October 12, 2007
Yes, says UCLA Law professor Lynn Stout in an essay recently posted on SSRN: Why We Should Stop Teaching Dodge v. Ford. Stout argues that the principle the case is supposed to stand for: that of a singular obligation of the board to maximize shareholder wealth has long been dispensed with, and that the 1919 case does not accurately reflect the current state of corporate law. Stout asserts that Dodge v. Ford remains a popular teaching case due to its simplicity. Simplicity, says Stout, is not always a virtue especially when it helps perpetuate a misleading conception of the law.
Here is the abstract:
Among non-experts, conventional wisdom holds that corporate law requires boards of directors to maximize shareholder wealth. This common but mistaken belief is almost invariably supported by reference to the Michigan Supreme Court’s 1919 opinion in Dodge v. Ford Motor Co.
This Essay argues that Dodge v. Ford is bad law, at least when cited for the proposition that maximizing shareholder wealth is the proper corporate purpose. As a positive matter, U.S. corporate law does not and never has imposed a legal obligation on directors to maximize shareholder wealth. From a normative perspective, options theory, team production theory, the problem of external costs, and differences in shareholder interests all suggest why a rule of shareholder wealth maximization would be bad policy and lead to inefficient results.
Courts accordingly treat Dodge v. Ford as a dead letter. (In the past three decades the Delaware courts have cited the case only once, and then on controlling shareholders’ duties to minority shareholders). Nevertheless, legal scholars continue to teach and cite it. This Essay suggests that Dodge v. Ford has achieved a privileged position in the legal canon not because it accurately captures the law – it does not – or because it provides good normative guidance – it does not – but because it serves professors’ need for a simple answer to the question, “What do corporations do?” Simplicity is not a virtue when it leads to misunderstanding, however. Law professors should mend their collective ways, and stop teaching Dodge v. Ford as anything more than an example of how courts can go astray.
June 6, 2007
Still more on the link between gender and trust and its potential implications for board governance. Matteo Migheli (University of Turin and Catholic University of Leuven) has posted an article to SSRN entitled, Trust, Gender and Social Capital: Experimental Evidence from Three Western European Countries. His study looks at differences between men and women in trusting and investment in social capital. He seeks to determine if lower levels of trusting by women can be attributed to a lower investment in social capital (i.e., networking). The study conducted in three different European countries finds that women invest less in social capital, but the lower levels of social capital do not fully explain gender differences in trust. Here is the abstract:
The economic literature has discussed the links between trust and gender, and trust and social capital. Given that some empirical evidence shows also that gender and trust are somehow related and specifically women tend to trust less than men, I try to investigate the effect of social capital on generalized trust, controlling also for the “gender effect”. This latter could be due to the fact that women are less prone to invest in social capital than men, as the literature highlights. Using the tools of experimental economy, I performed the same experiment in Oslo, Leuven and Torino, in order to obtain a mixed Western European sample. In this one I included Scandinavia, Central and Mediterranean Europe. My measure of social capital is more complete than the usual one: I add informal networks (such as phone conversations, time spent with friends, etc.) to formal ones (basically voluntary associations). Analysing the obtained results through both comparisons of conditional means and econometrics, I find out some influence of social capital on trust. Furthermore, also after controlling for social capital, gender differences persist still. Thus I can conclude that behavioural differences due to gender are not a mere reflex of different investments in social capital. I also found evidence that some kinds of formal and informal networks exert positive influence on generalized trust.
June 5, 2007
Following up on last week’s post on Joan Heminway’s recent article Sex, Trust and Corporate Boards, Erica Beecher-Monas also has an article on SSRN that explores the potential impact of diversity and independence on board decisionmaking. The article is titled Marrying Diversity and Independence in the Boardroom: Just How Far Have You Come, Baby? Here is the abstract:
Corporate governance reform, with its focus on agency costs, and corporate diversity, with its emphasis on social equity, would appear to have little common ground, other than the corporate setting. Both strands of reform, however, share an important goal: improved functioning of the corporation through more active decisionmaking by its board. The spectacle of boards asleep at the wheels of governance jarred Congress into action in the wake of the multibillion dollar Enron/Worldcom string of debacles. Despite massive regulatory changes in corporate governance mandated by Sarbanes-Oxley, however, skyrocketing executive compensation, backdating of options, and mis-reporting of financial statements continue to command the news. This article examines the theoretical and empirical basis for independence as a solution to director dereliction of monitoring duties, and posits that the lack of empirical support for independence may be due to a definitional quandary, and that defining independence as mere absence of financial conflicts rather than diversity of opinion may be the root of the problem.
This article takes an interdisciplinary approach to accountability of large publicly held corporations, using economics and cognitive insights into human rationality to assess the role of law in structuring human interactions – in this case focusing on the decision making processes of directors of large publicly held corporations. In particular, this article examines the Sarbanes-Oxley Act’s corporate governance solution of emphasizing the role of independent directors in the firm. This article further explores the psychology of small group dynamics, examines the inherent problems of homogeneous groups, and suggests ways in which diversity of opinion mitigates the effects of small group dynamics. My article recognizes that the trust fostered by homogeneity has the dark side of quashing dissent, and suggests ways to overcome resistance to diversity. This article concludes that nourishing a culture of dissent is the foundation for the kind of decisionmaking that leads to effective monitoring, and that while gender and ethnic diversity are no guarantors of diverse viewpoints, they are a good place to start in creating the kind of board culture that will begin to take its monitoring duties seriously.
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.