From Corporate Law to Corporate Governance

In the 1960s and 1970s, corporate law and finance scholars gave up on their traditional approaches. Corporate law had become “towering skyscrapers of rusted girders, internally welded together and containing nothing but wind.” In finance, the theory of the firm was recognized as an “empty box.” This essay tracks how corporate law was reborn as corporate governance through three examples of how we have usefully complicated the inquiry into corporate behavior. Part I frames the first complication, defining governance broadly as the company’s operating system, a braided framework of legal and non-legal elements. Part II adds a second complication by making the inquiry dynamic: corporate governance as a path dependent process that co-evolves with the elements of the broader capitalist regime. Part III considers unsuccessful efforts to simplify rather than complicate corporate governance analysis through static single factor models: stakeholder, team production, director primacy, and shareholder primacy. Part IV concludes by highlighting the tradeoff between a governance system’s capacity to adapt to change and its ability to support long-term investment.

THIS spring the Supreme Court rejected a claim that the anti-fraud provisions of the Securities Exchange Act' impose a general fiduciary duty on those who control a corporation to act fairly toward minority interests.2 This decision, rejecting attempts to expand federal authority over internal corporate affairs through interpretation and thereby limiting the federal role to preventing fraud in securities transactions, may well increase the demands for major federal regulatory legislation governing the shareholdercorporation relationship. It is almost universally the opinion of academic commentators that state corporation codes do not impose sufficiently stringent controls on corporate management and are lax in protecting shareholders. Only federal intervention, it is said, can correct this sorry situation. This article will test the intellectual underpinnings of the conventional wisdom and of the rather venerable proposals calling for the federal regulation of the governance of corporations3 against an economic theory of corporate function and control. It will conclude both that state corporate legal systems are

Although the question of whether international corporate governance is converging on the U.S. model remains contested, there is general agreement as to the nature of that U.S. model. Specifically, virtually all participants in the convergence debate assume that U.S. corporate law is based on a norm of shareholder primacy. This assumption is wrong. U.S. corporate law is far more accurately described as a system of director primacy than one of shareholder primacy. In this essay, the author argues that the comparative corporate governance literature's erroneous understanding of the U.S. model distorts both the positive and normative aspects of the convergence debate. On the positive side, if we use the extent of shareholder primacy as our metric, we end up with a distorted estimate of the extent to which systems have converged. On the normative side, corporate governance is a potentially important instrument by which to increase the economy's efficiency. In recent years, elite U.S. corporate law scholars have played a significant role in reforming the corporate laws of transition economies. If the goal is to export the U.S. model, on the assumption of its superiority, we do those economies no good - and may do much harm - by exporting the wrong model. Hence, we are constrained to examine the normative question: Does it matter? Is director primacy superior to shareholder primacy? This essay acknowledges that investor participation in corporate governance has economic benefits, but argues that director primacy is preferable on balance.

