REGULATORY ANALYSIS IN CORPORATE LAW
Martin Petrin
Drawing from recent experiences in the US, UK, and EU, this article examines
regulatory analysis of corporate law policies. It suggests that regulatory analysis, as
currently understood and applied in this area, suffers from severe weaknesses. The effects
of proposed corporate law policies are often particularly difficult to predict and even more
difficult to quantify, which negatively impacts analytical reliability. Moreover, given its
nature and interconnections with politics, corporate law is less amenable to purely
technocratic assessments than other areas of law. Based on three case studies, the article
explores these problems. It outlines a revised ‘procedural’ view, suggesting that regulatory
analysis in corporate law should be understood primarily as a process for enhancing
information, transparency, and monitoring, independently from specific normative criteria.
This leads to several implications. In short, regulatory analysis should combine quantified
analysis with leeway for regulatory judgment and focus on increased consultation, critical
engagement, review, and transparency as the dominant guiding factors.
Keywords: Regulatory analysis, impact analysis, cost benefit, corporate law, regulation
UCL Faculty of Laws. The author is grateful to Professor David Kershaw and the anonymous
referee for their insightful comments. Earlier versions of this article were presented at the National
Business Law Scholars Conference at Loyola Law School, Los Angeles and the Centre for
Corporate and Commercial Law at the University of Cambridge. I am thankful to participants at
these events and for discussions and comments from Iris Chiu, Eilís Ferran, Maria Lee, and Marc
Moore. Unless otherwise stated, all URLs were last accessed 10 March 2016.
REGULATORY ANALYSIS IN CORPORATE LAW 2
(A) INTRODUCTION
Legislatures and regulators in many countries have long been required to assess ex ante the
potential consequences of proposed laws and regulations through various forms of
regulatory analysis (hereinafter ‘RA’)
1
. Only upon a satisfactory outcome of these analyses
may regulators implement new laws, underscoring the importance of RA in the legislative
process. In particular due to its strong quantitative elements, RA has attracted both
academic support and criticism. This article contributes to this discussion, focusing
however on a more recent development, in which RA has begun to affect core areas of
corporate and corporate governance law
2
. Drawing from selected case studies in the United
States, the United Kingdom, and the European Union, the article thus explores the
application and avenues for further development of RA in the corporate law context, which
despite its significance has not previously been examined in the UK.
1
See C. Radaelli & F. de Francesco, Regulatory Impact Assessment, in: The Oxford Handbook of
Regulation, R. Baldwin et al., eds. (Oxford: OUP, 2010) 279 (stating that RA ‘has spread
throughout the globe’); R. Baldwin et al., Understanding Regulation (Oxford: OUP, 2012) 315–
319. For example, almost every OECD member state has now adopted some form of RA.
‘Regulatory Impact Analysis,’ http://www.oecd.org/gov/regulatory-policy/ria.htm.
2
In this article, the term ‘corporate law’ will be used in a broad sense, encompassing both
traditional corporate (or ‘company’) law and ‘corporate governance law’. On the potential
differences between these two and related terminology, see M. T. Moore, Corporate Governance in
the Shadow of the State (Oxford: Hart Publishing, 2013) 12–14. As such, ‘corporate law’ may also
overlap with aspects of financial and securities regulation, such as evidenced by the SEC’s proxy
access rule, which related to board composition and will be discussed below.
REGULATORY ANALYSIS IN CORPORATE LAW 3
The article proceeds as follows: In order to provide a foundational basis, the first part
begins by defining the concept of RA and outlining the legal frameworks within which it
operates in the three jurisdictions. This part also discusses various functions that are most
commonly attributed to RA in general.
In the second part, the article shifts to an examination of three recent examples. First, it
considers the US Securities and Exchange Commission’s rule on proxy access and its
controversial cost-benefit analysis of provisions designed to affect the composition of
corporate boards. Second, the article explores the role of RA in the UK’s latest executive
remuneration reforms, which entail the question of which corporate constituency should be
ultimately in charge of executives’ salaries. Third, RA will be discussed in the context of
EU provisions on non-financial corporate disclosure, an area that in part touches upon
contentious corporate social responsibility questions.
