Academic Roundup – May 2007

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 ratio of thirty to one. Even taking into account differences in market capitalisation, this still translates into a ten to one ratio.

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.

Leave a Reply