Showing papers on "Corporate group published in 2005"

Are emerging economies less efficient? Performance persistence and the impact of business group affiliation

Abstract: By drawing a theoretical distinction between the persistence of superior and poor performance, we reconcile the conflicting predictions of the ‘revisionist’ and accepted views on the persistence of firm performance in emerging economies. Using a sample of manufacturing firms in the United States and India, we show that superior firm performance in emerging economies persists only as much as developed economies in line with the revisionist argument. We also provide evidence consistent with the accepted view that poor firm performance persists longer in emerging economies compared to developed economies. Further exploration of the latter shows that, contrary to predictions of extant theories, firms in emerging economies that are affiliated with an MNC or a business group have a greater persistence of poor performance than firms that are unaffiliated with these intermediate governance structures, and hence would be better off operating at arm's length. Copyright © 2005 John Wiley & Sons, Ltd.

Institutional Herding, Business Groups, and Economic Regimes: Evidence from Japan*

Abstract: We study institutional herding in Japan. Japanese firms are primarily owned by financial institutions and other corporations, they may belong to a business group (the keiretsu), and they have experienced several distinct economic regimes in its recent past. Overall, we find herding in Japan occurs on a lower level than in the United States but with a large impact on price movements. The price impact is even greater for keiretsu-affiliated firms. We also find the effects and behavior of institutional herding depends on the economic condition and the regulatory environment.

A Frog in a Well Knows Nothing of the Ocean: A History of Corporate Ownership in Japan

Abstract: Japan’s corporate sector has, over the past century, been reorganized according to every major corporate governance model. Prior to World War II, wealth Japanese families locked in their control over large corporations by organizing them into pyramidal groups, called zaibatsu, similar to structures currently found in Canada, France, Korea, Italy, and Sweden. In the 1930s, the military government imposed a centrally planned command economy, with private property rights retained as little more than a legal fiction. The American occupation force replaced this with a widely held corporate sector similar to that of the United Kingdom and United States. A bout of takeovers and greenmail ensued. To defend their positions, Japanese top executives placed small numerous blocks of stock with each other’s firms, creating dense networks of small intercorporate blocks that summed to majority blocks in each firm. These networks, called keiretsu, halted hostile takeovers completely. Although their primary functions were to lock in corporate control rights, both zaibatsu and keiretsu were probably also rational responses to a variety of institutional failings. Successful zaibatsu and keiretsu were enthusiastic political rentseekers, raising the possibility that large corporate groups are better at influencing government than free standing firms. In the case of keiretsu especially, this rent seeking probably retarded financial development and created long-term economic problems.

Growth, Diversification, and Business Group Formation in Entrepreneurial Firms

Abstract: Recent empirical research has demonstrated that the growth process of entrepreneurial firms is frequently achieved through the formation of business groups: i.e. a set of companies run by the same entrepreneur (or entrepreneurial team). This has been hypothesised as result of a growth process by diversification of the original activity. This entrepreneurial growth process offers an alternative explanation for the formation of business Groups, than that arising from managerial efficiency and expediency. The main aim of the article is to explore group formation through entrepreneurial diversification using a sample of high growth entrepreneurial firms. The analysis demonstrates that the running of a group of companies by the same entrepreneur is not only induced by the geographical extension of their operation and by diversification but also by the differentiation policy aimed at serving different market segments within the same sector. This seems to contrast with the diversification policy and organisational setting of large, managerial firms

Multinational Corporations, Transnational Law: The United Nation's Norms on the Responsibilities of Transnational Corporations as Harbinger of Corporate Responsibility in International Law

