2011 Symposium "Berle II"
Friday, January 21, 2011 - Saturday, January 22, 2011
Thomas Stapleford (Bio)
Program of Liberal Studies
University of Notre Dame
"Advocates No More: American Economists and the U.S. Consumer Movement, 1920-1970"
Today the terms "economist" and "consumer advocate" are rarely associated with each other. During the interwar years, however, the U.S. federal government housed a plethora of economists with strong ties to a revitalized consumer movement. These ties, maintained in no small part by female economists, helped to drive both major policy initiatives and empirical research. By the mid- to late-1960s, these links had severely eroded, damaged by the fall of home economics as an academic discipline, anti-communist attacks on participants in the interwar consumer movement, and changes in the economics profession itself. In this paper, I sketch the broad outlines of this narrative while assessing the causes and consequences of American economists' changing relationship to consumers and consumer welfare.
Robert Van Horn (Bio)
Assistant Professor of Economics
University of Rhode Island
"Chicago's Shift in Attitude Toward Concentrations of Business Power (1934-1962)"
This essay traces Chicago economics' shift in attitude toward concentrations of business power. It argues that Chicago moved from a relatively anti-business power position to a relative pro-business power position and that this shift is linked to the effort of Chicago economists to rethink the classical liberal doctrine in the immediate postwar period.
Malcolm Rutherford (Bio)
Professor of Economics
Department of Economics, University of Victoria
"The Judicial Control of Business: Walton Hamilton, Antitrust and Chicago"
This paper deals with the views of Walton Hamilton on what he called the "judicial control of business." Hamilton was a central member of the institutionalist group of economists who rose to prominence in America in the 1920s. He had many contacts with members of the legal realist group, and himself moved to Yale Law School in 1928. He was a severe critic of the conservative members of the Supreme Court, and argued for the ability of the State to regulate business in the public interest. He was later to join Thurman Arnold in an attempt to develop an administrative approach to antitrust, designed to deal with the wide variety of restrictive trade practices. Hamilton's approach is contrasted with that developed more recently by members of the Chicago School. The Chicago approach downplays the problem of monopoly and emphasizes the power of competition to undermine positions of market power. There are, however, some interesting points of agreement, as Hamilton was one of the first to express concern for the problems of agency capture and of government regulations being turned into barriers to entry.
Angus Burgin (Bio)
Visiting Scholar at the American Academy of Arts and Sciences
Center of History and Economics
"Neoliberalism Before Neoliberalism"
Summary: The Colloque Lippmann, a gathering of intellectuals organized by the French philosopher Louis Rougier in Paris in 1938, is widely recognized as a foundational moment in the history of neoliberalism. This paper examines the origins of that gathering and the social philosophies of its central figures. It focuses on three individuals: Walter Lippmann, whose writings in the late 1930s provided an ideological program to the emerging community of free-market advocates; Louis Rougier, who developed a series of entrepreneurial projects that instilled them with a sense of coherence and purpose; and Wilhelm Röpke, who worked to develop permanent institutions that would be capable of sustaining their dialogue. By considering the convergence of these individuals' projects in the years leading up to the Second World War, the paper interrogates the early development of the word "neoliberalism" and the significance of the changes in both its meaning and its institutional support structures in subsequent years.
Ross B. Emmett (Bio)
Professor of Political Economy and
Political Theory & Constitutional Democracy
Co-Director, Michigan Center for Innovation & Economic Prosperity
James Madison College, Michigan State University
"Frank H. Knight on the Entrepreneur and the Modern Enterprise"
Frank Knight's theory of the entrepreneurial function in the modern enterprise is explored in two contexts. The first is the dismissal of the neoclassical theory of business enterprise by Berle and Means in The Modern Corporation and Private Property, and their subsequent call for measures that would ensure corporations acted in the social interest. The second context used to explore Knight's theory of entrepreneurship is his later arguments regarding the problem of intelligent control in a democratic society. Underlying all of Knight's work are his concerns about freedom and moral judgment in the midst of uncertainty, with the attendant problems commonly referred to today as the principal-agent problem and moral hazard. Knight argues that the entrepreneur personally absorbs these problems through his responsible direction of the modern enterprise; seen this way, profit is not just the return for bearing the risks of unknown consequences, but specifically for the courage to take up the challenge of organizing productive resources in the face of principal-agent and moral hazard problems. In the latter part of Risk, Uncertainty, and Profit, Knight argues that social functionaries are not entrepreneurs, and hence that democratic action will be plagued by principal-agent and moral hazard problems; a conclusion that much vexed him in his later ruminations on the fate of liberal democratic society. Were we to apply Knight's insights to Berle and Means' call for social control of the modern corporation, we could turn their argument around and ask: control by whom, for whose interest?
