Theories of Corporate Groups: Corporate Identity Reconceived

Full-text available at SSRN. See link in this record.Theoretical debates about the nature of the corporation have raged for over a century, with competing visions of the corporation holding sway in different regulatory arenas and each making claims for normative supremacy. Yet courts and commentators alike have persistently failed to consider the application of these concepts to corporate groups. Beginning from theories of the firm, this Article extends the standard understandings of corporate personhood to develop alternative theories of corporate group identity. It then illustrates the utility of these approaches in different areas of law and policy through the lens of the Supreme Court’s rulings in Citizens United, decided in January 2010, and Janus Capital Group Inc. v. First Derivative Traders, decided in June 2011, as well as leading appellate cases decided in the past year that examine the issue under international law. Acknowledging the complexity of corporations as organizations and the need for contextualized analysis, this Article then proposes a framework for identifying which theoretical perspective offers the best foundation in different areas of the law where alternative visions of the corporate group may lead courts and legislators to different legal rules and case outcomes

Sustainable Finance & China’s Green Credit Reforms: A Test Case for Bank Monitoring of Environmental Risk

In the past few years, the focus of international organizations on sustainable finance— the integration of environmental, social, and governance (“ESG”) considerations into global financial systems— has intensified because of its potential to promote financial stability, better risk assessment, and more efficient allocation of capital. The success of these efforts depends in part on whether banks and other financial institutions can manage, price, and monitor environmental risk. This Article offers new answers to this question from China— one of the most important global test sites for sustainable finance. Corporate governance theory suggests that creditor monitoring can promote managerial accountability and lower agency costs, a role that is critical in economies like China, Europe, and much of the developing world, where companies depend heavily on bank financing. China’s recent green credit reforms offer an opportunity to re-examine these theories and assess banks’ potential to drive sustainable finance across global capital markets. To examine banks’ monitoring potential, this Article uses data for 2012– 2017 from the annual reports and sustainability reports of the twenty-one Chinese banks that are at the forefront of China’s green finance initiatives, as well as insights from fieldwork conducted in 2016 and 2017. This investigation shows that leading Chinese banks are strengthening their ability to integrate environmental criteria into credit risk assessment in response to regulatory priorities but that barriers to efficient pricing and monitoring of environmental credit risk remain. This Article identifies key lessons from the Chinese context for sustainable finance reform elsewhere

From Public Policy to Materiality: Non-Financial Reporting, Shareholder Engagement, and Rule 14a-8’s Ordinary Business Exception

This article builds upon the author\u27s remarks at the 2018-2019 Lara D. Gass Annual Symposium: Civil Rights and Shareholder Activism at Washington and Lee University School of Law, February 15, 2019. In 2017, shareholder proposals urging corporate boards to report on their climate-related risk made headlines when they earned majority support from investors at ExxonMobil, Occidental Petroleum, and PPL. The key to this historic vote was the support of Blackrock, State Street, and Vanguard, which broke with management and cast their votes behind the proposals. The 2018 proxy season saw several more climate-related proposals earn majority support, and in 2018 and 2019 record numbers of proposals were withdrawn after the companies agreed to respond to shareholders’ requests. The highly visible 2017 proposal illustrates a number of key aspects of shareholder activism today. The first is the mainstreaming of shareholder activism from its origins in the civil rights and socially responsible investment movements to a point where the largest institutional investors are integrating “environmental, social, and governance” (ESG) or “non-financial” factors into their voting and investment policies. Second, the proposal shows how the focus of shareholder activism around ESG matters has broadened beyond the civil rights, labor, and human rights issues that were its major target throughout much of the twentieth century. Climate change risk and corporate environmental impacts are now among the top subjects of shareholder proposals today. Third, as explained below, mainstream investors like Blackrock and Vanguard are supporting ESG-oriented activism for economic reasons, not only or even necessarily because of commitments to a particular ethical or political position. And finally, this proposal is one of many ESG proposals (about 20 percent of all environmental and social proposals in 2018) that seek greater corporate transparency about non-financial risks and impacts, either to better inform investor decision-making or to prompt changes in corporate practice. This Article focuses on the challenge of achieving corporate transparency for investment purposes and considers whether shareholder activism is the best way to achieve it. Many in the business community appear to think so. For example, in 2016, many corporations and law firms offered comments to the Securities and Exchange Commission (SEC) on the question of whether the agency should develop new ESG-related disclosure rules. Nearly all took the position that shareholder engagement and other forms of shareholder activism were the best way to improve ESG disclosure and that the SEC should leave well enough alone

Sustainable Finance & China’s Green Credit Reforms: A Test Case for Bank Monitoring of Environmental Risk

In the past few years, the focus of international organizations on sustainable finance— the integration of environmental, social, and governance (“ESG”) considerations into global financial systems— has intensified because of its potential to promote financial stability, better risk assessment, and more efficient allocation of capital. The success of these efforts depends in part on whether banks and other financial institutions can manage, price, and monitor environmental risk. This Article offers new answers to this question from China— one of the most important global test sites for sustainable finance. Corporate governance theory suggests that creditor monitoring can promote managerial accountability and lower agency costs, a role that is critical in economies like China, Europe, and much of the developing world, where companies depend heavily on bank financing. China’s recent green credit reforms offer an opportunity to re-examine these theories and assess banks’ potential to drive sustainable finance across global capital markets. To examine banks’ monitoring potential, this Article uses data for 2012– 2017 from the annual reports and sustainability reports of the twenty-one Chinese banks that are at the forefront of China’s green finance initiatives, as well as insights from fieldwork conducted in 2016 and 2017. This investigation shows that leading Chinese banks are strengthening their ability to integrate environmental criteria into credit risk assessment in response to regulatory priorities but that barriers to efficient pricing and monitoring of environmental credit risk remain. This Article identifies key lessons from the Chinese context for sustainable finance reform elsewhere

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