Abstract: This article considers the ramifications of current efforts to internationalize the regulation of corporate social responsibility The primary focus will be on current United Nations efforts to regulate transnational corporations through the development of its Norms on the Responsibilities of Transnational Corporations and Other Business Enterprises With Regard to Human Rights The Norms are critically important for two reasons First, the Norms themselves point to the evolution of fundamental changes in global thinking about corporations, the character and source of their regulation that together will have significant ramifications for American domestic law The Norms evidence an increasing taste, at the international level, for a shift from a private to a public law basis for corporate regulation The corporate social responsibility debate is ultimately a debate about the fundamental character of corporations as principally private or public entities Second, the development and continued life of the Norms and the ideas it embodies illustrate the development of a mechanics of interplay between national, international, public and private law systems in allocating, and competing, for power to regulate The regularization and institutionalization of these mechanics evidence transnational law coming into its own as a separate field of power The article first briefly describes the traditional domestic context of the debates about so-called corporate social responsibility and its relation to basic issues of corporate governance The article then turns to the changing context in which the Norms were conceived A critical analysis of the Norms in this context points to potential critical changes in global consensus with significant ramifications for American domestic law First, the Norms considerably alter the framework of the debate about corporate social responsibility Corporations, seen as social, political, and economic actors, would serve not merely a broadened set of traditional stakeholders, but also the state and international community as well Traditional constraints on action against shareholders, and especially corporate shareholders, would be effectively disregarded for virtually all purposes Second, the Norms enlist transnational corporations as agents of international law implementation, even against states that have either refused to ratify certain international instruments or have objected to the gloss advanced by international institutions The Norms create an effective system for the implementation of international law norms through private law The Norms are implemented through the law of contract between individuals rather than by treaty or state action Because the Norms are based on a number of international instruments that have not been ratified by all states, the Norms use transnational corporations as a means of end-running states, and in the process, create the basis for the articulation of customary international law principles that will apply to states Third, the Norms substantially alter the balance of power over corporate governance between inside stakeholders (shareholders, lenders, etc) and outside stakeholders (community, society, the state) by providing a substantial role to NGOs to monitor TNC conformity to the requirements of the Norms The article ends with a preliminary consideration of the Norms in a broader context It analyses the Norms, not as substance, but as symptom of two great fundamental changes in the allocation of governance power in a global setting First, it illustrates rearrangements in the relative power of systems of domestic, international, public and private systems of governance Second, the Norms provide a template for the character and form of interaction and communication, among these systems of governance

Management accounting profile of firms located in Brazil: a field study

Abstract: Companies must have resources that provide competitive advantages and are important factors for success. There is a great variety of such resources-including information systems, concepts of participation, models, and organizational structures. These can be referred to as components of managerial practice. Each company can be characterized as having a unique configuration of tools that can be recognized as the company profile. This paper analyzes the conceptual adherence (i. e., the relationship between theory and practice) of the managerial accounting practices of medium-sized and large Brazilian companies. Statistical multivariate analysis has allowed for the identification of five clusters within the group of companies studied. The main conclusion for the sample is that conceptual adherence to tactical components is greater than to strategic components. In addition, it is apparent that the newer components have not been widely adopted in the sample, similar to other field studies in the UK and USA

Corporate Social Responsibility as Business Strategy

Abstract: I argue that Corporate Social Responsibility (CSR), particularly the corporate code of conduct, has been one of global business’ preferred strategies for quelling popular discontent with corporate power. By “business strategy” I mean organized responses, through organizations like the International Chamber of Commerce (ICC), to the threat public regulation poses to business’s collective self-interest. Attention to CSR’s historical development reveals it has flourished as discourse and practice at times when corporations became subject to intense public scrutiny. In this essay I outline two periods of corporate crisis, and account for the role codes have played in quieting public concern over increasing corporate power: 1) When developing countries along with Western unions and social activists were calling for a ‘New International Economic Order’ that would more tightly regulate the activity of Transnational Corporations (1960-1976); and 2) When mass anti-globalization demonstrations and high profile corporate scandals are increasing the demand for regulation (1998-Present).

The Choice of Group Structure: Divide and Rule

Abstract: This paper concerns the structure of Korean business groups. We investigate the factors that affect a controlling shareholder's decision regarding the structure of his business group and the location of its member firms, using financial and ownership data on conglomerate groups in Korea. We define new measures that represent the levels of vertical and circuitous structures of a group, and the location of member firms in the group. We empirically confirm that controlling shareholders strategically choose the structure of their business groups to secure control over the groups and to seek private benefit of control. The risk diversification and propping incentive of controlling shareholders is also found to affect the decisions.

Global corporate citizenship: what does it mean?

Abstract: This article investigates the relationship between corporate social responsibility and a phrase that is fast becoming a preferred description of much the same thing but now set in an international context, namely global corporate citizenship. It is argued that the distinction between these two has not been clearly enough made in the literature. In clarifying the difference, the political nature of the idea of citizenship is focused upon and the politics of introducing triple-line considerations into the activity of transnational corporations is explored. An engagement with a wide range of civil society actors by corporations to further the 'ethical' agenda, a reconsideration of 'corporate democracy' in an international context, and the idea of a 'progressive capitalist' group of companies that might spear-head genuine corporate citizenship are concentrated upon in this assessment. Finally, the politics of an alliance for global corporate citizenship is broached that would take companies well beyo...

