Spring 2022 Workshops

Jan. 31, 2022 (Mon)
4:20 – 6:10 PM

John Armour

Professor of Law and Finance
Oxford Law Faculty

Presentation via Zoom to Case Lounge (JG 701).

Green Pills

Paper is an early draft and has not been posted at the speaker's request.

Luca Enriques (Oxford Law Faculty)
Thom Wetzer (Oxford Law Faculty)

Many companies are now making “commitments” to reduce their carbon emissions over the coming years. But how credible are these promises? At the firm level, the business case for carbon reduction depends on regulatory changes that cause firms’ costs of carbon emissions to increase. However, the pace of regulatory change is not exogenous to corporate activity. The history of corporate strategy on climate change is littered with powerful rear-guard actions designed to stave off the enactment of rules intended to promote public welfare. In recognition of this, companies making carbon reduction commitments are also promising to put their lobbying heft behind increases in carbon pricing. We show that the endogeneity of regulatory change to corporate action undermines the credibility of corporate climate commitments, making them hard to distinguish from cynical “greenwashing”. In this paper, we propose a suite of mechanisms that firms can deploy to render their commitments credible independently of the cost of carbon. These have the effect of incentivising firms to commit jointly to pushing for increased carbon pricing and reducing carbon emissions. We suggest re-purposing core mechanisms of incentive alignment in corporate governance, including executive compensation and board structure, and introduce the idea of a “green pill” – a precommitment device similar in spirit (although different in operation) to the poison pill. Our findings have important implications for regulators, corporate boards, and environmentally concerned shareholder activists.

Feb. 14, 2022 (Mon)
4:20 – 6:10 PM

Madison Condon

Associate Professor of Law
Boston University School of Law

Presentation in Case Lounge (JG 701).

Market Myopia's Climate Bubble

A growing number of financial institutions, ranging from BlackRock to the Bank of England, have warned that markets may not be accurately incorporating climate change-related risks into asset prices. This Article seeks to explain how this mispricing occurs, drawing from scholarship on corporate governance and the mechanisms of market (in)efficiency. Market actors: (1) Lack the fine-grained asset level data they need in order to assess risk exposure; (2) Continue to rely on outdated means of assessing risk; (3) Have misaligned incentives resulting in climate-specific agency costs; (4) Have myopic biases exacerbated by climate change misinformation; and (5) Are impeded by captured regulators distorting the market. Further, trends in institutional share ownership reinforce apathy toward assessment of firm-specific fundamentals, especially over long-term horizons.

This underpricing of corporate climate risk contributes to the negative effects of climate change itself, as the mispricing of risk in the present leads to a misallocation of investment capital, hindering adaptation and subsidizing future combustion of fossil fuels. These risks could accumulate to the macroeconomic scale, generating a systemic risk to the financial system. While a broad array of government interventions are necessary to mitigate climate-related financial risks, this Article focuses on proposals for corporate governance and securities regulation—and their limits. The Securities and Exchange Commission is currently drafting a rule on mandatory climate risk disclosure. This Article argues that the SEC should seek out climate expertise through interagency collaboration and staff hiring, work with auditors and the Public Company Accounting Oversight Board, and provide guidance on climate risk analytics. This Article argues that climate risk disclosure is necessary, though alone not sufficient, to address the widespread disregard of corporate climate exposure.

Feb. 28, 2022 (Mon)
4:20 – 6:10 PM

Holger Spamann

Lawrence R. Grove Professor of Law
Harvard Law School

Presentation in Case Lounge (JG 701).

Indirect Investor Protection: The Investment Ecosystem and Its Legal Underpinnings

Revised 2022 02 21.

This paper argues that the key mechanisms protecting portfolio investors in public corporate securities are indirect. They do not rely on actions by the investors or by any private actor directly charged with looking after investors’ interests. Rather, they are provided by the ecosystem that investors (are legally forced to) inhabit, as a byproduct of the mostly self-interested, mutually and legally constrained behavior of third parties without a mandate to help the investors (e.g., speculators, activists, plaintiff lawyers). This elucidates key rules, resolves the mandatory vs. enabling tension in corporate/securities law, and exposes passive investing’s fragile reliance on others’ trading.

March 7, 2022 (Mon)
4:20 – 6:10 PM

Sarah Haan

Professor of Law
Washington & Lee School of Law

Presentation in Case Lounge (JG 701).

Corporate Governance and the Feminization of Capital

At the start of the twentieth century, women constituted a small proportion of shareholders in American publicly-traded companies. By 1956, women were the majority of individual shareholders. Although this change in shareholder gender demographics happened gradually, it was evident early in the century: Before the 1929 stock market crash, women shareholders had come to outnumber men at some of America’s largest and most influential corporations, including AT&T, General Electric, and the Pennsylvania Railroad. This Article synthesizes information from a range of historical sources to reveal an overlooked narrative of history, the feminization of capital—the transformation of American public company shareholders from majority-male to majority-female. It charts the growing proportion of women shareholders over the first half of the century, describes the business community’s response to this trend, and explores the impact of the rise of intermediation on the gender politics of corporate control.

