- •Isbn 0-19-926063-X (hbk.) isbn 0-19-926064-8 (pbk.)
- •1.1 Introduction
- •1.2 What is a corporation?
- •15 See Hansmann and Kraakman, supra note 2.
- •1.2.2 Limited liability
- •1.2.3 Transferable shares
- •1.2.4 Delegated management with a board structure
- •24 Sec Eugene Fama and Michael Jensen, Agency Problems and Restdual Claims, 26 journal of law and economics 327 (1983).
- •1.2.5 Investor ownership
- •1.3.2 Additional sources of corporate law
- •2.2.1.2 Setting the terms of entry and exit
- •13 The withdrawal right is a dominant governance device for the regulation of some non-corporate
- •2.2.2.2 Initiation and ratification
- •2.2.2.3 Trusteeship and reward
- •16 See infra 3.1.2.1.
- •2.2.3 Ex post and ex ante strategies
- •3.1.1.3 The decision-making structure of the board
- •3.1.2.2 The trusteeship strategy
- •3.1.2.3 The reward strategy
- •3.1.2.5 The affiliation rights strategy
- •3.1.2.6 Reflecting on the shareholder—manager conflict
- •3.2.1 The appointment rights strategy
- •10* See also mfra 4.1.2 (discussing corporate groups).
- •3.2.4 The reward, constraints, and affiliation rights strategies
- •3.3.1 The appointment rights strategy
- •14Fi Pistor, supra note 126, 190 (Germany); Bratton and McCahery, supra note 12, §3.2 (the Netherlands).
- •4.1.2 Corporate groups
- •4.1.3 Involuntary creditors
- •4.2.2 Rules governing legal capital and corporate groups
- •4.2.3 Fiduciary duties—The standards strategy
- •4.2.3.2 Auditor liability
- •4.2.3.4 Liability of third parties
- •4.2.3.5 Reflecting upon the standards strategy
- •4.3.2 The importance of divergence
- •5.1.2 Disinterested board approval: The trusteeship strategy
- •5.1.2.3 Costs and benefits of board approval
- •5.2 Transactions involving controlling shareholders
- •5.2.1 Mandatory disclosure: The affiliation strategy
- •5.2.2 Board and shareholder ratification: The trusteeship and decision rights strategies
- •5.3 Explaining differences in the regulation of related party transactions
- •6.1 What are significant corporate actions?
- •1 See supra 3.1.2,1. 2 See supra 5.1.2 and s.2.2.
- •6.2.1 The management-shareholder conflict
- •§122 Aktiengesetz (5% of ag capital or par value of €500,000, Germany); 5376 Companies Act (5%
- •6.2.2.2 Controlled organic changes (including freezeout mergers)
- •7.1.2.3 Agency problems of non-shareholders
- •7.3.1 Information asymmetry: The affiliation strategy
- •7.3.3 The mandatory bid rule: The exit strategy90
- •7.3.4 Competing bids
- •7.5 Agency problems of non-shareholder groups
- •8.1 Two objectives of investor protection
- •8.2 The entry strategy: mandatory disclosure
- •8.2.1.1 The threshold(s) for disclosure
- •8.2.2 Accounting methodology
- •8.2.4.1 The underproduction of information
- •8.3 Quality control: the trusteeship strategy
- •8.4.2 The standards strategy
- •8.5 Explaining differences in investor protection
- •9.2 Putting our results into context
- •Incentive strategy 26-7
3.1.2.2 The trusteeship strategy
As discussed in Chapter 2, the trusteeship strategy places authority over the interests of a vulnerable constituency in the hands of decision-makers who lack strong conflictijig interests.73 In the case of shareholders as a class, trusteeship protection implies a decision-making authority within the firm that does not share the financial interests of hired managers'. Naturally, trusteeship in this context is a matter of degree. At one extreme, simply defining a subset of the firm's managers as 'directors,' with powers and liabilities not shared by other managers, creates a measure of trusteeship insofar as the new manager-directors take more of the credit when the firm does well and face more of the blame when it does badly. They have a greater incentive than other managers to respect the interests of shareholders. At the opposite extreme, directors without a management role or other ties to the company have no reason not to respect shareholder interests, and potent ethical and reputational reasons to do so.
In addition, the law can reinforce trusteeship roles by removing opportunities for conflict with shareholder interests. This is done, not just by imposing restrictions on the ability of directors to enter into self-dealing transactions (restrictions
72 See, e.g., Lawrence A. Hamroermesh, Corporate Democracy and Shareholder-Adopted By-
Laws: Taking Back the Street?, 73 TULANE LAW REVIEW 409 (1998) (professional consensus is that
shareholder-adopted bylaw to repeal a poison pill would violate statutory powers of the board under
Delaware law). It remains to be seen whether other jurisdictions will also come to restrict shareholder
management rights as shareholdings become more diffuse. The case of the UK suggests that manage-
rialist restrictions on shareholder power are not the inevitable consequence of diffuse ownership, at
least not where institutional shareholders retain a major role in corporate governance.
73 Supra 2.2.2.3.
that are similar in character to, though perhaps different in detail from, those imposed on managers in genera!), but also by completely separating directors and managers: that is, by mandating that some directors cannot be salaried employees of the firm.
As noted above in the discussion of board committees, legal institutions encourage the appointment of at least some independent directors in all of the principal corporate law jurisdictions including, arguably, even Japan.7-1 Germany bars managers from sitting on supervisory boards entirely. France follows closely by providing that not more than one third of the directors elected by shareholders may be employees of a French open company, thus preventing managers from dominating the board.75 U.S. law, although not so categorical, strongly encourages non-employee (and otherwise independent) directors on the boards of public companies,76 while U.S. exchange rules now require a majority of independent directors on the boards of listed companies. The UK has been moving in the same direction as the U.S., but this does not show up so much in the statutory or decisional law as in the listing rules. (As a conse-quence, a gap in governance opened up between listed and non-listed public companies, which the UK Company Law Review has moved to close.) The UK leads the U.S., however, in dividing the roles of the CEO and chair of the board of directors and assigning the powerful chairman's role to a non-employee director.77
Like direct decision rights, the value of the trusteeship strategy for the protection of the interests of shareholders as a class is closely tied to ownership structure. If shareholders can organize to elect their own directors in a meaningful fashion, trusteeship is a poor substitute for legal rules that encourage the selection of directors who are strongly motivated, financially or otherwise, to act in the interests of shareholders. Thus, the trusteeship strategy—to the extent that it works at all—is potentially important as protection for shareholder interests only for public companies with dispersed shareholders. This means that trusteeship as a device for controlling managerialism is most attractive for U.S. companies, where it is already a well developed .institution, and perhaps also for Japanese companies, where it has only recently gained a foothold.78 Even in the
U.S., however, it is unclear how much independent directors actually contribute to the improvement of corporate governance.79