Blue Sky 2019-2020

When Worlds Collide: 21st Century FinTech meets 20th Century Regulation

• J. Christopher Giancarlo, Chairman, U.S. Commodity Futures Trading Commission (2017-19)

Location: Jerome Greene Hall, Room 807

Abstract: The late 20th Century digitization of information through the Internet took place in a regulatory “light” zone due to protection of freedom of speech. Conversely, the early 21st Century digitization of finance is taking place in a regulatory “heavy” zone because of the long-established authority of US state and federal governments to protect consumers of financial services. As a result, the practices that guided the digitization of information (i.e., “Don’t ask permission, ask forgiveness”) are ineffective for the digitization of finance, as we have seen with initial coin offerings. Yet, regulation and regulators need to adapt and not be an impenetrable barrier to the current wave of FinTech innovation. In his talk, Mr. Giancarlo explains the four-part Model for Regulatory Adaptation to FinTech Innovation that he successfully deployed as Chairman of the US Commodity Futures Trading Commission.

The Grip of Nationalism on Corporate Law

• Mariana Pargendler, Stephen and Barbara Friedman Visiting Professor of Law, Columbia Law School (Fall 2019)

Location: Jerome Greene Hall, Room 807

Abstract: Economic nationalism has played a major, but overlooked, role in the evolution of corporate law around the world. The historical experiences of several major jurisdictions show that nationalism has left an imprint on the most important features of the governance landscape, ranging from ownership structures and takeover defenses to choice of law and investor protection. Protectionist objectives, rather than the agency cost considerations that dominate the literature, are the proximate cause of corporate reforms with surprising frequency. The recognition of nationalism's grip on corporate law underscores a critical factor missing from conventional accounts of the development of corporate governance and complicates the normative analysis of corporate institutions by identifying a broader set of economic and geopolitical considerations. It also points to a different, and heretofore unforeseen scenario in the future of corporate governance: neither convergence nor persistence, as conventionally assumed, but backlash against (foreign) shareholder-oriented practices.

Corporate Technologies and the Tech Nirvana Fallacy (written with Dirk Zetsche)

• Luca Enriques, Professor of Corporate Law, Oxford University, Law Faculty (St. Cross College, Jesus College)

Location: Jerome Greene Hall, Room 807

Abstract: This article analyzes the impact of technology, in particular distributed ledgers/blockchains, smart contracts, Big Data analytics and AI/machine learning (collectively referred to as “Corporate Technologies”, or “CorpTech”) on the future of corporate boards. We take on a prediction often found in the finance, law and tech literature, namely that technology will solve corporate governance problems and even replace the board of directors. We argue that such claim is based on what we call the Tech Nirvana Fallacy, the tendency of comparing supposedly perfect machines with failure-prone humans. In addition, it fails to consider that CorpTech’s impact, while significant, will merely scratch the surface of the perennial problem of corporate governance, namely conflicts of interest among the relevant corporate stakeholders, and chiefly between controllers (managers or controlling shareholders) and shareholders: even where algorithms are well programmed and effectively replace human judgment, intra-corporate conflicts of interest do not vanish in a tech-dominated corporate environment, where the key question becomes: “is the human being that selects or controls the firm’s CorpTech conflicted?” This article analyzes the tech manifestation of agency problems within corporations and identifies – after considering possible market, governance, and regulatory solutions – elements of a governance framework for the CorpTech age.

Transformation Cost Engineering

• Matthew Jennejohn, Justin W. D'Atri Visiting Professor of Law, Business, & Society, Columbia Law School (Fall 2019)

Location: Jerome Greene Hall, Room 807

Abstract: Transactions in the market for corporate control are not fully standardized, but rather exhibit a material amount of variation. This paper explores a possible structural explanation: That the complexity of M&A agreements makes them susceptible to multiple sources of path dependency, which introduce tensions that unsettle incentives toward uniform standardization. Using natural language processing techniques and standard regression analysis, the article presents preliminary evidence indicating that the level of standardization of various M&A agreement provisions correlates differently with multiple sources of path dependency, lending support to the hypothesis that endogenous structural factors limit the standardization of M&A transactions. Those findings underscore the importance of including scope economies in theories of contractual innovation and enforcement, and emphasize the role of transaction designers’ organizational routines as a source of market resilience.

