Academic Roundup
Manifest-I presents a summary of recently released academic papers on international corporate governance
and corporate social responsibility issues.
Law and the Market: The Impact of Enforcement
John Coffee, Columbia Law School. Columbia Law and
Economics Working Paper No. 304.
The US is unique in both its expenditure on securities regulation enforcement
and the amount and severity of the sentences it imposes. While this paper finds
that, after adjustment for market size, the US does not differ materially from
other jurisdictions with common law origins, the financial penalties brought by
the US Securities and Exchange Commission exceed those of the UK’s Financial
Services Authority by a ration of thirty to one. Even taking into account
differences in market capitalisation, this still translates into a ten to one
ration.
The paper asks what the consequence of this emphasis on enforcement has been.
Recent commentary has suggested that it has threatened US market competitiveness, but
the paper argues that on closer examination it appears foreign firms most
deterred from cross-listing have been those with controlling shareholders and a
pattern of extracting high private benefits of control.
This comes as part of the paper wider investigation of why countries with
“common law origins” appear to expend more on securities regulation than those
with “civil law origins”. It is the paper’s hypothesis that this is a product of
the level of retail ownership in the jurisdiction. A high level of retail
ownership, it is argued, creates a political demand for greater enforcement.
Look at Me Now:
What Attracts US Shareholders?
John Ammer, Sara Holland, David Smith and Francis
Warnock. NBER Working Paper 12500
Non-US companies that cross-list on a US exchange
substantially increase US investor holdings of their stock, this paper has
found. The paper suggests that several hundred foreign firms could increase
their US holdings by 8% to 11% of their market capitalisation by cross-listing
in the US.
This is attributed to US investors’ preference for high
levels of disclosure, and the paper argues that cross-listing leads to
improvements in information transparency. Indeed, the increase in US investment
is found to be greatest for firms from weak accounting backgrounds.
The authors suggest these findings mean – as companies
that voluntarily commit to increased disclosure appear to attract more outside
investment – governments should be able to attract capital flows to their
countries through the promotion and enforcement of disclosure. Therefore, it is
argued, this “cross-listing effect” should diminish for firms from countries
that improve disclosure standards.
Accidentally
in the Public Interest: the Perfect Storm that Yielded the Sarbanes-Oxley Act
Joseph Canada, J Randel Kuhn Jr, and Steve Sutton,
University of Central Florida
This study aims to cut through the rhetoric surrounding
the US’ Sarbanes-Oxley legislation in order to understand the law’s intent, the
“perfect storm” that carried it through the legislative process, and the debate
over costs vs. benefits.
The position the paper arrives at is that a combination of
intense press scrutiny, the unveiling of major financial scandals, and a Senate
committee that placed heavy reliance on corporate governance proposals by former
SEC chairman Levitt, created a storm that the business and accounting lobbies
could not counter.
Furthermore, the authors argue that while US companies and
business organisations have found it politically difficult to protest against
Sarbanes-Oxley too vehemently, they have been able to complain about associated
costs.
In fact, the paper suggests, Sarbanes-Oxley has almost by
accident created one of the greatest protections in history for the public
interest within the area of financial markets. Preliminary evidence, it is
argued, has shown a steadily increasing benefit from Sarbanes-related activities
and a continuing decrease in costs. Therefore, they conclude, the benefits are
worth the costs.
The
Fetishization of Independence
Usha Rodrigues, assistant professor of law, University
of Georgia School of Law. Research Paper Series 07-007.
This paper examines the idea that a supermajority
independent board of directors is the ideal corporate governance structure by
comparing the notions of director independence found in the US Sarbanes-Oxley
legislation and corporate law in Delaware, the pre-eminent state for the
incorporation of US companies.
The paper finds two fundamentally different notions of
independence: Sarbanes-Oxley equates it with outsider status - an absence of
family ties to management or financial ties to the company; while Delaware takes
a situational approach, with the focus of concern varying as conflicts arise in
different contexts.
The lesson to be learned from Delaware, argues the paper,
is that independence is a tool useful for a specific function. An independent
director, it is argued, is not intrinsically better suited to furthering
investor interests than an inside director. To expect independent directors to
do more – to make better business decisions or govern the company better – is,
suggests the paper, to misconceive their role and to fetishise independence.
May 2007
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