Joan MacLeod Heminway, Sex, Trust, and Corporate Boards

May 31, 2007

Joan MacLeod Heminway has just published Sex, Trust, and Corporate Boards in the Hastings Women’s Law Journal. This interesting article explores the ways in which men and women differ in trusting others and demonstrating trustworthiness, and how these differing styles of trusting might influence board decisonmaking when women are present or absent from the board.  It suggests that representativeness might be an important feature for both the legitimacy and the quality of board decisionmaking and that gender is one category for which representativeness might matter.  Here is the abstract:

This article collects and interprets social science research on sex and trust and uses this work to shed new light on the emerging case for gender diversity on corporate boards. Specifically, the article describes social science research findings indicating (1) that men and women trust and are trustworthy on different bases and (2) that there is a bias against women in chief executive officer (and potentially other corporate leadership) positions. Based on this research, the nature of corporate management and control, and current legal scholarship on corporate governance, the article asserts that gender diversity on corporate boards may be desirable but difficult to attain. Ultimately, the article calls for more targeted research on the links among sex, trusting behavior, trustworthiness, and corporate board membership and also recommends that boards of directors pursue gender diversification in filling vacancies and new board slots as a means of diversifying trust in the corporation.

Two Books Explore the Link Between Corporations and Democracy

May 30, 2007

In Sunday’s Boston Globe, University of Pennsylvania professor Stephen Hahn reviews Age of Betrayal: The Triumph of Money in America, 1865-1900 by Jack Beatty.  Hahn describes the book as a history of American capitalism, which Beatty portrays as “a history that has compromised, if not undermined, our democracy and set us on a course of social and political crisis.”  Beatty pins the betrayal of American society on an “alliance between government and business,” with courts playing a leading role in whittling away “the promises of freedom, citizenship and independence” handing them instead over to corporations.

In contrast to Beatty’s view of corporations as an engine for the demise (or at least the compromise) of American democracy, a book recently featured on the Colbert Report credits the corporation with the birth of American democracy.  Bob Deans appeared with Stephen Colbert last week to plug his book, The River Where America Began, on the history of Jamestown.  Here is the (very funny) clip

Darian Ibrahim, The (Not So) Puzzling Behavior of Angel Investors

May 29, 2007

Darian Ibrahim of University of Arizona has posted The (Not So) Puzzling Behavior of Angel Investors on SSRN.  The article seeks to explain the differences in governance structures for angel-stage startup firms when compared to governance terms demanded by venture capital investors.  Ibrahim suggests that investor motiviation, degree of trust, and the anticipated need to accomodate future venture investments help to explain the dichotomy. Here is the abstract:

Angel investors fund start-ups in their earliest stages, which creates a contracting environment rife with uncertainty, information asymmetry, and agency costs in the form of potential opportunism by entrepreneurs. Venture capitalists also encounter these problems in slightly later-stage funding, and use a combination of staged financing, preferred stock, board seats, negative covenants, and specific exit rights to respond to them. Curiously, however, traditional angel investment contracts employ none of these measures, which is a marked departure from what financial contracting theory would predict. This article explains this (not so) puzzling behavior on the part of angel investors, and also explains why some angels are moving toward venture capital-like organization and adopting venture capital-like contracts in the process.

Interactive Federalism and the Proxy Access Debate

May 25, 2007

The latest academic salvos in the proxy access debate are now available online in the Virginia Law Review.  The May issue features an essay by Lucian Bebchuck, The Myth of the Shareholder Franchise, along with responses from Lynn Stout, Jonathan Macey and others disputing Bebchuk’s analysis and recommendations.

This important debate highlights the phenomenon of interactive federalism.  The various interations of policy proposals designed to “fix” perceived problems in the director election process play off of one another in an interesting and somewhat predictable fashion.   Corporate governance “activists” press their case with Congress or the SEC for reforms to federal regulatory scheme.  Business interests (represented in this instance by the corporate bar and Delaware judges) take note of the activists’ agitation and the SEC’s perceived responsiveness and advocate for more mild reforms at the state level.

Majority voting amendments to the Delaware Code and the Model Business Corporation Act reflect this pattern and succeeded in sidetracking the SEC’s 2003 shareholder access proposal.  However, the state-led majority vote movement may have helped spur another activist tactic: binding bylaw amendments, which has kept shareholder access on the federal agenda despite the apparent inclination by current Commissioners to sweep it aside.