History, Theory and Crisis
Brett McDonnell (Bio)
Professor of Law
University of Minnesota Law
"Of Mises and Min(sky): Libertarian and Liberal Responses to Financial Crisis Past and Present"
I want to compare the reactions of Keynes and Hayek to the Great Depression, and how their approaches have evolved over time into theories of financial regulation. I will probably concentrate more on Keynes than on Hayek, in part because I think the story is more problematic for Keynes. That is, Keynes really didn't have much of a theory of financial regulation. But, financial regulation was of course an important part of the New Deal response to the Great Depression, and is now an important part of the response to the current Great Recession. Is there a theory that justifies that regulatory response?
Can Keynes, especially as interpreted and developed by post-Keynesians such as Minsky, help justify and guide that regulatory response? Those are the questions I'm thinking about at this point.
Marc Moore (Bio)
University of London Laws
"The Ongoing Crisis in the Financial Markets is a Crisis of Theory as Well. A Seventy-Year Commitment in Private Ordering and Public Policy: The Paradoxical Foundations of Corporate Contractarianism"
Regulation and Governance of Financial Markets and Bankruptcy in the Shadow of Crisis
Todd Arthur Bridges (Bio)
Doctoral Candidate & Visiting Fellow
University of Oxford
"The Extra-Legal Governance Structure of a Shadow Financial System: An Empirical Investigation of Social Structures and Institutions in the U.S. Hedge Fund Market"
This research project consists of a multi-stage, multi-method investigation into how governance is being constructed by organizations in the U.S. financial system in the absence of formal state regulation. Specifically, the U.S. hedge fund market is a sociologically important case study because if offers qualities of a pseudo-natural experiment wherein the formal regulatory structures that operate in the traditional financial system have been removed, leaving organizations the opportunity to create their own extra-legal governance mechanisms and structures. This creation and reproduction of new forms of governance are empirically explored through fieldwork, semi-structured interviews, and social network analysis. The analysis has revealed a complex set of social mechanisms that form the social cogs and wheels that bring into existence a unique form of market governance. The governance mechanisms operate at multiple levels--the inter-organizational and intra-organizational levels. In addition to these governance mechanisms, the data shows that even though the hedge fund is one of the least regulated organizations in the U.S. financial system, formal law indirectly affects the hedge fund's governance practices on a day-to-day level. In the final section, findings suggest that the inter and intra- organizational governance mechanisms converge to form three "ideal types" of governance regimes: (1) entrepreneurial regime; (2) transition regime; and (3) bureaucratic regime.
Zach Gubler (Bio)
Lecturer on Law
Harvard Law School
"Regulating the Financial Innovation Process"
What is "financial innovation" and why should we care about it? This question has become increasingly important in the wake of the recent financial crisis, yet the nature of financial innovation remains poorly understood. Drawing on the "New Institutional Economics" literature, this Article contends that financial innovation should be understood first and foremost as a process of change, a change in the type and variety of available financial products to be sure, but also a change in financial intermediaries (such as banks) and in markets themselves. It argues that this reframing has important policy implications for the economics of regulating the financial innovation process and for understanding the dynamics of modern financial markets in general. As an illustration of these ideas, the Article undertakes a critical analysis of a current policy proposal: the requirement that banks that deal in over-the-counter derivatives transfer the management of certain risks associated with these instruments to a highly regulated third-party called a centralized clearing party. The Article argues that this proposal is properly viewed as an attempt to regulate the process of financial innovation itself and that, when viewed in this light, the proposal is neither as modest nor as obviously superior to the status quo as its proponents claim. Finally, the Article sketches two alternatives to the proposed rule that seek to navigate the trade-offs of what the Article refers to as the "new" economics of financial regulation.
