Research Roundup

Blair, Margaret M., The Four Functions of Corporate Personhood (April 9, 2012). Vanderbilt Law and Economics Research Paper No. 12-13; Vanderbilt Public Law Research Paper No. 12-15. Available at SSRN. Abstract follows:

In this article I argue that the legal device of creating separate juridical “persons” for certain business activities serves at least four functions that became especially important to business organizers during and after the industrial revolution, and that those functions are still important to most large, publicly-traded corporations. These are:

1. Providing continuity, and a clear line of succession in the holding of property and the carrying out of contracts.
2. Providing an “identifiable persona” to serve as a central actor in carrying out the business activity. Employees and investors in the enterprise, as well as customers of the enterprise, recognize, and perhaps identify with this persona, which serves as the bearer of important intangible assets such as goodwill, reputation and brand. This persona is the counterparty to all contracts that the corporation enters into with its various participants (employees, customers, suppliers, and investors), and can sue and be sued in its own name.
3. Providing a mechanism for separating pools of assets according to which assets are dedicated to the business, and which assets are the personal assets of the human persons who are participating in the business. The ability to partition assets in this way makes it easier to commit specialized assets to an enterprise, and lock those assets in so that they remain committed to the enterprise and can realize their full value (Blair, 2003; Hansmann and Kraakman, 2000).
4. The separateness of the corporate entity, once the corporation is created, requires a legal mechanism for self-governance, at least with respect to the undertakings of the entity. The governance structure prescribed by corporate law since the early 19th century is a managerial hierarchy topped by a board of directors that is distinct from shareholders, managers, and employees, and that has fiduciary duties to the corporation itself as well as to shareholders.

These four functions of entity status in corporations, all of which have been associated with the concept of corporate personhood, are important sources of value in organizing business activities that involve a substantial number of people using dedicated assets over long periods of time. All four of these functions have been important since the Industrial Revolution, and continue to be important in business activities today. In large corporations with many shareholders and ongoing business activities, the four functions come as a package and are connected to each other, although the corporate form can be deployed to achieve as few as one of these purposes. These functions would be very difficult, if not impossible, to accomplish using only transactional contracts.

Careful analysis of the functions of “personhood,” or “entity status” can shed light on policy questions about what Constitutional rights should be recognized for corporations.

Armstrong, Chris S., Gow, Ian D. and Larcker, David F., The Efficacy of Shareholder Voting: Evidence from Equity Compensation Plans (March 13, 2012). Rock Center for Corporate Governance at Stanford University Working Paper No. 2097. Available at SSRN. Abstract follows:

This study examines the effects of shareholder support for equity compensation plans on subsequent chief executive officer (CEO) compensation. Using cross-sectional regression, instrumental variable, and regression discontinuity research designs, we find little evidence that either lower shareholder voting support for, or outright rejection of, proposed equity compensation plans leads to decreases in the level or composition of future CEO incentive-compensation. We also find that in cases where the equity compensation plan is rejected by shareholders, firms are more likely to propose, and shareholders are more likely to approve, a plan the following year. Our results suggest that shareholder votes have little substantive impact on firms’ incentive-compensation policies. Thus, recent regulatory efforts aimed at strengthening shareholder voting rights, particularly in the context of executive compensation, may have limited effect on firms’ compensation policies.

Yermack, David, Tailspotting: How Disclosure, Stock Prices and Volatility Change When CEOs Fly to Their Vacation Homes (March 15, 2012). NYU Law and Economics Research Paper No. 12-07. Available at SSRN. Abstract follows:

This paper shows close connections between CEOs’ vacation schedules and corporate news disclosures. Identify vacations by merging corporate jet flight histories with real estate records of CEOs’ property owned near leisure destinations. Companies disclose favorable news just before CEOs leave for vacation and delay subsequent announcements until CEOs return, releasing news at an unusually high rate on the CEO’s first day back. When CEOs are away, companies announce less news than usual and stock prices exhibit sharply lower volatility. Volatility increases immediately when CEOs return to work. CEOs spend fewer days out of the office when their ownership is high and when the weather at their vacation homes is cold or rainy.