This interactive pattern shows that states respond to federal reform proposals even when federal reform efforts languish.  It also shows that the state approach to shareholder voting reform will not be the final word, and that reform proponents will continue to seek alternative avenues of reform when their efforts are thwarted either at the state or federal level.

SEC Approves New Interpretive Guidance for Compliance with Section 404 of Sarbanes-Oxley

May 24, 2007

The Securities and Exchange Commission has approved new interpretive guidance on compliance with Section 404 of the Sarbanes-Oxley Act. Here is the SEC’s Press Release.

Section 404 is perhaps the most maligned provision of the Sarbanes-Oxley Act.  Critics argue that the costs of 404 compliance are excessive and are disproportionately burdensome for smaller public companies.  According this New York Times article the guidance provides a relaxed set of compliance guidelines for smaller companies (with a market capitalization of less than $75 million).  The Public Company Accounting Oversight Board (PCAOB) is expected to adopt compatible auditing standards.

The Disclosure-Conduct Distinction?

May 24, 2007

In his written comments to the SEC on proxy reform posted below, Professor Stephen Bainbridge argues for a restricted view of the SEC’s authority to regulate the director election process.  His argument relies heavily on the reasoning of Business Roundtable v. SEC and the disclosure-conduct disctinction the Business Roundtable court sought to preserve.

The “disclosure-conduct” distinction heralded in Business Roundtable is based on the oft-repeated generalization that the federal securities laws are disclosure-based rather than conduct-oriented.  As I have discussed, such an assertion curiously ignores many provisions of the federal securities laws that directly proscribe conduct.  After the adoption of Sarbanes-Oxley which contains a number of significant corporate governance provisions, the disclosure-conduct distinction as a demarcation of SEC authority becomes far less tenable.

In an essay, Revisiting Business Roundtable and Section 19(c) in the Wake of the Sarbanes-Oxley Act, 23 Yale Journal on Regulation 249 (2006), Jeffrey Wu questions the continued viability of the Business Roundtable holding.  Here is the abstract:

Although section 19(c) of the Exchange Act authorizes the SEC to modify stock exchange rules “in furtherance of the purpose” of the Exchange Act, federalism has frustrated the SEC’s attempt to use that power to effect corporate governance reform. In Business Roundtable v. SEC, the D.C. Circuit vacated the SEC’s “one share, one vote” rule, on grounds that Congress did not intend for the SEC to intrude into corporate governance, which traditionally has been considered the domain of state law. However, the Sarbanes-Oxley Act has changed the federalism calculus of section 19(c). Because Sarbanes-Oxley’s amendments to the Exchange Act established a new federal policy of fighting fraud through corporate governance reform, federalism has lost much of its vitality as a constraint on SEC authority. Accordingly, the SEC should now have the power to use section 19(c) to promulgate corporate governance standards in furtherance of the purpose of Sarbanes-Oxley, particularly its audit committee provisions.

Stephen Bainbridge, The Scope of the SECs Authority Over Shareholder Voting Rights

May 23, 2007

Stephen Bainbridge has posted, The Scope of the SECs Authority Over Shareholder Voting Rights on SSRN.  It looks to be the written version of his comments before the SEC at its May 7 roundtable on Federal Proxy Rules and State Corporation Law.  Here is the abstract:

At a May 2007 Roundtable on The Federal Proxy Rules and State Corporation Law, the Securities and Exchange Commission posed the following question for discussion: What should be the relationship of federal and state law with respect to shareholders’ voting rights and ability to govern the corporation? To answer that question, this essay reviews the legislative history of Section 14(a) and of the Securities Exchange Act generally, as well as the leading judicial precedents. It concludes that, as a general rule of thumb, federal law appropriately is concerned mainly with disclosure obligations, as well as procedural and antifraud rules designed to make disclosure more effective. In contrast, regulating the substance of corporate governance standards is a matter for state corporation law.

The author was an invited panelist at the May 7th Roundtable and submitted this essay as his written comments.