Shareholder Value and Employee Interests: Intersections Between Corporate Governance, Corporate Law and Labour Law

Abstract: This paper is part of a larger project that examines, by way of detailed case studies of companies, the interaction between several key factors in the creation and sustainability of Partnerships at Work. These factors include particular employment systems, forms of corporate governance and ownership structures. The project investigates how these various factors have interacted so as to give rise to - or fail to give rise to - high performance partnership-style relations at work. The focus of this paper is on three core issues. We first examine the extent to which shareholder value has come to dominate debates around corporate governance and theories of the company. Secondly, we explore the extent to which the Australian corporate law framework offers clear support for shareholder value as a corporate governance norm or imperative. Thirdly, we examine the degree to which labour law provides a constraint on, or compels a modification of, the idea of shareholder primacy. In relation to the first two of these issues, whereas we can clearly identify the consolidation of the shareholder value norm in contemporary corporate governance debates, our analysis leads us to the conclusion that some longstanding parts of corporate law provide only modest support for shareholder primacy. However, recent corporate governance reform strategies, such as those linking senior executive remuneration to share prices, and increasing reliance upon independent directors, are more closely linked to the pursuit of shareholder value than some of the more longstanding corporate law doctrines. Yet the impact of each of these reforms on corporate performance, and hence on the delivery of shareholder value, remains uncertain based on the results of empirical studies designed to test the outcomes of these reform strategies. We also examine changes in corporate ownership, where, in the Australian context, the increasing ownership by institutional investors (which provides an incentive for active monitoring of the governance of the companies in which they invest) is in many cases counter-balanced by even larger non-institutional substantial shareholders (such as shareholdings of founding families or overseas companies), thereby reducing the prospects of successful institutional intervention. Patterns of institutional activism vary, depending on the size of the shareholding, the size of other non-institutional holdings in the company, the size of the company itself, the resources devoted to monitoring, the nature of the institution's portfolio and whether the institution is managing index funds. We note that institutional investors have, in recent years, increasingly argued for the types of corporate governance reforms which involve the pursuit of shareholder value. In relation to the third issue, we argue that labour law, although not often a key focus of the research of corporate governance scholars, has always been able to be viewed as part of corporate governance to the extent to which it structures and limits what management can do in its relations with employees. However, current developments in Australian labour law are moving to a position whereby management's power to restructure the enterprise for shareholder value is being subjected to fewer constraints, with a corresponding shift of risk to employees.

Specific Investment and Corporate Law

Abstract: At the close of the twentieth century, U.S. corporate scholarship was dominated by a principal-agent paradigm that assumed that shareholders were the principals or sole residual claimants in public corporations, and also assumed that corporate directors were the shareholders' agents. This approach led many corporate scholars to assume that the proper purpose of the corporation was to maximize shareholder wealth and that the chief economic problem of interest in corporate law was the agency cost problem of getting corporate directors to focus on this goal. There are basic aspects of U.S. corporate law, however, that the principal-agent model cannot explain. These include directors' extensive and sui generis legal powers; the fact that directors control dividends; the device of legal personality; and the open-ended rules of corporate purpose. These corporate law anomalies have prompted contemporary economic and legal scholars to begin to move beyond a focus on agency costs and to pay attention to a second economic problem that arises in public corporations: the problem of protecting specific investment. When corporate production requires more than one individual or group to make specific investments, problems of intrafirm opportunism arise if shareholders try to exploit each other's specific investments or try to exploit the specific investments of creditors, employees, customers, and other groups. Board governance, while worsening agency costs, may provide a second-best solution to such intrafirm rent-seeking. This perspective explains many important corporate law anomalies that cannot be explained by the principal agent model. It also suggests a pressing need to revisit conventional notions of corporate purpose. Focusing on the problem of specific investment suggests that the proper purpose of the public corporation is not maximizing shareholder wealth, but promoting long-term, value-creating economic production under conditions of complexity and uncertainty, in a fashion that provides surplus benefits not only to shareholders but to other groups that make specific investments in corporations as well. This corporate objective is difficult to measure, much less maximize. Nevertheless, it may provide a better gauge of good corporate governance than the simplistic rubric of shareholder wealth.