Stephen J. Lubben (Bio)
Daniel J. Moore Professor of Law
Seton Hall Law
"The Risks of Fractured Resolution - Finance and Bankruptcy"
This paper sketches the several existing systems for resolving financial distress in financial firms, including the new resolution authority created by the Dodd-Frank bill. By my count, there are at least six systems at work here, not counting state-by-state variations. I examine the coverage of these systems, and the uncertainty created by the interaction of the same. For example, under current law, a large hedge fund would be "resolved" under chapter 11 of the Bankruptcy Code - unless the newly created systemic risk counsel, a body dominated by people from outside the restructuring community, decides otherwise. This leaves it unclear to the fund's counterparties which set of rules is incorporated into their contracts with the hedge fund. Undoubtedly both will be priced, with a further discount for the uncertainty. That is unlikely to be the optimal solution, and the gaps in the overall structure are a potential source of systemic risk.
Michelle Harner (Bio)
Associate Professor of Law and Co-Director, Business Law Program
University of Maryland
"Behind Closed Doors: The Influence of Creditors in Business Reorganizations"
General corporate law delegates the power to manage a corporation to the board of directors. The board in turn acts as a fiduciary and generally owes its duties to the corporation and its shareholders. Many courts and commentators summarize the board's primary objective as maximizing shareholder wealth. Accordingly, one would expect a board's conduct to be governed largely by the interests of the corporation and its shareholders.
Yet, anecdotal and increasing empirical evidence suggest that large creditors wield significant influence over their corporate debtors. Although this influence is most apparent as the corporation approaches insolvency, the strength of the creditors' negotiating position often is based on the terms of the pre-insolvency contract. Creditors typically obtain restrictive covenants and veto rights that allow them to assert control over various corporate actions. Nevertheless, the extent of creditor influence is hard to gauge accurately because it frequently materializes behind closed doors, in negotiations between the corporation and creditors over refinancing terms, forbearance agreements, covenant waivers or rescue financing.
This article attempts to shed some light on the nature and extent of creditor influence by examining creditor influence over corporate debtors and creditors' committees in chapter 11 reorganization cases. Specifically, it reports and analyzes data from an empirical survey of professionals and individual creditors participating in the chapter 11 process. In many respects, the data confirm what commentators have gleaned from the terms of creditors' contracts and activity documented on chapter 11 dockets-creditors are trying to exert greater influence over corporate decisions in the restructuring context.
Fenner Stewart (Bio)
PhD Candidate & Academic Director
Comparative Research in Law and Political Economy Fellow
Osgoode Hall Law School
"Berle's Conception of Shareholder Primacy: A Forgotten Perspective for Reconsideration During the Rise of Finance"
Adolf A. Berle is celebrated as the grandfather of modern shareholder primacy, but this glosses over his opposition to how Henry Manne used his argument. If Berle were alive today, he would certainly reject this praise. This is not always appreciated in commentaries of his shareholder primacy argument. For this reason, this article offers a nuanced understanding of Berle's argument, providing a clear observation point for examining the shift from his shareholder primacy argument to the one of today. From this point of observation, the reader can see distinctions within, and potentials for, the shareholder primacy argument and thus the variety of ways that investor empowerment can develop during the current "rise of finance."
John Cioffi (Bio)
Assistant Professor of Political Science
College of Humanities, Arts, and Social Sciences
University of California Riverside
"Fiduciaries, Federalization, and Finance Capitalism: Berle's Ambiguous Legacy and the Collapse of Countervailing Power"
In addition to its classic theoretical and empirical analysis of the separation of ownership and control, the seminal work of Berle and Means also helped lay the intellectual foundation for the normative ideal of shareholder supremacy espoused by later generations of scholars and policymakers and their preoccupation with promoting the diffusion of shareholding as a policy goal and indicator of efficient, well-developed capital markets. Berle's emphasis on fiduciary duties as his favored legal mechanism of shareholder protection provided intellectual ammunition for this ideational and policy agenda. However, this misappropriation of Berle's work represents a substantial misunderstanding of the New Deal and post-New Deal political economic order and its legal infrastructure, for which Berle was an important inspiration and architect. Far from the shareholder-centric corporate governance model and extractive form of finance capitalism of our own day, the American political economy and the governance of large public firms during the New Deal and post-New Deal eras were defined, in the terminology of John Kenneth Galbraith, by relations of countervailing power among managers, shareholders (and other financial interests), strong unions and organized labor relations, and the relative autonomy of the regulatory state. The shareholder primacy inchoate within fiduciary duties was but one normative element in a more complex, and more balanced, set of political, legal, and economic arrangements, within which shareholder primacy could not become effective without destabilizing the broader political economic structure. The triumph of the ideology (if not the practical enforcement) of shareholder primacy and the priority accorded to the pursuit of shareholder value in legal norms and policy discourse is inseparable from the collapse of countervailing power and the rise of a crisis-prone form of finance capitalism marked by redistributions of income, wealth, and power increasingly skewed towards those privileged by their control over corporations and financial capital.
