Welfare, Dialectic, and Mediation in Corporate Law

Bill Klein extends an idealistic and progressive invitation with the Criteria for Good Laws of Business Association (the Criteria). The structure of our debates, he says, prevents us from joining the issue. The discourse will move forward if we can isolate core components on which we agree and disagree. The invitation, thus directed, is well-constructed. To facilitate engagement, each criterion is set out as pari passu with each other. And there is a good reason for the inclusion of each listed criterion. Each has an established place in public and private law jurisprudence. Each has influenced results, coming forth as salient in one or another area of law, in one or another regulation or case. We can, then, agree in the abstract to take each criterion seriously. Klein bids us then to cull, modify, and restate, so as to identify more clearly the goals we hold out for corporate law. The remainder of this essay takes up that invitation, taking our debates to the Criteria, taking the Criteria to our debates, and taking both to the law itself. It suggests that the criteria on which we can agree lie at a higher level of generality than the Criteria: corporate law makes us all welfare consequentialists who agree that good corporate law is about encouraging productivity. We differ over the means to that end in debates that have over time evolved away from the ideological and toward the functional. Absent an ex ante set of empirically verifiable formulas for productive business organization, we are left to our debates

Executive Compensation in America: Optimal Contracting or Extraction of Rents?

This paper develops an account of the role and significance of rent extraction in executive compensation. Under the optimal contracting view of executive compensation, which has dominated academic research on the subject, pay arrangements are set by a board of directors that aims to maximize shareholder value by designing an optimal principal-agent contract. Under the alternative rent extraction view that we examine, the board does not operate at arm's length; rather, executives have power to influence their own compensation, and they use their power to extract rents. As a result, executives are paid more than is optimal for shareholders and, to camouflage the extraction of rents, executive compensation might be structured sub-optimally. The presence of rent extraction, we argue, is consistent both with the processes that produce compensation schemes and with the market forces and constraints that companies face. Examining the large body of empirical work on executive compensation, we show that the picture emerging from it is largely compatible with the rent extraction view. Indeed, rent extraction, and the desire to camouflage it, can better explain many puzzling features of compensation patterns and practices. We conclude that extraction of rents might well play a significant role in U.S. executive compensation; and that the significant presence of rent extraction should be taken into account in any examination of the practice and regulation of corporate governance.

Internal Controls After Sarbanes-Oxley: Revisiting Corporate Law\u27s Duty of Care as Responsibility for Systems

Revisiting section 3.4.2 of Clark\u27s Corporate Law (\u27Duty of Care as Responsibility for Systems ) reminds us, however, that the internal controls story actually goes back many decades, and that many of the strategic issues that are at the heart of section 404 have long been contentious. My Article will briefly update Clark\u27s account through the late 1980s and 1990s before returning to Sarbanes-Oxley and rulemaking thereunder by the SEC and the newly created Public Company Accounting Oversight Board ( PCAOB ). My main point builds on one of Clark\u27s but digs deeper. Internal controls requirements, whether federal or state, are incoherent unless and until one articulates clearly for whose benefit they exist, and to what end. There are, in fact, a number of competing articulations. The failure to identify a single and coherent rationale creates significant uncertainty, which has been exploited by players in the legal, accounting, consulting, and information technology fields. Companies are probably spending more time and resources on 404 compliance than a reasonable reading of the legislation and the rules necessarily requires, heavily influenced by those who gain from issuer over-compliance. This rent-seeking compromises the political viability and substantive quality of what is at the heart a beneficial statutory reform

The vicious circles of control - regional governments and insiders in privatized Russian enterprises

How can one account for the puzzling behavior of insider-managers who, in stripping assets from the veryfirms they own, appear to be stealing from one pocket to fill the other? The authors suggest that such asset-stripping and failure to restructure are the consequences of interactions between insiders (manager-owners) and regional governments in a particular property rights regime. In this regime, the ability to realize value is limited by uncertainty and illiquidity, so managers have little incentive to increase value. As the central institutions that rule Russia have ceded their powers to the regions, regional governments have imposed various distortions on enterprises to protect local employment. Prospective outsider-investors doubt they can acquire the control rights they need for restructuring firms and doubt they can avoid the distortions regional governments impose on the firms in which they might invest. The result: little restructuring and little new investment. And regional governments, knowing the firms'taxable cash flows will have been reduced through cash flow diversion, have responded by collecting revenues in kind. To disentangle these vicious circles of control, the authors propose a pilot for transforming ownership in insider-dominated firms through a system of simultaneous tax-debt-for-equity conversion and resale through competitive auctions. The objective: to show regional governments, for example, that a more sustainable way to protect employment is to give managers incentives to increase enterprises'value by transferring effective control to investors. The proposed mechanism would provide cash benefits to insiders who agree to sell control to outside investors. The increased cash revenue (rather than in-kind or money surrogates) would enable regional governments to finance safety nets for the unemployed and to promote other regional initiatives.International Terrorism&Counterterrorism,Municipal Financial Management,Banks&Banking Reform,Economic Theory&Research,Payment Systems&Infrastructure,Municipal Financial Management,Economic Theory&Research,National Governance,Environmental Economics&Policies,Banks&Banking Reform