Specific Investment: Explaining Anomalies in Corporate Law

Abstract: This essay has two goals: to praise Professor Robert Clark as a remarkable corporate scholar, and to explore how his work has helped to advance our understanding of corporations and corporate law. Clark wrote his classic treatise at a time when corporate scholarship was dominated by a principal-agent paradigm that viewed shareholders as the principals or sole residual claimants in public corporations and treated directors as shareholders' agents. This view naturally led contemporary scholars to assume the chief economic problem of interest in corporate law was the "agency cost" problem of getting corporate directors to do what shareholders wanted them to do (presumably, to maximize share value). Clark's treatise in some ways adopted this perspective. It also, however, carefully noted important but anomalous aspects of corporate law that the principal-agent model could not explain, including directors' extensive and sui generis legal powers; the fact that directors control dividends; the device of legal personality; and the open-ended rules of corporate purpose. Today, economic and legal scholars have begun to move beyond agency costs and to focus attention on a second economic problem that arises in public corporations: protecting specific investment. When corporate production requires more than one individual or group to make specific investments, problems of intrafirm opportunism arise as shareholders try to exploit each other and try as well to exploit creditors, employees, customers, and other groups that make specific investments. Board authority, while worsening agency costs, may provide a second-best solution to such intrafirm rent-seeking. This perspective can explain the important corporate law anomalies Clark described. Because Clark wrote his treatise at a time when the principal-agent paradigm was ascendant, he could not himself easily explain the anomalies he carefully noted. His treatise nevertheless showed both remarkable insight and remarkable honesty in discussing them. As result Clark played an important role in drawing scholars' attention to the limitations of the principal-agent model and in spurring them to explore alternatives. His treatise remains one of the best available starting points for the reader who wants an accurate portrait of the structure of corporate law.

The diversified business group as an innovative organisational model for large state-enterprise reform in China and Vietnam

Abstract: The diversified business group (DBG) is a ubiquitous institution in developing economies. It is a formal inter-firm network that typically involves financial institutions, distributors and manufacturers. Groupwise diversification is viewed by some as a novel form of organisational innovation by entrepreneurial tycoons while others see it as an instrument for rent seeking. Inspired by Korean chaebols but chastened by Russian financial-industrial groups, China and Vietnam are creating business groups out of State enterprises. After reviewing the theory and cross-country experience, this paper concludes that selective economic grouping can be an efficient transitional organisation. DBGs can facilitate government monitoring, exploitation of scale economies for scarce managerial talent, better risk management, and realisation of network and scope economies. Success in incubating national champions is, however, predicated on a high technocratic capability for restraining abuse of market power, nurturing competitive market institutions, properly sequencing large-scale privatisation, and crafting WTO-compatible industrial and technology policies.

Corporate Law or the Law of Business? Stakeholders and Corporate Governance at the End of History

Abstract: Corporate law is said to be witnessing the end of history. The long battle between the conservative, private, shareholder-wealth-maximization school of corporate legal thought and the progressive, public, stakeholder-protection/social responsibility school is now over and the victor, it is claimed by conservatives and progressives alike, is the former. This article argues that the private, shareholder-wealth-maximization school's victory is more illusory than real, and depends on a distortedly narrow view of what constitutes corporate governance. Offering a legal history of how the progressive-inspired ideals of stakeholder protection and corporate social responsibility through mandatory legal rules have shaped the law affecting corporations, this article uncovers two patterns which caution against a rush to declare the ultimate triumph of shareholder primacy. The first pattern is that progressives have successfully influenced several important areas of corporate law, such as the allowance of charitable giving and adoption of constituency statutes. These corporate law victories, however, have had notably mixed results; while sometimes helping stakeholders, they have also expanded managerial discretion and thus permitted self-dealing and opportunism. A second pattern is that progressives have been tremendously successful in shaping laws outside of corporate law but that nevertheless regulate fundamental features of corporate behavior in the name of stakeholders. From securities and labor law reforms in the New Deal to the environmental and consumer protection laws of the 1960s and 1970s, progressives have won a diverse and broad array of mandatory legal rules designed to limit corporate conduct perceived as harmful to non-shareholder constituencies. These various bodies of law - what might be termed the law of business - are forceful shapers of the choices corporate management can make about basic operational and organizational decisions. These patterns suggest that today's progressives might find more success changing laws external to corporate law rather than altering fiduciary principles. They also suggest that claims about the "end of history" and the triumph of shareholder primacy depend on an artificially narrow view of the law affecting corporate management. Whatever its explanatory power in corporate law, shareholder primacy is far from an accurate description of the law of business or of corporate practice.

