Recent Research on SSRN

Abstracts from a few papers posted this month to the Social Science Research Newtork.

Hall, Thomas W. and Jörgensen, Fredrik A., Ownership and Performance in Europe (2012). Forthcoming, Review of Business. The authors consider the relationship between performance and ownership concentration in a large number of publicly traded and privately held companies located in smaller European economies (Austria, Belgium, Finland, Ireland, and Ukraine).

Combining two literatures — on ownership concentration and performance as well as on law and finance — they hypothesized that the relationship between performance and ownership concentration should vary by the level of legal protection afforded small shareholders as well as the type of ownership concentration (we consider the ownership concentration of a single blockholder as well as that of a coalition of the five largest blockholders). The results confirmed their hypothesis. Specifically, where minority shareholders are least protected, ownership concentration of a single blockholder is negatively related to performance; but the ownership portion of a coalition of the five largest shareholders is positively related to performance. These findings are robust to breaking down the sample by size and by one-digit SIC industry category.

Fairfax, Lisa M., The Future of Shareholder Democracy (2009). Indiana Law Journal, Vol. 84, 2009; GWU Legal Studies Research Paper No. 2012-93; GWU Law School Public Law Research Paper No. 2012-93 but posted this month to SSRN.

The author seeks to ascertain the impact of the Securities and Exchange Commission’s rejection in 2007 of a proxy access rule. On the one hand, the SEC’s rejection appears to be a stunning blow to the shareholders’ rights campaign because many shareholders’ rights advocates have long considered access to the corporate ballot as the “holy grail” of their campaign for increased shareholder power. On the other hand, some corporate experts maintain that characterizing proxy access as the indispensable ingredient for sufficient shareholder influence fails to appreciate the significance of recent developments such as the success of majority voting and the adoption of the e-proxy rules. Because these developments provide shareholders with alternative methods for influencing corporate affairs, some have even argued that they may make the issue of proxy access moot. However, this Article reveals the fallacies of such an argument and the importance of the continued pursuit of proxy access. Although other devices may prove useful, it is not likely that they will be as effective as proxy access in empowering shareholders.

Varottil, Umakanth, The Advent of Shareholder Activism in India (October 22, 2012). Consistent with reforms in several countries that seek to confer greater power in the hands of shareholders, the recent regulatory developments in India signify a greater opportunity for shareholder participation in the form of postal ballot, e-voting and the like. The rapid proliferation of proxy advisory firms, a hitherto non-existent phenomenon in India, bestows shareholders with the advice necessary to exercise their corporate franchise in an informed manner. The presence of activist institutional shareholders such as private equity funds and hedge funds has already caused an upheaval in some corporate boardrooms in India.

While these developments pave the way for a transformation in the tenor of the governance debate, shareholder activism encounters certain structural and institutional weaknesses embedded in the Indian markets. The dominance of controlling shareholders in most Indian companies operates to dampen the effects of shareholder activism. The legal system and institutions in India are not conducive to rendering timely and cost-effective remedies to shareholders who adopt a litigation strategy to counter managements that are perceived to act inimical to shareholder interests. This paper finds that although shareholder activism is becoming palpable in the Indian markets, its impact as a measure of corporate governance enhancement is far from clear.

Shabbir, Syeda Saima, The Role of Institutional Shareholders Activism in the Corporate Governance of Pakistan (October 21, 2012). Journal of Humanistics & Social Sciences, Vol.1, No. 2, pp. 1-23, 2012. The article explores the role of institutional shareholders’ activism in promoting good corporate governance practices in investee companies of Pakistan. In the year 2002, the Code of Corporate Governance (CCG) was issued by the Securities and Exchange Commission of Pakistan (SECP) ‘to establish a framework for good governance of companies listed on Pakistan’s stock exchanges.’ The SEC made it mandatory for all the stock exchanges to incorporate the provisions of the Code in their respective listing regulations. However, the institutional shareholders owning major shares in the investee companies are still contributing minutely towards ameliorating corporate governance environment in Pakistan partly due to their passive role and partly the non-efficacy of the Code and corporate laws.

Fisch, Jill E., The Long Road Back: Business Roundtable and the Future of SEC Rulemaking (October 15, 2012). Seattle University Law Review, 2013; U of Penn, Inst for Law & Econ Research Paper No. 12-34. The Securities and Exchange Commission has suffered a number of recent setbacks in areas ranging from enforcement policy to rulemaking. The DC Circuit’s 2011 Business Roundtable decision is one of the most serious, particularly in light of the heavy rulemaking obligations imposed on the SEC by Dodd-Frank and the JOBS Act. The effectiveness of the SEC in future rulemaking and the ability of its rules to survive legal challenge are currently under scrutiny.