How does ownership structure and manager wealth influence risk? : a look at ownership structure, manager wealth, and risk in commercial banks

Bank managers, stockholders, and directors must work closely together in deciding what risks their bank will assume and how to control the bank's overall risk exposure. Each decision-maker will have to understand the risk preferences of others in order to make mutually acceptable decisions and develop policies that reflect all of their concerns. To the extent that weak risk control is tied to management and ownership structure, bank examiners must also understand the basic components of a sound management and ownership structure if the examiner is to suggest corrective steps for a problem institution. ; This study looks at a sample of Tenth Federal Reserve District banks to investigate the relationship between bank risk, ownership of the bank by managers, and the degree to which managers and owners have their wealth concentrated in their bank stockholdings. Data for 270 randomly selected banks reveal that ownership and wealth diversification of bank owners and managers do influence bank risk. These effects extend not only to the overall risk of the bank, but are also reflected uniquely in asset quality measures, bank leverage, and other parts of a bank's risk exposure. ; Major findings highlight connections between bank risk, ownership structure, and manager wealth. Banks are less risky when bank managers have a higher concentration of wealth in their bank and, thus, have more to lose from taking on additional risk. Possibly seeking to avoid large loan losses that could threaten their employment, hired managers typically operate their banks with lower credit risk than banks with owner managers. Using capital as a buffer against risk, owner-manager banks tend to have higher capitalization than banks with hired managers. Stock ownership by hired managers provides incentives to operate their bank more in line with the risk preferences of owners. Finally, a hired-manager bank will be less risky when a major owner monitoring the bank has much of his or her wealth concentrated in the bank's stock. ; Thus, ownership structure and concentration of wealth in bank equity have a significant influence on bank risk. Understanding how risk preferences depend on ownership and wealth diversification can be valuable information to managers and owners as they grapple with the level and type of risk to take in their banks.Risk ; Banking structure ; Federal Reserve District, 10th

Institutional reform in emerging securities markets

In the long run, sound, efficient securities markets can contribute to economic growth; in the short run, they play an important role in financial liberalization. The author provides a guide to issues involved in institutional and regulatory reform of securities markets - and a discussion of the practical implications of different policy options and sequencing decisions. He argues that establishing sound securities markets requires institutional development that is a substantial task for many developing countries. Prerequisities for the development of securities markets include: (a) a macroeconomic and fiscal environment conducive to the supply of quality securities; (b) a legal, regulatory, and institutional infrastructure that can support efficient operation of the securities market. Essentially such an infrastructure must provide four things: (a) certainty about property rights and contracts; (b) transparent trading and other procedures and public disclosure by companies of all information relevant to the value of their securities; (c) protection against unfair practices by insiders and intermediaries; and (d) protection against the financial failure of intermediaries and market institutions such as clearinghouses. The author also provides examples of the policy conflicts and uncertainties that are routine in securities market reform and development, and suggests approaches to managing them.Financial Intermediation,Environmental Economics&Policies,Insurance&Risk Mitigation,Banks&Banking Reform,Economic Theory&Research

The Social Construction of Sarbanes-Oxley

The closer one looks at SOX and its origins in the financial scandals of the early 2000s, the blurrier the picture, which lets commentators see what they want to see and draw inferences accordingly. That is why social construction is so crucial. My aim in this paper is to illuminate the social nature of SOX\u27s diffusion into practice. I will leave to the reader the judgment about whether this has been or will be good or bad, and for whom. If I seem to challenge SOX\u27s critics more than its supporters, it is because the critics have been more venomous than is fair. Venom aside, the bite still deserves attention