Corporate law scholarship has never before acknowledged that the early decades of the twentieth century, a transformational era in corporate law and theory, coincided with a change in the gender composition of the shareholder class. Scholars have not considered the possibility that shareholders’ gender—which was being tracked internally at companies, disclosed in annual reports, and publicly reported in the press—might have influenced business leaders’ views about corporate organization and governance. This Article considers the implications of this history for some of the most important ideas in corporate law theory, including the “separation of ownership and control,” shareholder “passivity,” stakeholderism, and board representation. It argues that early-twentieth-century gender politics helped shape foundational ideas of corporate governance theory, especially ideas concerning the role of shareholders. Outlining a research agenda where history intersects with corporate law’s most vital present-day problems, the Article lays out evidence showing that the feminization of shareholding was an influence on changing ideas about the role of shareholders in corporate governance, and invites the corporate law discipline to begin a conversation about gender, power, and the evolution of corporate law.

March 21, 2022 (Mon)
4:20 – 6:10 PM

Vikramaditya Khanna

William W. Cook Professor of Law
University of Michigan Law School

Presentation in Case Lounge (JG 701).

Controlling Externalities: Ownership Structure and Cross-Firm Externalities

Coauthor: Dhammika Dharmapala (University of Chicago Law School)

In recent years, debates over the social purpose of corporations have taken center stage amidst rising concern about externalities (such as those associated with climate change and harmful speech) generated by firms. A key motivation is the claim that government regulation and liability regimes appear not to be functioning sufficiently well to force firms to internalize these externalities. There is thus rising interest in exploring alternative mechanisms. In particular, a rapidly growing body of scholarship argues that index funds increasingly approximate diversified “universal owners” with incentives to maximize portfolio value (and thus to internalize cross-firm externalities). However, much of this analysis has focused on diffusely held US firms, while most firms in the world (including many important firms in the US), and many firms thought to be large contributors to these externalities, are controlled firms. Could index funds influence such firms to internalize externalities; if not, what other options might we consider?

This paper examines these related questions within a more general conceptual framework for understanding how firms’ ownership structure and corporate law affect the internalization of cross-firm externalities. First, we provide novel empirical evidence suggesting that index funds are not well positioned to force controlled firms to internalize their cross-firm externalities (in particular, that index funds’ environmental engagements are concentrated among firms in countries with dispersed ownership structures). Second, we document that controlling shareholders are common among the largest firms in the energy, automobile, and technology sectors. Third, we explore the incentives of controllers by introducing the concept of “controller wealth concentration” (CWC): the fraction of a controller’s aggregate personal wealth that consists of stock in the firm that she controls. The lower the CWC the more scope there is for the controller to hold = investments in other firms affected by the externalities created by the controlled firm. A low CWC is a necessary (though not sufficient) condition for controllers to have a pecuniary incentive to take cross-firm externalities into account (indeed, controllers with low CWC may be more effective than index funds in getting controlled firms to internalize their externalities because of their status as controllers). Fourth, we construct measures of CWC for the controlling shareholders of a global sample of large technology-focused firms. For this sample, CWC is very high relative to that of a diversified portfolio, typically varying from about 50% to close to 100%, despite the existence of controlling minority ownership structures (CMS) – such as dual class stock – that permit controlling shareholders to exert control while holding modest cash flow rights. Thus, we conclude that undiversified controlling shareholders constitute a significant obstacle to the internalization of cross-firm externalities, limiting the ability of universal owners to encourage their investee firms to internalize such externalities. Are there then steps that can be taken to encourage controllers to diversify more?

Our framework suggests that, in principle, dual class structures (and other CMS) have the hitherto ignored advantage of allowing controllers to diversify their personal wealth (thereby potentially mitigating cross-firm externalities). Yet, we find that controllers do not typically diversify and lower their CWC even when they maintain control through dual class structures or other CMS. We discuss possible reasons - including founders’ over-optimism about their firms, the need to incentivize founders’ ongoing effort, and founders’ incentives to defer capital gains taxes – to explain why controllers fail to diversify. We then discuss other measures that might encourage controllers to diversify, but conclude that they are unlikely to have very large effects.

Globally, a large fraction of corporations have controlled ownership structures. For these firms, the lack of controller diversification makes it difficult to identify mechanisms to internalize corporate externalities, besides increasing regulation and enhancing liability (although these solutions present their own challenges).

March 28, 2022 (Mon)
4:20 – 6:10 PM

Elizabeth Pollman

Professor of Law
University of Pennsylvania Carey Law School

Startup Failure

Presentation in Case Lounge (JG 701).

