January 11, 2010
Sunday Dispatch No. 6 from New Orleans – New Scholarship on Corporate Governance
Posted by Erik Gerding

Following the panel, Bruce Aronson (Creighton) kicked off the paper presentations. He discussed a comparative work in progress that examined stock exchange competition, with an emphasis on the Tokyo stock exchange. Professor Aronson found the race to the bottom/race to the top paradigms less than satisfying since the scholarly debate seems to cycle between these two arguments.

Miriam Cherry and Jarrod Wong (McGeorge) presented an interesting paperthat proposes reforming clawbacks. The paper build off two arguments. First, clawbacks may be a draconian remedy. Second, Professors Cherry and Wong argue that a prospective approach of drafting clawback language into contracts is far more effective and raise less constitutional and other legal barriers than trying to convince courts to claw back retroactively without explicit contractual language. They applied this argument not only to executive compensation, but to clawback money from the early investors in what turn out to be Ponzi schemes as well.  Cherry and Wong argue that private ordering and best practices (and not necessarily regulation) could result in the adoption of these clawback provisions. 

J.W. Verret (George Mason) presented his paper on “Treasury Inc.: How the Bailout Reshapes Corporate Theory and Practice.” which looks at what government ownership stakes in private companies mean for corporate governance. He finds that corporate governance theory and practice in the U.S. are ill-equipped to handle questions raised by the federal government acting as a controlling shareholder. Professor Verret find that shareholder primacy, director primacy, the team-production model, and progressive/corporate social responsibility approaches all have significant shortcomings when the government acts as controlling shareholder. In terms of practical problems, Verret outlines how the government as controlling shareholder might give rise to:

  • different private companies becoming “affiliates” for some of the 33 Act exemptions;
  • a new potential for insider trading;
  • the U.S. Treasury to avoid being subject to fiduciary duties as a controlling shareholder;
  • the government to have the right to be lead plaintiff in securities class actions; and
  • the government wielding outsized power to elect directors.

AALS, Business Organizations, Corporate Governance, Financial Crisis, Legal Scholarship | Bookmark

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