Tuesday, May 13, 2014
Uncommon Law: Social Welfare and Corporate Governance in the Common-Law World
Reports of the uniformity of corporate governance among common law jurisdictions are greatly exaggerated (at least when it comes to shareholder rights and security, anyway). This is an essential descriptive thesis of Chris Bruner's Corporate Governance in the Common-Law World: The Political Foundations of Shareholder Power. It also is undoubtedly an engaging topic for a book--one that demanded my attention and resonated with me almost immediately. In research I did a few years ago for what ultimately became a draft paper and book chapter, I had explored the validity of claims of international convergence in insider trading regulation and found much the same thing that Bruner finds in this book: facial similarities in legal structures and doctrine may mask more interesting and telling differences.
The descriptive account is important, but it is not the heart and soul of the book. Rather, the core value of the book is that it strikes out beyond culture, history, and economics to politics--specifically, social welfare politics--to explain the differences among the corporate governance systems in the four jurisdictions studied--the United States, the United Kingdom, Australia, and Canada. By demonstrating that changes in shareholder power and protections vary with social welfare dynamics, the book begs a far more significant conclusion: that corporate governance oppresses and empowers the populace in much the same way that state government does and that the corporation therefore may be an arm of or a substitute for state government in promoting or effectuating policy. This take-away is unsurprising to me; it is intuitive and sometimes obvious in other contexts. Nevertheless, the weight of proof is hard to come by, and I am grateful for Bruner's work in providing it.
Many elements of the story are compelling.In light of debates here in the United States about the role of shareholders in the corporate form, it was of particular interest to me that the U.K. Companies Act (which I have not independently studied to an significant degree) casts shareholders in the role of principals that can dictate the activities of corporate directors. I had seen evidence of shareholder centrism in takeover regulation in the U.K. (which I teach in Comparative Mergers & Acquisitions, when I get the chance to teach that course), but the revelation that this shareholder-friendliness extends to the broader management function of the firm helped to explain and normalize the pro-shareholder mergers and acquisitions doctrine.
This observation about the doctrine also demonstrates a fundamental difference between the doctrine in the United States and the United Kingdom: in the United Kingdom, the board is an agent of the shareholders. While folks try to make that argument under U.S. law, the agency is not complete given, among other things, the inability of shareholders to direct the board (in most cases). In this aspect, the book's account of U.S. corporate governance offers support, at least from a comparative perspective, for the descriptive accuracy of Steve Bainbridge's evolving director primacy theory. At the very least, as Bruner notes, it is "explicable as a rejection of strict shareholder primacy." See p. 44. On that note, for those who haven't watched the videos of the recent UCLA Lowell Milken Institute event, A Conference and Micro-Symposium on Competing Theories of Corporate Governance, I highly recommend them.
I wonder (and I do not mean for this to be a mere rhetorical question) what, in light of Bruner's observations on U.S. corporate law, he might have to say about the introduction of social enterprise entities into state corporate law in the United States. In the past few years, we have seen in the United States the rise of benefit corporations, flexible purpose corporations, and the like (following on the introduction of B Corp certification and low-profit limited liability companies--L3Cs). This social enterprise entity movement (if you will) is in part a response to the lack of shareholder power under U.S. law to manage the business and affairs of the corporation--specifically, to ensure that the directors take into account social and environmental concerns in addition to traditional, financial shareholder wealth maximization. Yet, that account differs from Bruner's assessment in the book on other-constituency statutes like those in Indiana and Connecticut, see p. 44, which he characterizes as a "marginalization of shareholders." See also pp. 171-73. (I see Andrew also picks up on this thread.) The cultural, historical, economic, and political aspects of the emergence of social enterprise entities raise interesting questions that I would find to be a fruitful subject for further commentary. To the extent they may affect public companies (who may become and are acquiring social enterprise entities), the matter deserves thoughtful consideration. I can see how a treatment of this issue could both substantiate and challenge Bruner's observations about shareholder power under U.S. corporate law.
On a lighter note, as a securities law teacher and researcher, I also enjoyed the brief part of the book that explained the allocation of securities regulation authority in the various federal systems represented by the United States, Australia, and Canada. See p. 78. The issue of where authority in securities regulation resides in state governments outside the United States is always troublesome for those of us who desire to teach foreign law but have spent our time in the thickets of U.S. securities law. In other words, it's always difficult to find securities law in a new jurisdiction when searching for it from an ethnocentric perspective . . . . Here, I was admittedly a bit chagrined that U.S. securities law was classified as national law both as a default and in practice. Although the book only purports to address public companies (which admittedly are largely regulated under federal securities law in the United States), I would argue that a lawyer for a public company who forgets to check on the applicability of state securities law for a particular transaction is committing malpractice. This is true notwithstanding the breadth of constitutional power under the Commerce Clause and the resulting strong preemption provisions in the National Securities Markets Improvement Act of 1996. But I may be misunderstanding Bruner's analysis here.
No matter. The book is a good read (well written and provocative) and promises to generate much conversation here at Prawfs and elsewhere. It conveys a lot of information in a relatable and accessible way. I recommend it for your summer reading list.