Venture-backed startups famously aim for a successful “exit” by going public or selling to another company through an acquisition deal and achieving financial return for all equity holders. A different path, however, is far more common – failure. Despite the large amounts invested in venture-backed startups, and their high average rate of failure, these companies rarely use the formal bankruptcy process that is embraced by other types of distressed companies.

This Article provides an account of startup failure – how law and culture have shaped a system for dealing with startups that cannot reach an exit that will produce a financial return for all participants. This account explains why bankruptcy law does not fit the needs of most distressed startups, what we can learn from exceptions, and how alternative mechanisms serve an important role in the venture capital ecosystem. In particular, soft-landing acquisitions, acqui-hires, and assignments for the benefit of creditors mitigate the potential stigma of failure and allow entrepreneurs, investors, employees, and creditors to “fail with honor” and redeploy their talent and capital into other ventures.

Further, the Article sheds light on rising challenges to the continued functioning of this system for dealing with startup failures amidst evolving practices and regulatory agendas. These challenges could threaten not only the pathway for dealing with failure, but also, more generally, the ecosystem which produces some of the greatest business successes of our time. Existing norms and practices may come under pressure with new entrants into venture-backed investments, higher startup valuations, and larger amounts of funds raised. Looming antitrust changes could close or tighten an important means by which startups find an off-ramp to fail with honor and quickly redeploy talent and technology. Instead of banning tech acquisitions, as some policymakers have proposed, this Article highlights the need for more finely-tuned approaches that appreciate the value of facilitating failure. In addition, corporate law could increase doctrinal clarity for startup boards navigating distress, and as startup activity continues to spread beyond Silicon Valley, states could amend their relevant laws, such as assignments for the benefit of creditors, to foster more efficient failure.

April 4, 2022 (Mon)
4:20 – 6:10 PM

Jeremy McClane

Professor of Law
University of Illinois College of Law

Visiting Professor (Spring 2022)
Boston College Law School

Presentation in Case Lounge (JG 701).

Uncommon Implications of the Common Ownership Hypothesis

Coauthor: Michael Sinkinson (Yale School of Management & NBER)

March 2022 Draft

One of the most pressing dilemmas facing consumer protection policy and corporate law is the common ownership problem – the idea that diversified investment products that help millions of consumers are indirectly making them worse off. The hypothesis states that when the same investment funds own sizable stakes in rival firms, those firms will have less incentive to compete with one another, leading to higher prices, lower wages and greater income inequality. We argue that current attempts to resolve the common ownership question are destined for stalemate because they are premised on a misunderstanding of the empirical evidence that frames the issue. The problem stems from a flawed measure of common ownership that drives the results of the empirical research on common ownership mechanically, rather than revealing anything about the underlying reality of the issue. We demonstrate this flaw by replicating the foundational “airline paper,” showing that a relationship between ownership and anticompetitive price increases can be obtained using completely random common ownership or low, presumably harmless levels of common ownership, in line with what some have proposed as a legal limit.

We propose an alternative empirical and legal approach to the common ownership problem that empirically tests a set of logical implications of common ownership theory that have thus far been missing from the conversation. These implications entail empirical observations that should be surprising and uncommon absent the effects of common ownership. Specifically, if the economic theory that underpins the hypothesis is true, certain transactional forms in the life of a firm that are assumed irrelevant for consumers should have dramatic effects on consumer prices. For example, Mondelez’s decision to change a subsidiary’s on-paper nationality through a tax inversion would be expected to lower other companies’ coffee prices. And Proctor & Gamble’s decision to pay in stock instead of cash to acquire Gillette should cause unrelated third-party companies to sell cheaper batteries. We explain how predictions like these can guide legal research and empirical inquiry into common ownership’s effects, mechanisms and solutions.

April 18, 2022 (Mon)
4:20 – 6:10 PM

Andrew Baker

Fellow, Rock Center for Corporate Governance
Stanford Law School

Presentation in Case Lounge (JG 701).

The Effects of Hedge Fund Activism

In this paper I explore the relationship between the rise of hedge fund activism and firm outcomes, using a study design that explicitly takes into account how activists pick their targets. Contrary to much prior work, I find no evidence that activism is associated with increased firm operating performance or significant long-term returns once comparing to firms based on their similarity to the targets. However, activism does increase firm payouts to shareholders and decreases investment, consistent with the argument of many critics of activism. I also find that firm-level employment declines significantly following a targeting event, and that the subset of firms that experience an increase in operating performance also engage in higher levels of tax avoidance. The deregulation of proxy access rules, wholesale de staggering of corporate boards, and the rise in importance of proxy advisory firms who frequently recommend voting for activist proposals have made firms more susceptible to aggressive activism over the past three decades. The results in this paper, coupled with the rhetorical shift in focus from short-term profits to sustainable growth by large institutional investors, suggest a re-framing of the public debate over the benefits of shareholder activism.