New Principles for Corporate Law

Abstract: The fundamental assumptions of corporate law have changed little in decades. Accepted as truth are the notions that corporations are voluntary, private, contractual entities, that they have broad powers to make money in whatever ways and in whatever locations they see fit. The primary obligation of management is to shareholders, and shareholders alone. Corporations have broad powers but only a limited role: they exist to make money. Those who maintain these principles - a group that includes most of the legal scholars who teach and write in the area - have derived the narrow role of corporations in one of two ways. A few traditionalists take it as an article of faith, developed from a rights-based view of the private nature of corporations. Such view holds that shareholders are owners, and the corporation is their individual property. An argument that corporate governance operates in the realm of natural rights is a difficult, unpersuasive, and increasingly undefended contention: few of even the most vehement proponents of shareholder primacy make it anymore. Instead, the best and most thoughtful argument for shareholder primacy is not a rights-based claim, but an instrumental one. The claim is that maintaining the narrow role of corporations and of corporate governance is the best way to benefit society as a whole. The problem with the instrumental claim is that it is largely unsupported by empirical data and untested by rigorous counterargument. Absent both, the instrumental claim for shareholder primacy reveals itself to be as founded on faith as the traditionalists' rights-based arguments. The instrumentalist justification is often merely a post-hoc explanation for the status quo rather than a serious examination of what society's "best interest" would require in corporate governance. This article takes a novel approach to developing a set of principles and policies for corporate law, starting with a focus on society's well being. With society's interest as the explicit foundational principle, other principles for the regulation of corporations emerge that are strikingly different from the status quo. The principles derived here, five in all, begin at a high level of generality and become more particular and presumably more controversial. Nevertheless, all of them are rational, practical, and rooted in the protection of the public good. If adopted, these new principles and proposals would provide the basis for significant change in the way we govern corporations in this country. Of course, the foundational assumption that society's interest should be pursued will not satisfy those who see corporate law as governed by the realm of rights. Indeed, this article will not convince anyone who starts with the assumption that businesses can be run by their shareholder-owners as they see fit. For most people honestly wrestling with issues of corporate governance, however, shareholder primacy is not the foundational assumption but rather one of the potential conclusions. What this article makes clear is that other potential conclusions exist as well.

Playing Different Games? Regulatory Competition in Tax and Company Law Compared

Abstract: Modern economic writing regards the influence of market forces on legislation to be a major improvement to the quality of rule-making. This holds specifically true in the area of company law and tax law, which shape the framework for business activities like few other fields of law and have lead to increasing institutional competition among legislators. This article aims to analyse the rules and mechanics of the “competition game”, which work different in both legal fields. Through a comparison of U.S. and EC law it shows that in the area of company law both the product and its price are specified, while in the case of taxation the product is composed of a whole “bundle” of public goods. A comparison of both settings shows that the specificity of company law bears advantages as to the efficient allocation of resources and should not be given up by binding the availability of legal forms to taxation rights, as is the case in Delaware and its “franchise tax”. However, the specificity of company law also has its drawbacks, namely the necessary “cooperation” with other fields of regulation (such as creditor protection and labour relations). In this regard, the article discusses the fundamental problem that the possibility of corporate reorganisation in the European Internal Market through cross-border reincorporation or transfer of seat allows European companies a “pick-and-choose” approach, which threatens to undermine the functional “complementarity” between different parts of a legal system. The comparison of the different mechanics of company and tax law competition also reveals frictions that weaken its positive effects on the allocation of resources within an economy, namely arising from principal agent issues. In addition, both company and tax law have to deal with externalities and “spill over-effects” which may lead to underprovision of public goods and discriminatory effects. Finally, the article identifies positive effects on regulatory development that result from “vertical competition” between senior legislators at the federal or Community level and domestic rule makers.