Marc Schneiberg (Bio)
John C. Pock Professor of Sociology
"Toward an Organizationally Diversified American Capitalism: Cooperative, Mutual and Local State-Owned Enterprise" (abstract forthcoming)
Jerry Davis (Bio)
Wilbur K. Pierpont Collegiate Professor of Management & Professor of Management and Organizations
Ross School of Business, University of Michigan
"Organizational Alternatives After Shareholder Capitalism"
The managerialist corporation was a central pillar of post-war American society, providing stable employment, health care for employees and their dependents, and income security for retirees. The advent of shareholder capitalism put an end to managerialism, and the financial crisis has swept away much of what remained of the quasi-feudal 'corporate system' described by Berle and Means. The political currents against centralized provision of social welfare, coupled with legal and organizational innovations, suggest that we may be in the midst of a new period of de-centralized innovation in organizational forms that can be aided by thoughtful scholarship. This article will review some of these developments and suggest possible future courses.
Antony Page (Bio)
Professor of Law and Dean's Fellow
Indiana University School of Law - Indianapolis
"Is Social Enterprise the New Corporate Responsibility?"
The modern debate over corporate social responsibility began in the early 1930s with the famous exchange between Adolf Berle and Merrick Dodds. Since then, it has continued, peaking roughly every twenty years, with arguably little progress. On one side are those who contend that a corporation's board of directors has a paramount duty to maximize profits for the benefit of shareholders. On the other are those, following Berle, who believe that corporations have broader and wider social responsibilities to other stakeholders besides shareholders. Many in this camp claim that corporate law and norms impel corporate boards' to maximize shareholder value. They assert employees, suppliers, creditors and the community have legitimate claims on the corporation that must be recognized. These critics have pursued two major strategies. Mainstream proponents of corporate social responsibility have promoted extra-legal strategies, including self-regulation, external monitoring, and socially responsible investing. Proponents of "progressive" corporate law have advocated structural changes in corporate law itself designed to serve the interests of non-shareholder stakeholders, such as "other constituency" statutes that expand directors' discretion. More recently, however, a new approach has emerged that promotes the creation of organizational forms for businesses that expressly aim to both generate profits for owners and pursue a social mission. Such for-profit enterprises are loosely termed "social enterprises." The social enterprise movement has had recent legislative successes with the introduction in several states of organizational forms that are intended to better combine nonprofit and for-profit components. This article (1) analyzes social enterprise in light of the longstanding argument over corporate social responsibility, (2) explores the tension and commonalities between corporate social responsibility and social enterprise.
Celia Taylor (Bio)
Strum College of Law
University of Denver
"Social Business; Expanding the Scope of the Corporate Form" (abstract forthcoming)
Corporate Governance I: Theory
Afra Afsharipour (Bio)
Acting Professor of Law
University of California Davis School of Law
"Corporations as Trustees of the Nation? India's Corporate Governance and Corporate Social Responsibility Reform Efforts"
Corporate law in India has been fundamentally transformed since the early 1990s. In conjunction with significant economic liberalization, the Indian government has introduced a series of corporate law reforms aimed, in part, at creating a "system of transparent and accountable corporate functioning." Much of the early reforms were aimed at implementing rules and practices that addressed traditional corporate governance, in other words the relationship between the firm's managers and its shareholder and the relationship among different groups of shareholders, in particular majority and minority shareholders. More recently, not only has the government implemented laws to address corporate governance matters, but it has also stepped into the corporate social responsibility (CSR) area. At the end of 2009, amid much fanfare, the Indian Ministry of Corporate Affairs issued two separate voluntary codes, one aimed at corporate governance reforms and the other aimed at CSR reforms.
