New Working Paper, “The Independent Board as Shield”

I have posted a new corporate governance working paper on SSRN. The Independent Board as Shield examines the law’s continued, pervasive reliance on independent corporate directors to supervise managers despite many known problems with that model. Many thanks to those who provided comments on earlier drafts; additional feedback is welcome. The abstract appears below.

The Independent Board as Shield

Gregory H. Shill
University of Iowa College of Law

The raison d’être of independent corporate directors is to constrain the CEO and other top managers. Limitations in the capacity and incentives of such directors, however, mean they are themselves constrained in this job. To date, approaches to this puzzle have taken at face value that the independent board functions as a one-way ratchet empowering shareholders of public companies. Examining the model from a different perspective, however—that of insider-managers, who exercise great influence over directors—reveals a major flaw in the traditional understanding: the independent board works in both directions. It empowers shareholders, and it also empowers managers.

A great deal rests on the independent board’s presumed status as a shareholders’ sword rather than a managers’ shield. Consider its interaction with the business judgment rule. By design, the rule insulates workaday decisions such as whether a burger chain should add a breakfast menu. It does not extend beyond that sphere automatically, however; before it can reach the kinds of decisions that require major tradeoffs between the interests of insiders and shareholders—say, the choice of whether to pay a bonus to retain a CEO—the approval of independent directors is required. But if they approve, the rule is triggered and the decision is immunized from shareholder challenge.

Reconceptualizing the independent board as a CEO’s shield destabilizes more than just the theoretical and legal vision of the model; it also destabilizes corporate law’s reliance on self-regulation as a substitute for external regulation of the most powerful organizations in the world. To address this in the context of the board, the Article urges that certain sensitive transactions be deemed ineligible for cleansing at the board level and instead be submitted for either shareholder approval or robust judicial review. More broadly, the Article’s analysis suggests that corporate self-regulation may be less efficient than assumed.

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“Should Law Subsidize Driving?” to be Published in NYU Law Review

I’m delighted to share that my latest article, Should Law Subsidize Driving?, will be published in the New York University Law Review. The abstract appears below. I’m very grateful for the comments I’ve received to date, and welcome additional feedback.

Should Law Subsidize Driving?

Abstract

A century ago, captains of industry and their allies in government launched a social experiment in urban America: the abandonment of mass transit in favor of a new personal technology, the private automobile. Decades of public and private investment in this shift have created a car-centric landscape with Dickensian consequences.

In the United States, motor vehicles are now the leading killer of children and the top producers of greenhouse gases. They rack up trillions of dollars in direct and indirect costs annually, and the most vulnerable—children, the poor, and people of color or with disabilities—pay the steepest price. The appeal of cars’ convenience and the lack of meaningful alternatives has created a public health catastrophe.

Many of the automobile’s social costs originate in the individual preferences of consumers, but an overlooked amount is encouraged—indeed enforced—by law. Yes, the U.S. is car-dependent by choice. But it is also car-dependent by law.

This Article conceptualizes this problem, and offers a way out. It begins by identifying a submerged, disconnected system of rules that furnish indirect yet extravagant subsidies to driving. These subsidies lower the price of driving by comprehensively reassigning its costs to non-drivers and society at large. They are found in every field of law, from traffic law to land use regulation to tax, tort, and environmental law. Law’s role is not primary, and at times it is even constructive. But where it is destructive, it is uniquely so: law not only inflames a public health emergency but legitimizes it, extending its longevity.

The Article urges a teardown of this regime. It also calls for a basic reorientation of relevant law towards consensus social priorities, such as health, prosperity, and equity.

New Article, “Should Law Subsidize Driving?”, Is Up on SSRN

A draft of my latest Article, Should Law Subsidize Driving?, is now up on SSRN. I’m happy that it has begun to attract a readership in its first 24 hours (about 120 downloads). The Article conducts a law and economics analysis of every field of law that touches on driving, and infuses it with the best work from half a dozen other fields from public health to traffic engineering, before concluding that law subsidizes driving extravagantly and pervasively. This creates immense negative externalities that are not tracked with any comprehensiveness or rigor.

The Article also introduces a novel term, automobile supremacy, to describe the systematic discrimination that law practices—in hidden, often unintentional or counterintuitive ways—against not just other forms of transportation but virtually all other social objectives in service of the car.

It’s my most ambitious work yet, and parts of this draft will almost certainly be edited down and shifted to a book project. Feedback is most welcome.

Should Law Subsidize Driving?
Abstract

A century ago, captains of industry and their allies in government launched a social experiment in urban America: the abandonment of mass transit in favor of a new personal technology, the private automobile. Decades of public and private investment in this shift have created a car-centric landscape with Dickensian consequences.

In the United States, motor vehicles are now the leading killer of children and the top producers of greenhouse gases. They rack up trillions of dollars in direct and indirect costs annually, and the most vulnerable—children, the poor, and people of color or with disabilities—pay the steepest price. The appeal of cars’ convenience and the lack of meaningful alternatives has created a public health catastrophe.

Many of the automobile’s social costs originate in the individual preferences of consumers, but an overlooked amount is encouraged—indeed enforced—by law. Yes, the U.S. is car-dependent by choice. But it is also car-dependent by law.

This Article conceptualizes this problem, and offers a way out. It begins by identifying a submerged, disconnected system of rules that furnish indirect yet extravagant subsidies to driving. These subsidies lower the price of driving by comprehensively reassigning its costs to non-drivers and society at large. They are found in every field of law, from traffic law to land use regulation to tax, tort, and environmental law. Law’s role is not primary, and at times it is even constructive. But where it is destructive, it is uniquely so: law not only inflames a public health emergency but legitimizes it, extending its longevity.

The Article urges a teardown of this regime. It also calls for a basic reorientation of relevant law towards consensus social priorities, such as health, prosperity, and equity.

New Article: “The Golden Leash and the Fiduciary Duty of Loyalty”

I’m delighted to share a new article by yours truly on corporate governance and shareholder activism, The Golden Leash and the Fiduciary Duty of Loyalty, that will be published in the UCLA Law Review.

The “golden leash” is a controversial form of third-party compensation under which activist hedge funds supplement the salaries of directors they nominate to the board, in exchange for increasing the value of the company. A director compensated pursuant to such an arrangement stands to earn millions of dollars rather than the $250,000 paid to a typical director of a large public company, though the more richly compensated director usually works much harder and takes a lot of public abuse.

I offer a qualified defense of the golden leash, situating it in the context of other, more mainstream structures that depend on a more relaxed, porous conception of the fiduciary duty of loyalty than is commonly applied in the context of the golden leash. I also offer thoughts on how a properly disclosed golden leash can not only work for shareholders but improve procedural corporate governance more broadly.

The abstract follows. I welcome any comments on the draft.

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