Setting Up Dates with Death? The Law and Economics of Extreme Sports Sponsoring in a Comparative Perspective

• Horst Eidenmueller, Freshfields Professor of Commercial Law, Oxford University, Law Faculty (St. Hugh's College)

Location: Jerome Greene Hall, Room 807

Abstract:

Extreme sports and extreme sports sponsoring have become key features of the modern entertainment and sports industry. This article attempts to investigate fundamental issues of the law and economics of extreme sports sponsoring from a comparative perspective. A set of 40 interviews were conducted with sponsored athletes between June and September 2018. These interviews provide an up-to-date and, to the best of my knowledge, unique account of contract practice regarding extreme sports sponsoring worldwide.

The main findings of the article can be summarized as follows: First, extreme sports sponsoring contracts are currently unbalanced. Risks and rewards are unbundled: while the athletes bear almost all the risks, the sponsor firms reap almost all of the rewards. This does not necessarily imply that the current contracting practice is inefficient. Unequal bargaining power and strong non-monetary incentives of athletes may account for an uneven distribution of the monetary cooperative surplus. But the available evidence suggests that the current practice incentivizes athletes to take inefficient risks, and, based on athletes’ preferences, there are ways to significantly increase the cooperative surplus compared to the status quo. In particular, firms could arrange for comprehensive health, disability and life insurance for the benefit of athletes and their families—at little costs to firms and with a significant positive effect on athletes’ welfare. Firms could establish systematic counseling, coaching and training programs for athletes, and they could move away from bonus-based compensation schemes.

Second, sponsor firms face higher duties of care vis-à-vis young and/or inexperienced athletes. These athletes, in particular, are prone to “inefficient risk-taking." Depending on the factual circumstances of the individual case, these duties may include enhanced counseling, coaching and safety training, as already mentioned. They may also require firms to refrain from subjecting young or inexperienced athletes to extremely high powered financial incentives (bonus schemes) that encourage inappropriate risk-taking.

Third, sponsors also face higher duties of care if they are involved in or influence the organization of extreme sports events or control the premises/facilities on which such events take place.

Fourth, currently, sponsored athletes are treated by sponsors as independent contractors. Depending on the facts of each individual case and the applicable legal standard to delineate independent contractors from employees, this may or may not be correct. This article suggests that courts should give more weight to economic (in)dependency as a relevant standard in addition to control exercised by sponsor firms when assessing whether a sponsored athlete is an employee. Further, even if an athlete cannot be characterized as an employee of a particular sponsor, the level of control exercised by that sponsor and the athlete’s economic dependency on him or her are factors that should weigh in on the sponsor’s duties of care under contract and/or tort law, creating a more finely tuned regulatory system than the dichotomy of independent contractor and employee suggests.

Ownership of the World's Listed Companies (OECD report)

• Mats Isaksson, Head of the Corporate Governance and Corporate Finance Division, Directorate for Financial and Enterprise Affairs, Organisation for Economic Co-operation and Development (OECD)
• Serdar Çelik, Senior Economist, Corporate Governance and Corporate Finance Division Organisation for Economic Co-operation and Development (OECD)

Location: Jerome Greene Hall, Room 807

Abstract: At the end of 2017, there were approximately 41 000 listed companies in the world. Their combined market value was about USD 84 trillion, which is equivalent to the global GDP. Who owns these companies and how they perform their role as shareholders is therefore of economy-wide importance. It will affect not only the amount of risk capital that is made available to independent entrepreneurs who can challenge the status quo by developing new technologies and products. It will also affect how the performance of existing corporations is scrutinized and how decisions about their future direction are made.

By using firm-level ownership information from the 10 000 largest listed companies, that together make up 90% of the global market capitalization, this report provides unique data about who their owners are and how they own. The findings provide an empirical starting point for understanding how important features in corporate ownership may impact key policy priorities such as productivity growth and business sector dynamics.

Making Corporate Social Responsibility Pay

• Dorothy Lund, Assistant Professor of Law, USC Gould School of Law

Location: Jerome Greene Hall, Room 807

Abstract: The world is clamoring for corporations to serve society. With the recognition that adequate externality regulation is unlikely to be forthcoming, legal scholars, politicians, major shareholders, and corporate stakeholders have joined in urging companies to practice corporate citizenship. In this Article, I show why much of this advocacy is unlikely to alter corporate decision making to the desired extent. In particular, proponents of corporate social responsibility ask fiduciaries to operate against a deeply-ingrained incentive structure that pushes them to maximize shareholder wealth as a first priority.

Therefore, this Article proposes a way forward that works within the wealth-maximization framework, but could, under certain circumstances, encourage corporations to prioritize stakeholder goals. More specifically, individuals could use “corporate social responsibility bonds” to offset costs associated with prosocial corporate decision-making. The intuition is as follows: if it is welfare-maximizing for individuals to see corporations make public-interested choices, there should be a possible Coasian bargain between those individuals and the corporation. In such situations, an issuer could create a bond to raise funds to support a predetermined public-interested corporate decision. Any investor for whom the choice is welfare-maximizing could support the bond; their loan would be forgiven if the decision was made, and if it is not, the investor would get their money back plus interest.