India's corporate governance and CSR reforms have both in large part pinned their hopes on independent directors. In the corporate governance realm, these reforms envision independent directors as serving both a monitoring function and an advisory function. However, while the independent director model has much to recommend, and there is some evidence of the markets assigning a positive value to independent directors on boards of Indian companies, there are serious constraints to the model for the Indian context. It is clear that without significant additional reforms, the independent director model will not fully address the most important corporate governance concern in India - the pervasive influence of promoters and controlling shareholders. Like India's corporate governance reforms, the government's recent CSR guidelines similarly place much responsibility upon corporate directors. India's CSR guidelines and the government's various public statements connected thereto view directors from a Gandhian perspective as trustees with duties to shareholders, stakeholders and society as a whole.
This Article argues that the Indian government's corporate governance and CSR efforts, which are both now undergoing a shift to a more mandatory status, while laudable in some respects, present a somewhat problematic view of the governance of Indian companies and how that governance relates with the role of the corporation in Indian society. Moreover, recent proposed corporate law reforms in India suggest imposition of rules that have been described as "regulatory micromanagement of corporate boards" without necessarily assisting directors in addressing the fundamental majority-minority agency problems that arise in controlled companies. Similarly, India's proposed CSR guidelines may in fact hamper independent directors and exacerbate some of the problems that this Article discusses with respect to majority-minority agency costs.
Alan Hutchinson (Bio)
Distinguished Research Professor
Osgoode Hall Law School
"Commercial Profits, Democratic Deficits, and Corporate Governance: A Different Balance"
This paper will address the contemporary debate around the dimensions and indicators of what counts as 'good corporate governance'. In particular, it will move beyond the traditional evaluative focus of economic success and instead look to a more inclusive standard of social well-being. Drawing upon an expansive understanding of the role of corporations in modern society and its recent crises, it will suggest ways in which the performance of corporations can be appreciated and assessed in terms of both economic and social improvement. As well, proposals will be made to develop appropriate institutional and practical reforms to advance such an approach. Theoretical solutions to the problem of the modern corporation.
Nina Walton (Bio)
Assistant Professor of Law
University of Southern California Law
"On the Optimal Allocation of Power Between Shareholders and Managers"
The question of how to allocate power between managers and shareholders, while intensely debated, remains unresolved among scholars and policymakers. This paper contributes to this debate by formally investigating the optimal allocation of power for shareholders recognizing that they may be heterogeneous, and that agency problems exist with managers. In the model, I treat shareholders as economic actors who choose decision rules (or the degree of
management insulation) under a veil of ignorance with the goal of maximizing their utility. Managers choose their consumption of private benefits based on the insulation levels chosen by shareholders. I demonstrate that shareholders
face a trade-off when choosing the level of managerial power. High insulation is desirable because it prevents other minority shareholders from blocking potentially pro?table investments. Low insulation is desirable because it prevents other shareholders from approving potentially unprofitable investments, as well as reducing agency costs.
Yuri Biondi (Bio)
Tenured Research Fellow
"The Problem of Social Income: The entity view of the catherdral"
This paper deals with the problem of social cost raised by Coase (1960) by comparing alternative institutional responses that are ownership, market, taxation, responsibility (or tort law) and the accounting system of the joint entity. This institutional comparative analysis understands alternative institutional designs as socio-economic systems involving monetary, legal, and political dimensions, as advocated by Ostrom (1990), Calabresi and Melamed (1972), and Coase (1960) among others. In particular, the ownership solution involves the allocation by law of control rights that individuals can bargain. The market solution involves the allocation of that right through a competitive auction. Taxation requires the establishment of a public order concerned with the right to fix and raise taxes. The responsibility solution involves the enforcement of a compensation claim or liability for tort and damages. Drawing upon the institutional approach of Berle (1947), the entity solution consists of a joint governance system that is accounted for by an accounting system. The paper disentangles the special conditions of efficiency, information and control that belong to each institutional solution. It shows that, by requiring explicit income-sharing and joint-decision instrumentalities, the entity solution provides the most satisfying results according to a criterion of systemic efficiency that is introduced.