Becker, Bo, Bergstresser, Daniel B. and Subramanian, Guhan, Does Shareholder Proxy Access Improve Firm Value? Evidence from the Business Roundtable Challenge (January 19, 2012). Harvard Business School Finance Working Paper No. 11-052; Harvard Business School NOM Unit Working Paper No. 11-052; Harvard Law and Economics Discussion Paper No. 685. Available at SSRN. Abstract follows:

We use the Business Roundtable’s challenge to the SEC’s 2010 proxy access rule as a natural experiment to measure the value of shareholder proxy access. We find that firms that would have been most vulnerable to proxy access, as measured by institutional ownership and activist institutional ownership in particular, lost value on October 4, 2010, when the SEC unexpectedly announced that it would delay implementation of the Rule in response to the Business Roundtable challenge. We also examine intra-day returns and find that the value loss occurred just after the SEC’s announcement on October 4. We find similar results on July 22, 2011, when the D.C. Circuit ruled in favor of the Business Roundtable. These findings are consistent with the view that financial markets placed a positive value on shareholder access, as implemented in the SEC’s 2010 Rule.

Dallas, Lynne, Short-Termism, the Financial Crisis, and Corporate Governance (February 16, 2012). Journal of Corporation Law, Vol. 37, p. 264, 2011; San Diego Legal Studies Paper No. 12-078. Available at SSRN. Abstract follows:

This article is a comprehensive exploration of why financial and nonfinancial firms engage in short-termism with particular attention given to the financial crisis of 2007-2009. Short-termism, which is also referred to as earnings management (or, alternatively, managerial myopia), consists of the excessive focus of corporate managers, asset managers, investors and analysts on short-term results, whether quarterly earnings or short-term portfolio returns, and a repudiation of concern for long-term value creation and the fundamental value of firms. This article examines market and internal firm dynamics that contribute to short-termism, which requires an examination of various structural, informational, behavioral and incentive problems operating within firms and markets. This article also discusses various regulatory responses to mitigate short-termism, including provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. It is the objective of this article to seek changes that would improve our financial system and prevent a financial meltdown in the future, such as the financial crisis of 2007-2009 that has had such a devastating impact on the U.S. and global economies.

Sharpe, Nicola F., Questioning Authority: Why Boards Do Not Control Managers and How a Better Board Process Can Help (February 10, 2012). Illinois Program in Law, Behavior and Social Science Paper No. LBSS12-02; 38 Journal of Corporation Law __ (Forthcoming 2012); Illinois Public Law Research Paper No. 11-14; Illinois Program in Law, Behavior and Social Science Paper No. LBSS12-02. Available at SSRN. Abstract follows:

Few Chief Executive Officers (CEOs) believe their boards of directors understand the strategic factors that determine their corporation’s success. In fact, some long-term directors “confess that they don’t really understand how their companies make money.” Yet broadly accepted theories of corporate governance, such as Stephen Bainbridge’s Director Primacy, are founded on the faulty premise that boards of directors have the actual authority to stop managers from behaving badly. These theories, as well as corporate law, wrongly assume that boards have practical authority over managers. This Article directly challenges that assumption and argues that managers, not boards, control corporate decision-making processes. The problem is that legal scholars and policymakers have ignored the connection between decision-making processes and practical authority. This Article is the first to identify and examine this relationship, which is essential to helping boards live up to their legislative mandates.

This Article argues that an effective decision-making process is essential to securing a corporate board’s actual authority. Unless boards engage in such a process, regulators will continue to expect boards to perform tasks that exceed their capabilities. Organizational behavior theory, which can be found in business literature, but is frequently ignored in law, provides the attributes of an effective decision-making process. Analyzing the components of an effective process, and identifying which components are truly controlled by boards as opposed to managers, supplies a roadmap for what boards need in order to have both de facto and de jure authority in their corporations. This Article provides that original analysis.

Gevurtz, Franklin A., The Globalization of Corporate Law: The End of History or a Never-Ending Story? (April 15, 2011). Washington Law Review, Vol. 86, No. 3, 2011; Pacific McGeorge School of Law Research Paper No. 12-02. Available at SSRN. Abstract follows:

Considerable scholarship during the last few decades addresses the question of whether corporate laws are becoming global by converging on commonly accepted approaches. Some scholars have asserted that such convergence is occurring around the most efficient laws and institutions thereby marking the “End of History” for corporate law. This paper responds to such assertions by developing three claims not previously given due attention in the convergence literature. First, it demonstrates that the history of corporations and corporate law has been one of seemingly constant movement toward global convergence; yet, the resulting convergence is always incomplete or transitory. Next, it points out that there are other forces besides efficiency which produce convergence. This means that convergence often occurs around corporate laws and institutions which have no particular efficiency or other normative advantage or that necessarily represent stable equilibrium points. Finally, the paper asks what are the important corporate laws and institutions by which to measure the extent of convergence at any one time. It develops the answer that a stable convergence is least likely for the most important corporate law issues, which are characterized by tensions between competing policies and no easy solutions for the problems presented.