R&D and productivity in corporate groups: an empirical investigation using a panel of French firms

Abstract: Using a panel of more than 3,100 French corporate groups’ affiliates and parent companies, we estimate a production function model where we enable the productivity of a firm to depend on the knowledge produced by the R&D activities of the other companies in the group. We find indeed that a firm’s productivity may significantly be enhanced thanks to the R&D capital of the other affiliates. This enhancement can be estimated to be, for the corporate group as a whole, between 30% and 40% of the “usual” estimate of the direct impact of firms’ R&D expenses on their own productivity. However, this effect differs depending on whether the firm itself conducts some R&D or not. In case it does, the other affiliates’ R&D does not appear to impact significantly on its own performances: those depend only on its proper R&D activity. At the opposite, the other affiliates’ R&D has a very significant effect on the productivity of firms which do not conduct any R&D. These results emphasize the existence of group spillovers, which differ from the usual industry or geographical spillovers. In particular, they do not seem to require an “R&D based absorptive capacity” to pre-exist and they are clearly the result of an explicit strategy, defined at the group level. Finally, these results might lead to revise upwards our estimates of the private returns on R&D investments.

The Future of Codetermination After Centros: Will German Corporate Law Move Closer to the U.S. Model?

Abstract: U.S. corporate law focuses on the maximization of shareholder wealth. By contrast, German corporate law continues to attach considerable importance to the interests of other stakeholders. Most importantly, German corporate law is designed to serve the interests of employees as well as those of shareholders. Under German codetermination law, employees are represented on the so-called supervisory board, thereby participating in the management of the corporation. In their present form, the rules on codetermination apply only to corporations incorporated in Germany. This did not present much of a problem as long as Germany adhered strictly to the so-called real seat doctrine. Under that doctrine, the location of the corporate headquarters determined the applicable corporate law. As a result, firms headquartered in Germany were forced to obey by the German rules on codetermination. However, in a series of groundbreaking decisions, the Court of Justice of the European Communities has made it clear that the real seat doctrine violates the Freedom of Establishment guaranteed by the Treaty Establishing the European Community. According to the Court, once a corporation has been validly formed in any given Member State, it generally has the right to be governed by the corporate law of that Member State. Thus, the rules on codetermination can now be evaded with impunity by so-called pseudo-foreign corporations that are headquartered in Germany, but incorporated in another Member State. This leads to an obvious question: Could Germany extend the scope of application of its codetermination law to cover pseudo-foreign corporations without violating European Community law? This note argues that the answer is yes. This note was first published in the Fordham Journal of Corporate and Financial Law, which kindly allowed me to post a copy on SSRN.

Corporate Governance and Company Law Reform: a German perspective

Abstract: Corporate crises and international trends in corporate governance have revealed the need for reform, and resulted in a great number of changes in corporate law. In spite of this, the existing legal framework for corporate governance in Germany presents itself reluctant to major changes. The German approach to reform has focused on the improvement of corporate monitoring by the supervisory board. It neither questions the two-tier structure, nor does it reconsider the existing representation of shareholders or other stakeholders under the current form of co-determination. The German Corporate Governance Code represents a new instrument of soft law and its recommendations are likely argued to improve the work of the supervisory board by providing detailed guidelines for corporate decision-making that express a generally accepted standard of best practice.

Taking Shareholder Protection Seriously? Corporate Governance in the U.S. and Germany

Abstract: This article provides a comparative study of four major dimensions of corporate governance in the U.S. and Germany: (1) the laws affecting corporate governance, particularly those designed to protect minority shareholders; (2) the prescribed role and actual conduct of corporate boards; (3) the market for corporate control (including hostile takeovers); and (4) incentive compensation. The authors pose the question: If the primary purpose of the corporate governance system is to serve the interests of minority shareholders, how do the U.S. and German governance systems rank on each of these four dimensions ? Their conclusion is that although the U.S. system is more shareholder friendly in many respects than the German, both systems have major shortcomings, particularly in the market for corporate control. The authors conclude with a list of proposed changes to both systems that would amount to “taking shareholders seriously.”

Corporate Law, Profit Maximization and the Responsible Shareholder

Abstract: What are the implications for the debate over corporate social responsibility, and for the normative economic analysis of corporate governance law, of the existence of shareholders whose investment decisions are not based solely on the pursuit of profit or other self-interest? The Article makes three basic points. First, ethical investing is significant because if corporations pursue stockholder profits to the exclusion of all other considerations, it is not because of managers' corporate law duties, which are unconstraining, but because of stockholder self-interest and market mechanisms that make management sensitive to the preferences of stockholders. Consequently, any hope one may have for greater corporate social responsibility lies with ethical investors rather than with corporate managers alone. Second, ethical investing is not inconsistent with the nexus of contracts conception, but it is awkward for corporate law theorists who advocate a rule of exclusive profit-maximization. Third, these theorists respond by characterizing ethical investing as either irrational and aberrant, or else rational and pernicious, both of which characterizations are misguided. I also consider the implications of the foregoing for two specific questions arising in North American corporate law in connection with ethical investing, specifically (a) whether corporate law should filter out shareholder social responsibility proposals; and (b) whether disclosure of matters relevant to ethical analysis of corporate conduct should be mandatory.

