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.
Klaus J. Hopt
Comparative company law starts with the rise of the modern company in the first half of the 19th century. Ever since the need for looking across the border was felt by legislators, lawyers, academics, judges and regulators. Most recently there has been a renewed interest in comparative company law, partly because of the emergence of European company law and partly because the corporate governance movement has sharpened the sense of competition with other countries. Comparative company law follows the close relations of company, capital market and banking law that exist today, in particular after the financial crisis. Comparative company law must also take notice of company self-regulation and the international code movement and is more and more influenced by economic considerations. The chapter concludes with perspectives for future research.
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.
This chapter examines the regulatory issues that arise when there is an offer to acquire shares directly from one or more shareholders of a company such that control of that company shifts to the acquirer. It begins with a comparison between control shifts implemented by contract and corporate transactions which produce the same result. It identifies three principal areas where contract may need to be supplemented by takeover-specific rules arising out of the coordination costs of target shareholders, powers of target management, and agency costs of non-controlling shareholders. It then considers how takeover regulation could be fashioned so as to promote efficient and discourage inefficient transfers of control. The chapter concludes by focusing on the choices actually made in four countries: Japan, Germany, UK, and the United States.
Jeffrey N. Gordon
This chapter discusses the question of “convergence or persistence” in corporate law and governance. It first considers efforts to measure convergence directly by focusing on the evolution of law-on-the-books governance provisions before analyzing capital market evidence on convergence, with particular emphasis on capital market indicators such as the decline in “cross-listings” onto US stock exchanges by firms from jurisdictions with weaker investor protection and the increase in initial public offerings (IPOs) on emerging market stock markets. The chapter proceeds by reviewing evidence of divergence, especially “divergence within convergence,” and the failure of the European Union to produce more convergent corporate governance. It also looks at the “End of History” debate over whether corporate governance has converged on a “shareholder value” model and concludes by asking whether “stability” will become a general objective of corporate governance convergence.
This chapter examines changes in criminal law over the last decades, paying particular attention to corporate criminal liability (CCL). After outlining the main features of CCL with a focus on corporations, it traces the emergence and expansion of CCL in various countries such as England and the United States and the adaption of the concept of corporate criminal liability by other countries. It then looks at the opposition of some countries to CCL, including Germany, Italy, Greece, Bulgaria, and Latvia. The chapter also discusses issues of efficiency, fairness, and the transferability of criminal law (and its premises) onto collectives, along with the main differences between existing models of CCL. Finally, it considers the present and the future of criminal law based on the development of CCL, with emphasis on conflict rather than the offender and the domination of preventive aspects.
Zoe Adams and Simon Deakin
Rent-sharing between employees and shareholders is a necessity if the societal value of the firm is to be maximized. This is reflected in laws across the world which, in different ways, underpin job security and worker voice. Where employees have no role in firm-level governance and are weakly protected by regulation, contractual arrangements intended to align investor and worker interests often fail. A growing body of empirical evidence, drawing in part on leximetric data, points to the beneficial economic effects of employment protection and codetermination laws for innovation and productivity. These laws also promote equality, in contrast to laws mandating additional protections for shareholders to those provided by basic corporate law, which are distributionally regressive as well as being of questionable value for efficiency.
Mark J. Roe and Massimiliano Vatiero
In this chapter, we analyze three instances that illustrate the political economy of corporate governance. First, we examine how the politics of organizing financial institutions affects, and often determines, the flow of capital into the large firm, thereby affecting, and often determining, the power and authority of shareholder-owners. Second, we show how continental European nations have been slow in developing diffusely owned public firms in the years after World War II. The third political economy example deals with management in diffusely owned firms. The chapter also looks at the historical organization of capital ownership in the United States, noting how the country’s fragmented financial system limited the institutional blockholders and increased managerial autonomy over the years. Finally, it discusses the power of labor in postwar Europe, political explanations for the continuing power of the American executive and the board in recent decades, other political economy channels for corporate governance, and the limits of a political economy analysis.
Despite deep differences in their political systems, legal regimes, and economic structures, emerging markets share a recent history of rapid economic growth and capital market expansion. This chapter explores the degree and direction of transformation in corporate governance in emerging markets in the last decades. It begins by surveying the interaction between the ownership structures prevailing in emerging markets – marked by the presence of controlling shareholders, business groups, and state ownership – and the underlying institutional environment. It then examines the driving forces of change by comparing the relative roles played by legislatures, regulators, courts, and alternative institutional arrangements in corporate governance reform in Brazil, Russia, India, and China (collectively known as the BRIC countries). The chapter concludes by evaluating the degree of convergence and persistence in emerging markets governance, and underscoring the need to consider the particular contextual significance of different practices.
A. C. Pritchard
This chapter explores the interrelationships among corporate governance, capital markets, and securities law. More specifically, it considers the role that securities law should play in encouraging corporate governance standards that hold managers and directors accountable to shareholders. It also examines whether disclosure, bolstered by market forces, is sufficient to promote efficient corporate governance provisions. After charting the origins of the dividing line between securities law and corporate governance in the United States, the article looks at the efforts of the Securities and Exchange Commission to push against that boundary. It then analyses the institutional connections between capital markets and corporate governance, especially whether there are practical limits to the link between securities law and corporate governance. Finally, it discusses future prospects concerning the boundary between corporate governance and securities law.
This chapter explores the different ways in which market actors are “co-opted” as corporate law regulators. It considers the preconditions for generating “endogenous self-regulation” through the lens of the formation and operation of the UK Takeover Code and Panel. From endogenous self-regulation, the chapter moves onto consider “market-controlled” regulation where the state directly co-opts market actors as regulators. The chapter shows that the regulatory biases generated by self-regulation are more multi-faceted than, and often inconsistent with, the standard account that self-regulation is likely to generate rules that favour the regulated.
Joseph A. McCahery and F. Alexander de Roode
Plaintiffs’ lawyer fees and monetary awards have a distorting effect on shareholder value effects in US derivative cases. In this chapter we analyze the benefits of corporate litigation without these externalities using a data set for the Netherlands between 2002 and 2013. We find significant abnormal returns within a short timespan surrounding the filing and resolution of M&A-related lawsuits. Over longer horizons, resolutions have little impact on shareholder value. However, our findings suggest that longer waiting times for court resolutions are costly. The evidence from the Netherlands supports the view that in settings without strong distortions derivative style litigation may be important.