Artificial Intelligence (‘AI’) and distributed ledger technology (‘DLT’) are referred to as the new ‘Corporate Technologies’ or ‘CorpTech’ (Enriques and Zetzsche, 2019), currently watched in terms of their potential for change. Specifically, we are watching for the extent to which the organisation, structures and processes, and institutions of economic life, especially those under the aegises of corporations, would shift in response to the advent of AI and DLT. We also need to consider if such shifts warrant responses from the law. We discuss AI and DLT as different domains of technological advancements but they also interface at certain points. The different treatment we give to AI and DLT is essential as their impact on change is different. However, as we will engage in theoretical treatment of how technological change impacts institutions and corporate law more generally, we refer to ‘CorpTech’ as an umbrella term where relevant. We make two distinct but interrelated contributions to the literature on CorpTech. First, we advance an analytic framework, which we term as ‘incremental/facilitative’, ‘radical/disruptive’ and ‘fundamental/structural’, to promote a nuanced understanding of the development of AI and DLT and their effects on business processes, organisation and management, particularly on corporate governance. Second, we develop a theory of how CorpTech will shape corporate law and governance by examining the drivers for institutional change combined with the drivers for corporate law and governance. We argue that CorpTech is unlikely to radically alter the power structures and incentive mechanisms of shareholders, directors and managers, and hence, any fundamental/structural changes to corporate governance is not likely in the near future. After providing a critical overview of AI and DLT and their effect on business practices and corporate governance through this three-level framework, our second contribution is to demonstrate that the major power groups influencing corporate law and governance norms are likely to mobilize old ideology with technological spins in order to achieve incremental institutional changes aligned with their incentives and interests. We suggest it would be unlikely that institutional change would be achieved to facilitate radical/disruptive or fundamental/structural changes to the extent that it denudes extant power structures of their power. To make this argument, we first explore the key theoretical drivers of institutional change. Subsequently, we explain how these drivers are connected to the theoretical drivers for changes in corporate law and governance, specifically the role of shareholders and directors/managers within the context of different economic systems and ownership structures. Finally, we apply this combined theoretical framework to the three-level framework of technological change we discussed. We predict that directors and shareholders will embrace incremental/facilitative AI and DLT to render the board and general meeting decision-making process more efficient and effective. AI is, however, unlikely to fully replace directors or managers, let alone companies, in the foreseeable future. Thus, the idea of self-driving companies is unlikely to become a mainstream economic phenomenon. We are also doubtful that DLT will result in full disinter-mediation as powerful corporate organs will prefer to manage and subsume its use to be compatible with their incentives and preferences.

Contents: Introduction P.M. Vasudev and Susan Watson PART I: THE 'GREAT DEBATE' 1. New Thinking on 'Shareholder Primacy' Lynn A. Stout 2. Shareholder Primacy in Corporate Law - A Response to Professor Stout Peter Watts 3. Derivation of Powers of Boards of Directors in UK Companies Susan Watson 4. Enlightened Shareholder Value, Social Responsibility and the Redefinition of Corporate Purpose Without Law David Millon 5. Re-evaluating the Basis of Corporate Governance in the Post, Post-Enron Era Leonard I. Rotman 6. Corporate Stakeholders in New Zealand - The Present, and Possibilities for the Future P.M. Vasudev 7. Institutional Investors as Blockholders Aviv Pichhadze PART II: PRIVATE REMEDY IN CORPORATE LAW AND ITS LIMITS 8. The Role of Corporate Law in Preventing a Financial Crisis - Reflections on In Re Citigroup Inc Shareholder Derivative Litigation Franklin A. Gevurtz PART III: CORPORATE GOVERNANCE AND GLOBALIZATION 9. How Public Regulation Changes Corporate Governance Practice - Corporate Board Reform in Taiwan Yu-Hsin Lin 10. Corporate Law Reform and Corporate Governance in Malaysia - Responses to Globalization Aishah Bidin PART IV: CORPORATE ETHICS AND RESPONSIBILITY 11. Public Regulatory Encouragement to the Adoption of Private Ordering Systems to Achieve Environmental Protection through Sustainable Commerce Peter A. Appel and T. Rick Irvin 12. Codes of Ethics and Corporate Governance - A Study of New Zealand Listed Companies Trish Keeper Index