Reputation and Spillovers: Evidence from Indian Business Groups

Abstract: We investigate the importance of reputation-based implicit contracts in firm financing in the context of Indian Business Groups. The group structure enables us to cleanly analyze the negative spillovers on other firms, triggered by a member firm defaulting on its debt obligations. We hypothesize that business group insiders will support financially distressed member firms in order to maintain the group's reputation. The default by a group firm will damage a group's reputation - making it more difficult for the remaining firms to raise capital, thereby affecting their performance and survival. We show this to be the case for our sample: Groups use intra-group loans to support member firms in financial distress and, as a result, firms belonging to groups with unimpaired reputation are less likely to become bankrupt, relative to stand alone firms. The first bankruptcy in a group is followed by a significant drop in the amount of external finance raised, a discontinuous drop in investments and profits, and an increase in the bankruptcy probability of other healthy firms in the group. Consistent with loss of reputation being the reason for these spillovers, we find that negative consequences are more severe for firms in the group with closer managerial links to the bankrupt firm and for firms which depend more on external finance.

Other People's Money: Corporations, Agency Costs, and Campaign Finance Law

Abstract: This article offers a political history of the first major federal campaign finance law, the 1907 ban on corporate contributions to candidates. This law has been widely misunderstood by courts and scholars who contend that the corporate contribution ban was motivated primarily by progressive era fears of the excessive power and influence of big business. Challenging this prevailing wisdom, this article shows that concerns about excessive corporate power, while present, were matched if not exceed by a different conception of corporate political corruption. At the turn of the century, corporate political contributions were widely understood to be corrupt because they amounted to a misuse of other people's money: company executives were opportunistically misappropriating the owners' money to purchase legislation designed to immunize executives from the oversight of owners. In other words, corporate political corruption was also conceptualized as a problem of agency costs within firms. This agency costs story of corporate contributions was especially salient in the wake of the radical transformation in corporate law at the end of the nineteenth century that broadened managerial discretion, restricted traditional rights of owners, and paved the way for the separation of ownership from control. Moreover, the underlying campaign finance scandal that paved the way for adoption of the corporate contribution ban - the New York Life Insurance scandal - was one in which opportunism and misuse of other people's money was a paramount theme. As a result of this scandal, the various political partners in the coalition behind the Tillman Act were attracted to, and unified by, the other people's money theme. For Congress and President Roosevelt, partisanship, ideology, and self-interest were all better served by emphasizing other people's money instead of excessive corporate power. This other people's money definition of electoral corruption not only shaped the first federal regulation of corporate campaign activity, but ultimately defined the main channel through which almost all subsequent federal election laws pertaining to corporations would flow. Whereas legal scholars argue that corporations have been subject to special restrictions on their campaign activity due to a desire to restrain excessive corporate power - and thus are meant to further political equality - this article suggests that agency costs provides a better explanation of the trajectory and details of federal law pertaining to corporate involvement in elections. The prevailing tendency in federal campaign finance law on corporations has been to allow corporate involvement so long as firms organize their political activity to avoid agency costs. While other people's money began as a tool to limit corporate involvement in elections, the long reliance since on agency costs since has opened up new avenues of corporate influence - at the expense of political equality rather than in its service. Although we often think of corporate political corruption as business interests buying too much influence, this Article shows that agency costs has also played a formative role in the regulation of corporate politics and, indeed, has become a hidden cornerstone of campaign finance law.