J.W. Verret, Pandora’s Ballot Box, or a Proxy With Moxie? The Majority Voting Amendment to Delaware Corporate Law

May 22, 2007

Much of the academic discussion on shareholder voting rights focuses on the merits and demerits of the SEC’s recent shareholder access proposal or variations thereof.  The states’ efforts to reform director elections have received far less attention.  Because state-led reforms inevitably respond to and influence reform efforts at the federal level, this oversight is unfortunate. 

A forthcoming Business Lawyer article by Jay Verret seeks to fill this gap.  The article explores the impact and reform potential of Delaware’s recent legislative amendments aimed at facilitating “majority voting” rules for director elections.  Here is the abstract: 

The Delaware General Assembly has recently adopted a provision to the Delaware General Corporation Law which provides that where shareholders have adopted a majority voting bylaw for corporate elections over the traditional plurality scheme, a corporation may not subsequently amend its bylaws to return to plurality voting without shareholder approval.

I will compare this provision to other approaches and try to explain the reasons underlying its adoption. I will also briefly summarize the evolving shareholder empowerment debate and analyze the majority voting provision in the context of that discussion. I will then describe some unique and unanticipated interactions between majority voting bylaws and various other working parts of corporation and securities law affecting the shareholder franchise, a carefully protected right in Delaware jurisprudence. The most prevalent corporate strategies responding to this movement will be explored and the difficulties of implementing majority voting will be described.

Finally, I will analyze voting schemes from the political sphere to generate analogous lessons for the corporate arena. I will then end with some predictions about future developments which will hinge on the outcome of SEC rules proposals, further DGCL revisions, and the responses of Delaware incorporated entities. This analysis blends three distinct groups of thought i) Theoretical corporate law scholarship, especially on the general shareholder empowerment debate, ii) Analysis of Delaware Court of Chancery and Supreme Court cases, with a focus on those that directly implicate the shareholder franchise, and iii) Practical analysis on the future of the majority voting movement for Delaware incorporated entities, and the strategic choices facing boards of directors in light of online proxy solicitation, Exchange Rule 452, and the looming specter of corporate ballot access.

Shareholder Voting

May 21, 2007

The next few posts will be on the topic of shareholder voting.  The SEC recently held the first of three open roundtables on Shareholder Rights and the Federal Proxy Rules.  The webcast of the May 7 roundtable on the Federal Proxy Rules and State Corporation Law is now available here.  The unofficial transcript of the same event is here.

In light of expected reforms to the SEC’s proxy rules, it seems like an ideal time to catalogue and examine various viewpoints on the purposes and value of shareholder voting rights.  To some extent differing viewpoints about the extent to which shareholders should be able to exert control over major corporate decisions can be traced to very different understandings of the added value of shareholder power in the corporate governance system. 

To the extent that shareholders add no value or represent a nuisance, the nominal power currently provided under the existing regime seems ideal.  To the extent that shareholders could provide an important source of accountability for directors and executives, the need to enhance shareholder rights seems self-evident.

Upcoming posts will highlight current and forthcoming papers on these topics along with commentary regarding the interesting interplay between federal and state rules in this important area of corporate law.

Scholarly Tributes

May 18, 2007

Most academics value scholarly recognition and seem to welcome it from any source.  In corporate and securities law, scholars make a great deal out of which articles are voted among the 12 or so “best” in the annual poll by Corporate Practice Commentator (Robert Thompson, editor).  Recent blog posts at Leiter Reports, Securities Law Prof, and Conglomerate are examples of the current discussion.

Maybe poll results, with their democratic flavor, are meaningful substantively.  Yet at least as meaningful, but not enjoying the same celebrity status, is selection of the 16 articles reprinted to form the Commentator’s annual bound volume. In contrast to polling, this selection reflects scholarly judgment backed by the costs and stakes of publishing.

From 1994 to 2004 (Volumes 35-45), the Commentator reprinted 179 articles and the period’s “best of” polls produced 112 favorites.  Only 30 articles appeared in both the volumes and the polls.  The small overlap reflects the different procedures and purposes of the poll compared to the publication decision.  No doubt, scholars are happy to be in either category.  But if one cannot be in both, which is preferred and why?  Should more attention be given to pieces selected for publication or those voted in the poll?  (Disclosure: one article of mine was selected for publication and none voted tops in the polls.)


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