In the last decade, economists have produced a considerable body of research suggesting that the historical origin of a country's laws is highly correlated with a broad range of its legal rules and regulations, as well as with economic outcomes. We summarize this evidence and attempt a unified interpretation. We also address several objections to the empirical claim that legal origins matter. Finally, we assess the implications of this research for economic reform.

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The Economic Consequences of Legal Origins

We examine the effect of securities laws on stock market development in 49 countries. We find little evidence that public enforcement benefits stock markets, but strong evidence that laws mandating disclosure and facilitating private enforcement through liability rules benefit stock markets.

/pdf/what-works-in-securities-laws-13eie9llnc.pdf

What Works in Securities Laws

This book provides a detailed account of how structural flaws in corporate governance have enabled managers to influence their own pay and produced widespread distortions in pay arrangements. The book also examines how these flaws and distortions can best be addressed. Part I of the book (titled The Official View and its Limits) critically examines the arm's length contracting view, which underlies much of the academic research on executive compensation as well as the law's approach to it. We show that boards have not been operating at arm's length from the executives whose pay they set. While recent reforms can improve matters, they cannot be expected to eliminate significant deviations from arm's length contracting. We also show that the constraints imposed by market forces and shareholders' power to intervene are not tight enough to prevent such deviations. Part II of the book (titled Power and Pay) shows how an understanding of the role of managerial power can help explain executive compensation practices. We provide a framework for assessing whether pay arrangements are a product of managerial influence. We discuss managers' interest in camouflaging the amount and the performance-insensitivity of their pay. Applying our framework, we discuss how managerial influence can help explain, among other things, the evidence on the relationship between managerial pay and managerial power; the use of retirement benefits and other compensation arrangements to provide stealth compensation; and the ability of departing managers to obtain more than their contractual entitlement. Part III of the book (titled Decoupling Pay from Performance) examines how managerial influence has operated to reduce the performance-sensitivity of executive pay. Among other things, we examine the structure of non-equity compensation, the design of conventional option plans, the use of restricted stock grants, and managers' freedom to unload options and shares. Part IV of the book (titled Going Forward) discusses how executive compensation - and corporate governance more generally - can be improved. We examine the extent to which pay arrangements can be improved by adopting board process rules, imposing shareholder approval requirements, and making pay more transparent. We conclude that problems with compensation arrangements cannot be fully addressed without ensuring that directors focus on shareholder interests and operate at arm's length from the executives whose compensation they set. To achieve this result, we argue, it is not sufficient to make directors independent of executives as recent reforms has sought to do; it is also necessary to make directors dependent on shareholders by changing the legal arrangements that insulate boards from shareholders.

/pdf/pay-without-performance-the-unfulfilled-promise-of-executive-2jxhdecmc3.pdf

Pay without Performance: The Unfulfilled Promise of Executive Compensation

https://dspace.mit.edu/bitstream/handle/1721.1/99175/Hanlon_A%20review%20of%20tax%20research.pdf;sequence=1

A review of tax research

This paper is a survey of the literature on boards of directors, with an emphasis on research done subsequent to the Benjamin E. Hermalin and Michael S. Weisbach (2003) survey. The two questions most asked about boards are what determines their makeup and what determines their actions? These questions are fundamentally intertwined, which complicates the study of boards because makeup and actions are jointly endogenous. A focus of this survey is how the literature, theoretical as well as empirical, deals—or on occasions fails to deal—with this complication. We suggest that many studies of boards can best be interpreted as joint statements about both the director-selection process and the effect of board composition on board actions and firm performance. ( JEL G34, L25)

/pdf/the-role-of-boards-of-directors-in-corporate-governance-a-bnth5jodza.pdf

The Role of Boards of Directors in Corporate Governance: A Conceptual Framework and Survey

Company Law: Theory, Structure and Operation is the first United Kingdom law text to use economic theory to provide insights into corporate law, an approach widely adopted in the United States. In this book, Brian Cheffins discusses the inner workings of companies, examines the impact of the legal system on corporate activities, and evaluates the merits of governmental regulatory strategies. The book covers core areas of the undergraduate company law syllabus in a stimulating and theoretically enlightening fashion and addresses important company law topics such as: * limited liability of shareholders * shareholders' remedies * corporate governance (including the Cadbury Report) * executive pay (including the Greenbury Report) * the role of self-regulation in United Kingdom securities markets * the impact of European Union Directives on company law in the UK Brian Cheffins also examines in detail a number of questions which have not been fully explored elsewhere. These include: * What are the justifications for legal regulation of company affairs? * What are the drawbacks associated with government intervention? * How can one ascertain the optimal format for company law rules?

