Lawrence A. Cunningham
This chapter examines the functions of corporate accounting and financial reporting around the world, with particular emphasis on how local realities that explain persistent diversity often pose a barrier to aspirations for a universal system. It first charts the history and progress of contemporary efforts to move accounting from its diverse local roots to a unified global stage before turning to a discussion of the varying functions of accounting and reporting laws around the world. It then looks at aspects of accounting that are affected by national variation, including securities regulation, corporate governance, and corporate finance. Finally, the chapter explains how related forces contribute to persistent divergence in financial reporting.
According to a common narrative, the failure of banks in the financial crisis reflected poor corporate governance practices, as well as inadequate prudential regulatory safeguards. Yet it turns out that the “best” governance practices according to ordinary standards were the ones that did worst during the financial crisis. In the period leading up to the financial crisis, it was believed that regulation would cause banks to internalize the costs of their activities, meaning that what maximized bank shareholders’ returns would also be in the interests of society. Consequently, large banks used the same governance tools as non-financial companies to minimize shareholder-management agency costs, namely independent boards, shareholder rights, the shareholder primacy norm, the threat of takeovers, and equity-based executive compensation. Unfortunately, such tools had the adverse effect of encouraging bank managers to take excessive risks. Consequently, a significant rethink about the way in which banks are governed is required.
This chapter examines corporate law and governance from a behavioral perspective. It begins with an overview of the growing body of behavioral knowledge and its impact on the core assumptions of the agency theory. It then goes on to consider a number of specific areas of corporate law and governance where behavioral perspectives are particularly relevant, with particular emphasis on rule making. The chapter also explores how the board of directors performs, along with modern executive compensation systems, often in the form of performance-based pay. Finally, the chapter turns to the interaction between executives, non-executives, and (institutional) investors in corporate governance.
This chapter reviews the benefits and costs of using indices, in particular the G- and E-indices, in empirical corporate governance research. As with corporate governance itself, the widespread use of corporate governance indices have both costs and benefits. The literature has identified a number of concerns with the use of these indices including concerns over measurement error, endogeneity, reverse causation, omitted variables and proper identification of the actual mechanisms by which corporate governance might matter. On the other hand, these indices enjoy several important benefits that explain their continued and widespread use. It concludes that event study methodology and the utilization of legal shocks/regulatory discontinuities for identification will likely play an ever greater role in future research.
Stephen M. Bainbridge
This chapter explores issues relating to the board of directors. Focusing on the formal model of corporate governance, it considers why corporate decisions are made through the exercise of hierarchical corporate authority instead of consensus. Specifically, it examines the survival advantage that a bureaucratic hierarchy confers on a large corporation and which of its constituencies should elect the board. It first outlines the key functions of the board of directors drawing on the unitary and dual board models. It then asks why corporations are run by boards of directors rather than by shareholders or the chief executive officer. It discusses why ownership and control are separated in the corporate form, with special emphasis on the US experience, along with the economic rationale for vesting control in a group rather than in an individual. Finally, it analyses how boards fail and looks at the reforms that have been implemented to improve their performance.
This chapter examines issues relating to corporate governance in closely held corporations. It begins by describing the typical characteristics of closely held corporations, with particular emphasis on shareholder involvement in management, number of shareholders, share transfers, market for shares, and the broad spectrum of shareholders and applications. It then considers common governance issues and conflicts in closely held corporations and proceeds with a discussion of the governance framework for such corporations consisting of company law, model articles, articles of association, shareholder agreements, and corporate governance guidelines. It also explores the internal governance and management of closely held corporations, the governance of share transfer restrictions, and provisions for shareholder withdrawal and expulsion. The chapter concludes with an analysis of shareholder conflicts, especially oppression by majority shareholders and ex-post opportunism by minority shareholders, and how they are governed in closely held corporations.
This chapter deals with fundamental issues of corporate insolvency (bankruptcy) law. Particular attention is paid to the agency problems related to “insolvency (bankruptcy) governance” of corporations and how these problems are addressed in various jurisdictions. Methodologically, the chapter is based on a functional approach that compares different legal regimes against the yardstick of economic efficiency. The structure of the chapter follows the issues as they arise in time in a corporate insolvency proceeding: objectives of insolvency laws, opening and governance of proceedings, ranking of claims and the position of secured creditors and shareholders, and rescue proceedings. The chapter also covers the contractual resolution of financial distress. It concludes with thoughts on the reasons for the identified jurisdictional divergences and an outlook on the worldwide efforts toward harmonization of (corporate) insolvency laws. In terms of jurisdictions, the chapter mainly draws on the corporate insolvency laws in the US, England, France, and Germany.
This chapter deals with the European Union law on competition and mergers, with emphasis on the provisions of Articles 101 and 102 of the TFEU. The role of markets is to coordinate supply and demand. EU competition law is applied to address situations in which firms are able to distort the ability of markets to coordinate supply and demand, such problems arising when firms are able to aquire or exercise power over the market. A number ways in which problems of market power manifest themselves and the ways in which EU competition law can be, and has been, marshalled to address those problems are the subject of this chapter. This chapter considers the idea of a market and the absence of competitive constraints, before consider unilateral and collusive behaviour giving rise to or exploiting market power. Finally, it considers the EU Merger Regulation as a primary instrument for regulating the competitive consequences of durable changes in market structure.
Geoffrey Parsons Miller
This chapter discusses the compliance function, a form of internalized law enforcement employed by corporations and other complex organizations to ensure that employees and others associated with the firm do not violate applicable rules, regulations or norms. It first examines compliance within a general theory of enforcement. It considers the concept of internal control, the development of the compliance function and its distribution among control personnel, and compliance programs, policies, and contracts within an organization. It then analyzes the oversight obligations of the board of directors and the management team including the chief executive officer, the chief financial officer, the chief compliance officer, the chief legal officer, and the chief risk officer. It also outlines the elements of a robust compliance program and concludes by considering internal investigations, whistleblowers, criminal enforcement, compliance outside the firm, and business ethics beyond formal compliance.
Consumer law, while now an established field, remains very much in flux, subject to shifting not only with the political winds but also with the willingness of individuals to identify themselves as consumers subject to economic abuse from sellers unless laws and rules to protect consumers are established and regularly implemented or enforced. This article discusses the following: pre-purchase issues, the First Amendment and advertising regulation, unfair practices and the consumer, consumer credit, post-purchase issues.