Contents: Acknowledgements Introduction Jeremy Moon, Marc Orlitzky and Glen Whelan PART I THE EMERGENCE OF ETHICAL CORPORATE GOVERNANCE CONCERNS 1. J. Maurice Clark (1916), 'The Changing Basis of Economic Responsibility' 2. E. Merrick Dodd, Jr. (1932), 'For Whom are Corporate Managers Trustees?' 3. A.A. Berle, Jr., (1932), 'For Whom Corporate Managers Are Trustees: A Note' 4. Joseph L. Weiner (1964), 'The Berle-Dodd Dialogue on the Concept of the Corporation' PART II THE MANAGERIAL REVOLUTION 5. Adolf A. Berle (1965), 'The Impact of the Corporation on Classical Economic Theory' 6. Eugene F. Fama and Michael C. Jensen (1983), 'Separation of Ownership and Control' 7. James H. Davis, F. David Schoorman and Lex Donaldson (1997), 'Toward a Stewardship Theory of Management' PART III SHAREHOLDERS, STAKEHOLDERS AND MANAGERIAL DUTIES 8. William M. Evan and R. Edward Freeman (1988), 'A Stakeholder Theory of the Modern Corporation: Kantian Capitalism' 9. John Hendry (2001), 'Missing the Target: Normative Stakeholder Theory and the Corporate Governance Debate' 10. Ian Maitland (2001), 'Distributive Justice in Firms: Do the Rules of Corporate Governance Matter?' 11. Alexei M. Marcoux (2003), 'A Fiduciary Argument Against Stakeholder Theory' 12. Richard Marens and Andrew Wicks (1999), 'Getting Real: Stakeholder Theory, Managerial Practice, and the General Irrelevance of Fiduciary Duties Owed to Shareholders' 13. David Lea (2004), 'The Imperfect Nature of Corporate Responsibilities to Stakeholders' PART IV COMPARATIVE AND GLOBAL PERSPECTIVES 14. Ruth V. Aguilera and Gregory Jackson (2003), 'The Cross-National Diversity of Corporate Governance: Dimensions and Determinants' 15. Lori Verstegen Ryan (2005), 'Corporate Governance and Business Ethics in North America: The State of the Art' 16. Josef Wieland (2005), 'Corporate Governance, Values Management, and Standards: A European Perspective' 17. Martin Rhodes and Bastiaan van Apeldoorn (1998), 'Capital Unbound? The Transformation of European Corporate Governance' 18. David Kimber and Phillip Lipton (2005), 'Corporate Governance and Business Ethics in the Asia-Pacific Region' 19. G.J. Rossouw (2005), 'Business Ethics and Corporate Governance in Africa' 20. Mauro F. Guillen and Mary A. O'Sullivan (2004), 'The Changing International Corporate Governance Landscape' PART V ALTERNATIVE PERSPECTIVES AND NEW DIRECTIONS 21. Gerald F. Davis (2005), 'New Directions in Corporate Governance' 22. Matthias Benz and Bruno S. Frey (2007), 'Corporate Governance: What Can We Learn from Public Governance?' 23. Thomas Clarke (2007), 'The Materiality of Sustainability: Corporate Social and Environmental Responsibility as Instruments of Strategic Change?' 24. John Roberts (2001), 'Corporate Governance and the Ethics of Narcissus' 25. Amiram Gill (2008), 'Corporate Governance as Social Responsibility: A Research Agenda' 26. David Antony Detomasi (2007), 'The Multinational Corporation and Global Governance: Modelling Global Public Policy Networks' Name Index

Corporate Governance Regimes addresses corporate law’s leading question: whether one or another corporate law regime possesses relative competitive advantage. To this end, the editors have brought together an international team of scholars in economics and law to critically assess the new theories of ownership and control which seek to explain the important efficiency advantages of dispersed ownership and the inevitable limitations of control-oriented systems of governance. Contributors describe and analyse the relative strength of the forces that shape the evolution of corporate law rules and practice. They also raise the issue of whether nations undertaking reforms should develop corporate governance policies that borrow from other systems’ best practices, or pursue a course of internally designed corporate governance reforms. And, building on new theories of law and finance, they examine the incentives for introducing meaningful corporate governance reforms that disrupt or destabilize Europe’s blockholding regimes. The collection is divided into seven parts. Part One provides not only a means for assessing the key features of market- and control-based systems of governance but a standpoint for determining whether national governance systems are likely to converge on a single, optimal system of governance. Part Two introduces the reader to the building blocks of European corporate governance and the securities law harmonization program. Part Three examines the complex ownership and control structures that are found in Western Europe, investigating the consequences of large shareholdings for minority investors. Part Four offers law and finance analyses of the relationship between legal and financial systems and corporate performance. Part Five looks at the economic perspective on the operation of the market for corporate control and the key legal rules and institutions of the bankruptcy and insolvency regimes in the USA and Britain. Part Six is devoted to exploring the economic effect of institutional shareholder participation in corporate governance in the USA, Britain, and continental Europe. The final section, Part Seven, evaluates empirically the executive compensation arrangements in the USA, Britain, and continental Europe. The contributions supply a pool of current research on the motivational effect of performance-related remuneration and the substantial increase in top executive remuneration in the USA.