Company Law: Theory, Structure and Operation

Preface 1. Setting the Scene 2. The Determinants of Ownnership and Control: Current Theories 3. The Sell Side 4. The Buy Side 5. Up to 1880 6. 1880 - 1914 7. The Separation of Ownership and Control by 1914 8. 1914 - 1939 9. 1940 - 1990: The Sell Side 10. 1940 - 1990: The Buy Side 11. Epilogue: Challenges to the UK System of Ownership and Control

Corporate Ownership and Control: British Business Transformed

The corporate world today subdivides into rival systems of dispersed and concentrated ownership, with different corporate governance structures characterizing each. Various corporate governance experts have argued that ownership concentration is a consequence of poor legal protection of shareholders. The experience in the United Kingdom casts doubt, however, on the extent to which legal regulation matters in the corporate governance context. Developments in Britain suggest that a highly specific set of laws governing companies and financial markets do not have to be in place in order for dispersed share ownership and strong securities markets to develop. Instead, alternative institutional structures can perform the function that “law matters” advocates say the legal system needs to play.

https://www.jstor.org/stable/10.1086/322052

Does Law Matter? The Separation of Ownership and Control in the United Kingdom

Outside directors can fail to do a good job, sometimes spectacularly. Yet outside directors of U.S. public companies who fail to meet what we call their "vigilance duties" under corporate, securities, bankruptcy, environmental, and other laws almost never face personal liability. This paper describes the almost impenetrable windows within which outside directors may be personally liable for good faith conduct. The principal liability window is under securities law, for a seriously rich (hence worth chasing) director of an insolvent company, where damages exceed the DO barely open under securities law, but only if the firm is bankrupt -maps poorly (we argue) onto the policy factors that should inform director liability. We therefore consider whether the right policy move is toward greater liability of outside directors under corporate law, less liability under securities law, or some of both. We conclude that neither move will make a large difference in practice, given the mediating effects of insurance, indemnification, and settlement incentives. In a companion paper, Bernard Black & Brian Cheffins, Outside Director Liability and Reputational Sanctions Across Countries, we argue that a barely open liability window is likely to be a stable solution, both politically and in the D&O insurance market, and that a barely open window may strike a sensible balance between wanting directors to be aware of potential liability while wanting good candidates to neither avoid becoming directors nor to be overly risk-averse. The details of the window's shape may have only a second-order effect on director behavior.

Outside director liability

It is often assumed that strong securities markets require good legal protection of minority shareholders. This implies both “good” law—principally, corporate and securities law—and enforcement, yet there has been little empirical analysis of enforcement. We study private enforcement of corporate law in two common-law jurisdictions with highly developed stock markets, the United Kingdom and the United States, examining how often directors of publicly traded companies are sued, and the nature and outcomes of those suits. We find, based a comprehensive search for filings over 2004–2006, that lawsuits against directors of public companies alleging breach of duty are nearly nonexistent in the United Kingdom. The United States is more litigious, but we still find, based on a nationwide search of court decisions between 2000–2007, that only a small percentage of public companies face a lawsuit against directors alleging a breach of duty that is sufficiently contentious to result in a reported judicial opinion, and a substantial fraction of these cases are dismissed. We examine possible substitutes in the United Kingdom for formal private enforcement of corporate law and find some evidence of substitutes, especially for takeover litigation. Nonetheless, our results suggest that formal private enforcement of corporate law is less central to strong securities markets than might be anticipated.

Brian R. Cheffins

Papers

Company Law: Theory, Structure and Operation

Corporate Ownership and Control: British Business Transformed

Does Law Matter? The Separation of Ownership and Control in the United Kingdom

Outside director liability

Private Enforcement of Corporate Law: An Empirical Comparison of the United Kingdom and the United States