Cheers and Boos for Employee Involvement: Co-Determination as Corporate Governance Conundrum

Abstract: Employee involvement in a very general sense is by and large an accepted policy goal in the European Union. Its forms nonetheless vary considerably among Member States and sometimes include boardroom representation. Board composition, performance and incentive structures are core areas of the ongoing corporate governance debate in Europe and most other parts of the world. These two discourses are rather disparate. Recent EC legislation and jurisprudence do not proactively pursue an integrated approach. The following paper maps out overlapping areas of employee participation and corporate structure, explores some theoretical underpinnings for employee involvement from a contract-theory perspective and analyses issues specific to internationally engaged corporate groups. Finally, a transaction-based approach for modernisation of employee involvement is suggested. Preference is given to default rules that do not require employees to be represented at board level yet leave room for agreements to that effect. The plasticity of private law, the resilience of the corporate form and the governance-assisted employment relationship can defy petrification. Transaction-based employee involvement promotes a productive conjunction of corporate governance components consonant with the specific character of the employment relationship. An evolutionary approach to reform requires flexible legislation instead of deference to existing models. However, consensual model building needs proper enabling tools. Academic groundwork in private international law, contract, labour and corporate law is called for.

Introduction to the Metaphors of Corporate Law

Abstract: Corporate law is dominated by a series of metaphors that present corporations as private, individualized, egalitarian and market-like, hiding their organizational, institutional, political and power distributing aspects. These metaphors - property, contract/market, agency and individuality - drive current interpretations of the law but remain in strong conflict with it, in part because historic corporate law stemmed from explicitly political conceptions. Although the metaphors have taught us to ignore the group and institutional characteristics of corporations, treating them as powerless and passive players in the markets, corporations in fact are powerful governance and economic institutions.

R&D and productivity in corporate groups: an empirical investigation using a panel of French firms

Abstract: Using a panel of more than 3,100 French corporate groups' affiliates and parent companies, we estimate a production function model where we enable the productivity of a firm to depend on the knowledge produced by the R&D activities of the other companies in the group. We find indeed that a firm's productivity may significantly be enhanced thanks to the R&D capital of the other affiliates. This enhancement can be estimated to be, for the corporate group as a whole, between 30% and 40% of the "usual" estimate of the direct impact of firms' R&D expenses on their own productivity. However, this effect differs depending on whether the firm itself conducts some R&D or not. In case it does, the other affiliates' R&D does not appear to impact significantly on its own performances: those depend only on its proper R&D activity. At the opposite, the other affiliates' R&D has a very significant effect on the productivity of firms which do not conduct any R&D. These results emphasize the existence of group spillovers, which differ from the usual industry or geographical spillovers. In particular, they do not seem to require an "R&D based absorptive capacity" to pre-exist and they are clearly the result of an explicit strategy, defined at the group level. Finally, these results might lead to revise upwards our estimates of the private returns on R&D investments. (This abstract was borrowed from another version of this item.)

EC Company Law Directives and Regulations: How Trivial are They?

Abstract: What role does EC legislation in the corporate law area play within the EU? How much does it shape Member States' corporate laws? And how relevant is it for the corporate governance of EU companies and their management? At first sight, the EC appears to have played and to be playing a central role in shaping EC corporate law, with the high number of directives and regulations covering a wide range of corporate law issues. One might then think that EC institutions have a strong influence upon Member States' corporate laws, whether because they have intervened in the area or because they may do so. Quite to the opposite, EC company law directives and regulations appear to have had thus far very little impact on national company laws and, more to the point, on EU businesses' governance and management. First, EC corporate law does not cover core corporate law areas such as e.g. fiduciary duties and shareholder remedies. Second, EC corporate law rules are underenforced. Third, in the presence of very sporadic judiciary interpretation by the European Court of Justice, EC corporate law tends to be implemented and construed differently in each Member State, i.e. according to local legal culture and consistently with prior corporate law provisions. Fourth, when it has introduced new rules, it has done so with respect to issues on which Member States would have most probably legislated even in the absence of an EC mandate. Last but not least, most EC corporate law rules can be categorized as optional, market mimicking, unimportant or avoidable. To the contrary, national corporate laws contain core corporate law rules, which do have an impact upon EU companies' governance and management. There are, of course, due qualifications to the triviality thesis. First of all, a few rules or sets of rules indeed have had or are bound to have a meaningful impact upon companies and their operations. Second, EC corporate law has increased the regulatory burden of corporate laws across the EU, correspondingly securing higher rents for certain interest groups. Third, secondary EC corporate law has had and will continue to have an impact on the evolution of European corporate laws and the dynamics of regulatory competition. Finally, its production has become an industry itself, employing many EC and national functionaires and lobbyists, and creating occasions for rent extraction by politicians.