European corporate law and corporate governance are moving ahead beyond expectation. Some British voices called this “a renaissance in the past decade”. In December 2012, the European Commission came forward with an Action Plan that combines both corporate law and corporate governance rules and contains sixteen disparate initiatives partly to be implemented through Directives, partly through non-legal measures. Meanwhile a fight on the Draft Shareholder Rights Directive is going on in the European Council and the Parliament, with major compromises pending in 2015. Further corporate law harmonization measures are under way, in particular the proposal of Single-Member Private Limited Companies. The European Court of Justice’s case law has a far-reaching impact on the free movement of corporations in the European Union, but is not able to singlehandedly create European corporate law with decisions based on the freedoms of the Treaty. On this background the article analyzes seven critical areas of European Corporate Law and Governance as of 2015: Empowering shareholders and institutional investors; controlling shareholders, groups of companies and related party transactions; new European corporate forms; corporate and bank governance; free transfer of seat without new incorporation; corporate finance and capital maintenance and European takeover law reform. The article ends with looking into the goals, methods and scope of European corporate law-making. Free mobility and minimum protection have to be balanced. Transparency as a method of regulation strengthens private autonomy and supports market forces. Harmonization must be limited to the core areas of corporate law, and national and European corporate law will need to complement one another. It remains to be seen whether the codification plans of the Commission and the private model law initiatives will produce convincing results. In sum any step to more European law in the before-mentioned core areas should not only be left to the forces or deadlocks of political compromise, but in order to be really useful will need to be addressed in a careful, ongoing, policy-oriented, economic and comparative law discussion.

There has been much debate for many years as to what should be the objective of the large public company. This issue is important for a number of reasons, not least of which is that the theory nominated will underpin corporate governance and dictate to a large extent the kind of corporate governance system that will exist. As far as the objective of the company is concerned, two theories have been dominant. They are the shareholder primacy and stakeholder theories. The former is said to be operative in what can be called “Anglo-American jurisdictions.” Notwithstanding the fact that it has been regularly said that the US and the UK and other Anglo-American jurisdictions embrace shareholder primacy, there are many who feel that, due to a number of factors (mentioned in the paper), some of these jurisdictions are moving towards more of a stakeholder approach to corporate governance. After setting out what stakeholder theory stands for, this paper analyses whether stakeholder theory should overtake shareholder primacy as the leading theory in Anglo-American jurisdictions. Specifically, the paper examines the arguments propounded in support of stakeholder theory and evaluates the strength of these arguments with the aim of determining if there is sufficient justification for the theory to be wholeheartedly embraced in Anglo-American jurisdictions. The two major parts of the paper involve, first, an examination of the rationale given for the theory’s existence as well as the leading arguments that are put forward for it being embraced by all companies. The second part identifies and analyses some of the concerns raised about the theory and the primary points that are directed against the theory. The paper concludes that while the stakeholder theory is attractive in a number of ways, it is lacking in many respects, and it cannot be justified as a theory of the objective of large corporations.

This handbook offers a comparative and functional overview of corporate law and governance. It examines the shift from corporate law to corporate governance — from a largely legal emphasis to one that focuses on the corporation’s inputs, outputs and how they are managed and, ultimately, the ways in which governance interacts with other institutional elements that comprise a capitalist system. It also discusses the conventional goals and mechanisms of corporate governance, along with their limitations when applied to banks; the roles and functions of the board of directors, how boards fail, and the reforms that have been tried to improve their performance; how mergers and acquisitions are regulated; and the functions of corporate accounting and financial reporting worldwide. Other chapters deal with the ‘corporate law’ issues involved in the regulation of takeovers; the relationship between corporate governance and employment relations; fundamental issues of corporate insolvency law; legal and policy issues relating to transactions between a corporation and one of its ‘related parties’; current trends in the regulation and practice of executive remuneration; corporate governance in closely held corporations; and economic benefits and costs of external and internal asset partitioning in corporations.