More broadly, this Article’s motivating insight—the individuals with the strongest interest in seeing corporations pursue corporate social responsibility goals are not always the shareholders—has consequences for corporate law and corporate governance. In particular, it cautions that we should recognize the limits of corporate law and shareholder activism to achieve socially optimal levels of corporate responsibility. The more difficult question is whether and how to reorient our corporate law system away from shareholders and toward other constituencies. As that project forges on, this Article proposes action that could allow corporate outsiders to influence corporate behavior without any delay—one decision at a time.

Governing the New Socialist Firm

• Katharina Pistor, Edwin B. Parker Professor of Comparative Law, Columbia Law School, and Director, Center on Global Legal Transformation

Zoom Teleconference: email [email protected] for more information

No paper will be distributed.

The Role of the Federal Reserve in Containing the Economic Fallout from COVID-19

• Kathryn Judge, Harvey J. Goldschmid Professor of Law

Zoom Teleconference: email [email protected] for more information

Materials will be distributed along with Zoom invitation.

Exit, Voice, Liability, and Scope: Tradeoffs in Limiting Agency Costs (Introduction)

• Henry Hansmann, Oscar M. Ruebhausen Professor Emeritus of Law and Professorial Lecturer in Law, Yale Law School, and Senior Fellow, Center for Contract and Economic Organization, Columbia Law School

Zoom Teleconference: email [email protected] for more information

Abstract: The contemporary literature on organizational law and economics focuses with singular intensity on managerial agency costs. We analyze the four principal mechanisms employed to limit those costs, in both commercial and non-commercial organizations, since the Renaissance, with a particular focus on relationships among the mechanisms.

Two of the four mechanisms—the right to withdraw from the firm, and the right to participate in its management—are, respectively, analogous to the late Albert Hirschman’s famous concepts of “exit” and “voice.” In contrast to conventional interpretations of Hirschman, however, we find that these two mechanisms are typically complements rather than substitutes: strong exit rights generally accompany strong voice. The same is true, moreover, of our third mechanism, “liability,” which is the right of the organization’s owners (or principal beneficiaries) to bring suit against the organization’s managers for breach of fiduciary duty. That is, managers constrained by strict fiduciary duties are also typically constrained by stronger owner rights of exit and voice. It is only in our fourth constraining mechanism—limiting the “scope” of the authority delegated to managers—that we find much substitutability with the other three mechanisms—and even limited scope is, in important cases, employed where managers are also constrained by strong owner rights of exit, voice, and liability.

This strong complementarity among devices for constraining the actions of managers, we suggest, is primarily a response to another fundamental agency problem in organizational design: the exploitation of non controlling owners (or beneficiaries) by controlling owners. Although strong owner rights of exit, voice, and liability can help assure that an organization’s managers serve its owners well as a class, these mechanisms can also be used to redistribute value among the class of owners itself. Apparently these conflicts of interest among owners commonly overshadow managerial agency costs, which appear to be, in general, only a second-order problem in organizational design.

Quote Manipulation

• Merritt Fox, Michael E. Patterson Professor of Law, Co-Director of the Program in the Law and Economics of Capital Markets, and Co-Director of the Center for Law and Economic Studies, Columbia Law School
• Lawrence Glosten, S. Sloan Colt Professor of Banking and International Finance, Columbia Business School; Co-Director, Program in the Law and Economics of Capital Markets, Columbia Law School
• Sue Guan, Research Scholar, Program in the Law and Economics of Capital Markets, Columbia Law School

Zoom Teleconference: email [email protected] for more information

Abstract: Merritt Fox, Larry Glosten, and Sue Guan are working on a project concerning securities law manipulation through making bids and offers in the market ("quote manipulation"), as opposed to manipulation by engaging in actual transactions, which is at least what a literal reading of the existing statutes appears to require for the manipulation to be illegal.

"Spoofing" and "layering" are terms that have been used for particular types of quote manipulation. After Dodd-Frank, "spoofing" is illegal in the markets related by the Commodities Act but the term is not defined. There is no parallel change under the securities laws, though the SEC is pursuing headline cases as though quote manipulation was clearly illegal.

The Missing “California Effect” in Data Privacy Law

• Jens Frankenreiter, Postdoctoral Fellow in Empirical Law and Economics, Ira M. Millstein Center for Global Markets and Corporate Ownership, Columbia Law School

Zoom Teleconference: email [email protected] for more information