Corporate Governance II: The Board of Directors
Lissa Lamkin Broome (Bio)
Wachovia Professor of Banking Law & Director of the Center for Banking and Finance
University of North Carolina School of Law
Kim Krawiec (Bio)
Professor of Law
John Conley (Bio)
William Rand Kenan Jr. Professor of Law
University of North Carolina School of Law
"Does Critical Mass Matter? Views from the Board Room"
In this article, we report and analyze the results of a series of wide-ranging interviews with corporate directors and other relevant insiders on the general topic of whether and how the racial, ethnic, and gender composition of corporate boards matters. In particular, we explore their views on the concept of "critical mass" - that is, the theory that women and racial or ethnic minorities are unlikely to have an impact on board outcomes until they grow from a few tokens into a considerable minority of the board.
In contrast to other recent research, we find little support among our respondents for the "critical mass" theory. Rather, their narratives highlight a tension between what we refer to as the "critical mass" and the "first and only." On the one hand, our respondents were nearly uniform in their statements that race and gender diversity was a good and positive ideal on corporate boards, and that more of it would be all the better. Some female respondents even expressed the view, consistent with the critical mass theory, that having more women on the board increased their comfort level.
Yet, at the same time, our female and minority respondents tend to view themselves as path breakers - often the first and only female or minority at many important stages of their careers. They exhibit a certain pride in the notion that they are highly qualified corporate directors, accustomed to their "outsider" status, and need no additional reassurance or support from the presence of members of their own demographic group.
Nicola Sharpe (Bio)
Richard W. and Marie L. Corman Scholar
University of Illinois College of Law
"Matching Form and Function: Identifying the Realistic Roles of the Corporate Board of Directors"
Why do corporations need a board of directors? What tasks are boards of directors able to perform well? Delaware law empowers the board to manage or direct the management of the corporation. Legal scholars most frequently describe the board as solving the agency problem inherent in the corporate form due to the separation of ownership from control. Economic literature similarly treats the board as the shareholders' primary means of monitoring managers to ensure that managers are serving in the best interests of the shareholders. Not surprisingly, corporate board reforms adopt a similar approach. The shift toward increasing the monitoring function of the board through director independence, which started in the 1970s, has continued through major legislative overhauls such as the Sarbanes-Oxley Act, changes in the stock exchange listing standards post-Enron, and the government's involvement in corporate boards following the 2008 financial crisis. Against the backdrop of forty years of repeated corporate failure, there has been a shift away from a managerial dominated model of the firm (where the board performed a cursory advisory role) to a more board-centric model where the board theoretically has more influence and greater monitoring responsibility.
Each major cycle of failure has prompted a rapid response designed to improve corporate governance. However, many of these regulatory reforms have not been well designed to accomplish their desired ends. One reason may be that there is an insufficient understanding of what boards can actually accomplish. As a result, many of the reforms have failed to adequately address the repeated failures that have plagued the corporate arena for the past several decades.
Legal theories of corporate governance abound. In addition to the theoretical work, there are numerous empirical studies examining the success and failure of the board of directors. Neither the legal theories nor the empirical work are organized around the tasks actually performed by boards, or around whether boards actually perform those tasks well. Regulators, commentators, and scholars hastily propose reforms designed to help the board function better and to reduce the risk of repeating prior mistakes. To determine whether reform is actually needed and if so what type, this Essay explores two issues. This Essay first asks, given the repeated blame directed at the board of directors and the continual failure for adequate reform, is the board of directors still necessary? This Essay argues that it is. Next, the Essay identifies the tasks the board of director typically performs and then categorizes them. In doing so, it is clear that there are certain functions that are more feasible for the corporate board to perform, while others may be beyond the core competencies of a typical board of directors. This Essay posits that close monitoring of corporate executives is likely outside the scope of the real-world function of most boards of directors. Specifically, this Essay argues that boards have often been accused of failing when, in light of what one can reasonably ask of boards, most boards have in fact performed their duties well.
(Speakers are listed in order of appearance)