Fisch’s article critically evaluates the Business Roundtable decision in the context of the applicable statutory and structural constraints on SEC rulemaking. She questions the extent to which deficiencies in the SEC’s rulemaking process can accurately be ascribed to inadequate economic analysis, arguing instead that existing constraints impede the SEC’s formulation of regulatory policy, and that this failure was at the heart of Rule 14a-11.

Bad rules make bad law, and Rule 14a-11 was a bad rule. This essay argues that the flaws in SEC rule-making are quite different, however, than those identified by the DC Circuit. Moreover, in the case of Rule 14a-11, Congress played a critical role by explicitly authorizing the SEC to adopt a proxy access rule. By substituting its own policy judgment for that of Congress, the DC Circuit threatens not just the ability of administrative agencies to formulate regulatory policy, but the ability of Congress to direct agency policymaking.

Cotter, James F., Palmiter, Alan R. and Thomas, Randall S., The First Year of ‘Say on Pay’ Under Dodd-Frank: An Empirical Analysis and Look Forward (October 15, 2012). Vanderbilt Law and Economics Research Paper No. 12-32. The authors ask whether Dodd-Frank has made a difference in how shareholders vote on executive pay practices and whether the Act has changed the dynamic in shareholder-management relations in U.S. companies. Using voting data from the first year of “say on pay” votes under Dodd-Frank, they look at the patterns of shareholder voting in advisory votes on executive pay.

Dodd-Frank’s “say on pay” mandate has not broadly unleashed shareholder opposition to executive pay at U.S. companies, as some proponents had hoped for. Nonetheless, it has affected pay practices at outlier companies experiencing weak performance, high executive pay levels, which are identified by proxy advisory firms like ISS. In addition, mandatory “say on pay” seems to have led management to be more responsive to shareholder concerns about executive pay and perhaps toward corporate governance generally. This shift in management-shareholder relations may be the most important consequence of the Act thus far.

Chan, Alex Chu Kwong and Young, Angus, Chinese Corporate Governance Regime from a Historical-Cultural Perspective: Rethinking Confucian System of Governance (October 3, 2012). Looking back into China’s own rich history, there appeared to be an effective indigenous system regulating governance, one that was non-legal and based on Confucian doctrines governing Chinese merchants for centuries. Therefore, it might be prudent to revisit and revive such value based, norm driven self-regulated system to regulate corporate governance in China.

At the heart of this Confucian centered benchmark, is the notion of san gang wu chang. This system of governance is not state or rule centered, rather this is a value based, norm driven, and community enforced framework, aimed at creating social harmony. These Confucian moral values aspire to higher standards of behaviour, much greater than what laws could because it is archetype standards of a righteous person. History has shown that in China’s regions like An Hui and Shan Xi merchants had voluntary observed these Confucian traditions. There was even a Chinese terminology to describe merchants that adhere to such self-regulatory standards, known as ru shang. More importantly, such self-regulatory governance measure had worked in China for centuries.

This study contradicts myths and misleading claims by observers like Max Weber who claimed that Confucianism had prevented China from developing capitalistic economy. The analysis of san gang wu chang, as a governance and regulatory mechanism, it appears to work as a community of practice at the macro level, and on a micro level compliance is motivated by an individual’s beliefs and compulsion to do so. This was more than an ideal for the reason that moral benchmarks combined with hierarchical order creates a socially binding set of obligations. Examples from An Hui and Shan Xi had offered antidotal evidence of how this Confucian centered system was reaised. Furthermore, this regime was far more complex and sophisticated than a set of moral principles. Unlike rules, it was flexible with harmony, instead of set of laws as its an end goal.

Practitioner/Policy Implications: China had an indigenous set of governance code that was no less effective than contemporary Western laws and thus should look at its own rich history and culture to provide an alternative set of company laws, one that is based on Confucianism. This is not to say that Chinese or Confucian centred regulatory order is necessarily superior to Western models, rather this is intended to offer greater variety to suit different types of investors and incorporators in China. This alternative is expected to be more culturally receptive from a Chinese perspective. Critics might argue that this is unnecessary. This paper argues that the present choice of different Western models of governance are based on Judo-Christian heritage and elements of Roman civil law dating back to the Roman Empire, all of which might be culturally estranged and meaningless beyond superficial compliance for the Chinese. Yet this paper does not advocate the removal of existing Western modeled corporate laws in China, the regulation solution would most likely be the establishment of a pluralistic governance regime, one the international markets are familiar with and the other, a Confucian based Chinese framework for those who subscribe to Confucian values.

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