In the paper, I argue that in the 1990's Anglo-American corporate governance became the dominant model for large, public firms in the international business world. Corporate governance professionals relentlessly promoted and exported Anglo-American corporate governance throughout the developed and developing world. I contend that it is an appropriate time to examine critically the advocacy of Anglo-American corporate governance. An important part of the critical assessment is to explain the momentum of the dominant model: to understand why Anglo-American corporate governance appeared so persuasive and inevitable, and why other models were less compelling and pushed to the margins of the debate. I argue that corporate governance advocates used psychological factors both to create this momentum, and thus the one-sidedness of corporate governance debates, in many countries and to persuade policy-makers abroad to use Anglo-American corporate governance as a model to transform their governance systems. I base my argument upon a study of French corporate governance, which I selected because I had previously written about this governance system and had myself participated in governance advocacy in France in the 1990's. After briefly presenting the orientation of behavioral law and economics that inspired the study and the major psychological factors identified by psychological research I next present the study. In it, I examine public texts, French and non-French, influential in recent French corporate governance debates and either representative of or strongly influenced by Anglo-American corporate governance advocacy, to see how corporate governance advocates used psychological factors in them to make a psychologically persuasive case for the Anglo-American model. I then present the results of the study. I highlight, by both a table and a general description, the major differences between the French and non-French texts in the use of the psychological factors, and examine examples of the factors in each of the texts. I draw several conclusions from the study. The study implies that psychologically powerful advocacy altered the French governance debates by pushing finance and governance alternatives into the background and did not necessarily promote a corporate finance and governance solution that would be both acceptable in and appropriate for France. The study also suggests that there is a need for policy-makers to develop a more rational way of debating about corporate finance and governance, in light of this pervasive use of the psychological factors by governance advocates. After offering a few general guidelines on how to achieve this goal, I argue that, because its development will take time, culture and politics give policy-makers a mental framework that blunts the immediate effects of the psychological factors and that guarantees for them and others a space for debate on governance changes. I then briefly examine a recent French law dealing with corporate governance and contend that it shows both the success of Anglo-American corporate governance advocates (based on their use of the psychological factors) and the cultural and political resistance to them by French policy-makers.

The spate of corporate governance scandals in the USA, Asia and Europe during the late 1990s has renewed interest in the role of corporations in society. International organizations such as the World Bank and OECD have come to recognize that corporate law plays an important role in economic development and GDP growth. In this research review Jonathan Macey presents the key papers that have influenced the development of corporate law scholarship.

Chinese Characteristics Compared: A Legal and Policy Perspective of Corporate Finance and Governance in Taiwan and China

This chapter discusses the various sources of company law and corporate governance. The main sources of company law are legislation, case law, the constitution of the company, contract, European Union law, and human rights law. Legislation is the principal form of UK company law, with the Companies Act 2006 being the most important piece of company law legislation. However, companies are, to a degree, permitted to create their own internal rules through their constitution. Companies can also create their own law by drafting their own standard terms for use in contracts. Meanwhile, corporate governance best practice principles are found in a series of reports and codes, with the three principal codes being the UK Corporate Governance Code, the Wates Corporate Governance Principles, and the UK Stewardship Code 2020. Both of the codes operate on a comply-or-explain basis, under which certain persons must comply with the code or explain their reasons for non-compliance.

The worldwide financial crisis that was unleashed in 2007-2008 occurred at a time of many challenges in the transformation of the economic and social system. As this protean crisis showed, new reflection in the field of corporate governance is necessary. This paper aims to explore a new conception of corporate governance based on the existing legal literature and case law. Shareholder primacy and the focus on shareholders alone in the traditional view of companies’ corporate governance lead to a difficult situation. In order to identify an innovative way to design corporate governance, the paper studies current positions on the conception of the latter. Then it considers in detail the consequences of corporate law and its definition of the company. In this regard, a strong trend in the regulatory approach is clearly pro-shareholder, but the paper relies heavily on writings and cases that address the matter with originality to change the dominant point of view. It is relevant to raise awareness of traditional and more recent writings and cases from the legal traditions of different countries. These sources of law demonstrate that the economic system could better take into account the ethical ideals of the future that human communities demand we respect. In its research, the paper suggests that an alternative conception of corporate governance could be chosen as a positive reaction to the crisis. This is a political choice with a strong basis in part of “forgotten” corporate law. The findings point out the possibility that corporate governance can be designed in more than one way.