Drawing from an analysis of these case studies, the article’s final part provides an
assessment of RA in corporate law. It suggests that while this tool may be useful, the
inherent uncertainties in measuring the impact of corporate law policies as well as the
biases affecting RA mean that its role is different from what it is often perceived. In
contrast to other areas with a more ‘scientific’ basis and (to a certain extent) ex ante
measurable effects, such as health and safety law, the consequences of proposed corporate
law policies – which have no connection to physical ‘laws of nature’ – are particularly
difficult to predict and quantify. Contentious issues therefore may need to be decided based
at least in part on expert or regulatory judgment. Moreover, and relatedly, corporate law is
to a large degree influenced by politics, and regulatory analysis is embedded in the political
process, which frames outcomes and is difficult to reconcile with purely ‘evidence-based’
REGULATORY ANALYSIS IN CORPORATE LAW 4
lawmaking that is apolitical and technocratic in nature. Indeed, it creates a risk that RA may
be deployed to clothe political judgments in the garb of technocratic neutrality.
While this article focuses on and adds to the literature on RA in corporate and financial
law as key aspects of ‘economic regulation’,
3
there are other sectors with similar
characteristics. The analysis and recommendations developed in this article can therefore be
applied more broadly. The dividing line between areas that are more amenable to traditional
RA – such as health and safety – and those that are not – such as corporate and financial
law – can arguably be drawn based on the extent to which definite, exogenous factors or
principles form the input for an assessment.
4
In corporate and financial law, fewer such
exogenous factors are available.
5
Moreover, this area is characterised by its strong impact
on various branches of the economy, intersections with societal and political issues, and its
3
See F. Chittenden et al., Impact Assessment in the EU, in: Better Regulation, S. Weatherill, ed
(Oxford: Hart Publishing, 2007) 272, defining ‘economic regulation’ as encompassing ‘regulations
that seek to alter the commercial and financial frameworks and markets’.
4
See text to n 153–160 (discussing, in part, Jeffrey Gordon’s arguments in this respect). In these
areas, it may also be possible to conduct experiments, which is not an option in other fields.
5
Other examples (based on the policy areas for UK impact assessments) that may suffer from
comparable problems in terms of RA include arts and culture; community and society; equality,
rights and citizenship; foreign affairs; and trade and investment.
REGULATORY ANALYSIS IN CORPORATE LAW 5
particularly dynamic nature.
6
These factors make corporate law RA especially challenging
– although not ‘sui generis’
7
– and amplify problems that are also present in other areas.
Against this background, the article suggest that rather than a mechanical method to
unearth the ‘best’ possible laws according to a normative criterion (such as varying
conceptions of ‘efficiency’ or ‘fairness’), RA should be conceptualised as mainly a
procedural and informational tool that supplements open consideration of the political and
policy judgments that underpin regulatory choices. As such, and contrary to common views
of RA, the tool’s main functions are increasing transparency and information for the public
and regulators alike, providing participatory opportunities for interested parties, and
facilitating monitoring of regulators. The article thereby offers an alternative viewpoint to
recent scholarly works that either support or propose to abolish the current regime of RA in
corporate and financial law. To conclude, the article discusses the revised view’s normative
consequences and measures to improve and better align RA with its model.
6
See J. C. Coates, ‘Cost-Benefit Analysis of Financial Regulation: Case Studies and Implications’
(2015) 124 Yale Law Journal 882, 998–1003.
7
On this, see also E. A. Posner & E. G. Weyl, ‘Cost-Benefit Analysis of Financial Regulation: A
Response to Criticisms’ (2015) 124 Yale Law Journal Forum 246, available at
http://www.yalelawjournal.org/pdf/Posner-WeylPDF_ijby4z9e.pdf (countering arguments that CBA in
financial regulation is different from other fields).