperfect. This Article proposes to address the problem at its very source, which is the incentives that SIFI owners have to push for excessive risk-taking by managers. Building on the traditional rule of “double liability,” we propose to modify the current (general) rule limiting the liability of SIFI shareholders to the amount of their initial investments in such companies. We propose replacing the extant limited liability regime with a new system that imposes additional liability over and above what SIFI shareholders already have invested in a preset amount that varies with a SIFI’s centrality in the financial network. Our liability regime has a number of advantages. First, by increasing shareholder exposure to downside risk, it discourages excessive risk-taking. At the same time, by placing a clearly defined ceiling on shareholders’ total liability exposure, it will not obliterate shareholders’ incentives to invest in the first place. Second, the liability to which shareholders are exposed is carefully tailored to the level of systemic risk that their institution creates. Thus, our rule induces shareholders to account for the negative externality SIFIs can impose without unduly stifling such financial institutions’ role within the financial system and in the wider economy. Third, as the amount of liability is clearly defined ex ante using the rigorous tools of network theory, our rule minimizes the influence of interest groups and the impact of idiosyncratic government decisions

Extended Shareholder Liability for Systematically Important Financial Institutions

Regulators generally have tried to address the problems posed by the excessive risk-taking of Systemically Important Financial Institutions (SIFIs) by placing restrictions on the activities in which SIFIs engage. However, the complexity of these institutions makes such attempts necessarily imperfect. This article proposes to address the problem at its very source, which is the incentives that SIFI owners have to push for excessive risk-taking by managers. Building on the traditional rule of “double liability,” we propose to modify the current (general) rule limiting the liability of SIFI shareholders to the amount of their initial investments in such companies. We propose replacing the extant limited liability regime with a new system that imposes additional liability over and above what SIFI shareholders already have invested in a pre-set amount that varies with a SIFI’s centrality in the financial network. Our liability regime has a number of advantages. First, by increasing shareholder exposure to downside risk, it discourages excessive risk-taking. At the same time, by placing a clearly defined ceiling on shareholders’ total liability exposure, it will not obliterate shareholders’ incentives to invest in the first place. Second, the liability to which shareholders are exposed is carefully tailored to the level of systemic risk that their institution creates. Thus, our rule induces shareholders to account for the negative externality SIFIs can impose without unduly stifling such financial institutions’ role within the financial system and in the wider economy. Third, as the amount of liability is clearly defined ex ante using the rigorous tools of network theory, our rule minimizes the influence of interest groups and the impact of idiosyncratic government decisions. Last, as markets know in advance the amount of liability to which shareholders are exposed, our rule favors the creation of a vibrant insurance and derivative market so that the risk of SIFIs defaults can be allocated to those who can better bear it

Home-Country Effects of Corporate Inversions

This Article develops a framework for the study of the unique effects of corporate inversions (meaning, a change in corporate residence for tax purposes) in the jurisdictions from which corporations invert ( home jurisdictions ). Currently, empirical literature on corporate inversions overstates its policy implications. It is frequently argued that in response to an uncompetitive tax environment, corporations may relocate their headquarters for tax purposes, which, in turn, may result in the loss of positive economic attributes in the home jurisdiction (such as capital expenditures, research and development activity, and high-quality jobs). The association of tax-residence relocation with the dislocation of meaningful economic attributes, however, is not empirically supported and is theoretically tenuous. The Article uses case studies to fill this gap. Based on observed factors, the Article develops grounded propositions that may describe the meaningful effects of inversions in home jurisdictions. The case studies suggest that whether tax-relocation is associated with the dislocation of meaningful economic attributes is a highly contextualized question. It seems, however, that inversions are more likely to be associated with dislocation of meaningful attributes when non-tax factors support the decision to invert. This suggests that policymakers should be able to draft tax-residence rules that exert non-tax costs on corporate locational decisions in order to prevent tax-motivated inversions

Home-Country Effects of Corporate Inversions

This Article develops a framework for the study of the unique effects of corporate inversions (meaning, a change in corporate residence for tax purposes) in the jurisdictions from which corporations invert (“home jurisdictions”). Currently, empirical literature on corporate inversions overstates its policy implications. It is frequently argued that in response to an uncompetitive tax environment, corporations may relocate their headquarters for tax purposes, which, in turn, may result in the loss of positive economic attributes in the home jurisdiction (such as capital expenditures, research and development activity, and high-quality jobs). The association of tax-residence relocation with the dislocation of meaningful economic attributes, however, is not empirically supported and is theoretically tenuous. The Article uses case studies to fill this gap. Based on observed factors, the Article develops grounded propositions that may describe the meaningful effects of inversions in home jurisdictions. The case studies suggest that whether tax-relocation is associated with the dislocation of meaningful economic attributes is a highly contextualized question. It seems, however, that inversions are more likely to be associated with dislocation of meaningful attributes when non-tax factors support the decision to invert. This suggests that policymakers should be able to draft tax-residence rules that exert non-tax costs on corporate locational decisions in order to prevent tax-motivated inversions