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The Elephant in the Room

US Treasury securities are to financial markets what carbon is to life on Earth—ubiquitous, foundational, indispensable, and acting very scary of late. “The Treasury market is the biggest, deepest and most important bond market in the world and acts as a benchmark that is used to price trillions of dollars of assets globally,” says the Financial Times, an authority on these matters—yet you would be hard-pressed to find half a dozen law review articles on the subject. A pair of papers by Yesha Yadav, most recently with (her dad) Pradeep K. Yadav, deserves much praise for starting to fill the gap. The papers properly frame the subject at the intersection of law, finance, and economics, while public and private sector “grandees” and “heavyweights” sound financial stability alarms and try to patch the fraying market architecture.

We have it on good authority that carbon is a relatively recent arrival in our universe; more so the US Treasuries. As recently as a century ago, the US Treasury Department was hawking versions of bespoke project bonds and struggling to emerge from Britain’s shadow in the financial markets. A succession of design choices in response to 20th century upheavals helped transform the US Treasury market from a fringe contender into the undisputed center of global financial gravity. Its centrality was on full display in October 2008 when frightened humans gorged on sticky pudding while the markets supplying their carbs scrambled for their own comfort food, the US Treasury securities.

Market response to the COVID-19 shock cast doubt on the Treasuries’ place as a safe haven. Governments and institutions scrambled for US dollars to meet essential needs and insulate themselves from turmoil—but they demanded cash and would no longer settle for the US government IOUs. With financial markets on the fritz, the US Federal Reserve intervened, buying $1.5 trillion in US Treasuries with crisp new cash in March and April 2020. Following its recent crisis playbook, the Fed launched, revived, and extended dollar liquidity facilities for all manner of wholesale market participants and foreign central banks. Implicitly recognizing that the risk of another “dash for cash” was here to stay, the Fed established standing repurchase facilities in July 2021 to reassure domestic, foreign, and international investors that their Treasuries were as good as cash. But there is not one magic pill to restore Treasury greatness.

Yadav’s two articles focus on the elaborate and apparently fragile institutional design underpinning the Treasuries’ global role. The first puts some of the dysfunction to the long history of opacity, regulatory fragmentation, and misaligned incentives in the US government debt market. It argues for better interagency coordination through the Financial Stability Oversight Council (FSOC) and central clearing, a form of mutualization that should incentivize market participants to do the right thing. The second article (joint with P.K. Yadav) highlights Treasury market fragmentation and the increasingly problematic role of primary dealers, the large financial institutions that serve as the New York Fed’s counterparties in buying and selling Treasury securities. The article’s recommendations include more and better information reporting, more robust consolidated oversight, and constraints on primary dealers’ ability to quit in bad times.

The information and coordination problems the authors identify seem right, and some of their prescriptions are ahead of the curve.1 I see the most valuable contribution of both papers in helping disentangle questions about the government debt contract and its safety from questions about the safety of the market in which it trades.

Answers to the contract questions are mostly straightforward. As a debt contract, the US Treasury looks goofy (the promise to repay is filed under “Miscellaneous”); like all government debt, it would be very hard to enforce. Indeed, the crucial bottom-line question of whether the US Treasury could default (stop paying its debt) gets an emphatic answer – of course it can, and it has, and everyone knows it. The 2021 debt limit drama adds an unnecessary data point for extra credit.

The more interesting questions concern the market – how the United States managed to grow a market where questioning its debt was taboo, and to invest vast networks of people and institutions around the world in maintaining the legal and market fiction of the debt’s absolute safety, the original and ultimate too-big-to-fail. The answers are long and complex.

Even when the United States was, in today’s terms, a frontier market in default, Hamilton and allies had sought to make its debt more than a funding instrument. It was supposed to be money, political glue, and a social and economic organizational device rolled into one. From the start, the Treasury cultivated a mix of domestic elites and foreign investors. Foreigners, most notably foreign central banks, today hold about a third of all tradable Treasury debt, tied to the US dollar’s role as the global reserve currency. Tax administration, monetary policy, bank and market regulation, and even bankruptcy laws were designed around Treasury circulation. The shadow banking system, collateralized with Treasury debt, grows out of the original design. The Treasuries’ “safety” has always been about their many functions in the broader institutional and political context—more than the present value of future cash flows. By the same token, Treasury market regulation is not about the issuer; it is all about the scaffolding around the hollow core.

The Federal Reserve has intervened to buy Treasury securities before, when it got especially worried about gaps between cash and Treasury securities—notably when Hitler invaded Poland in 1939. Is today’s persistent Treasury market turbulence the start of something different? Who knows? Curiously, foreign central banks were among the biggest sellers of US Treasury securities in March of 2020. Although the Fed responded on a massive scale, the jitters keep coming, along with big storms, and sticky pudding is back in vogue.

Professor Yadav’s two articles and the research agenda they set are perfectly timed. I hope law scholars stay engaged in this space, preferably across disciplines – extra points if you can get your family to come along.

  1. I may not be on board with all of them: I am sour on FSOC; I am on the fence about a debt market regulated by the debtor (Treasury) and its fiscal agent (the New York Fed); and I worry about primary dealers bolting preemptively for fear of getting trapped. But my disagreements on policy particulars are beside the point for my purposes here—we need to be having a far broader and deeper debate on the subject in the legal academy.
Anna Gelpern, The Elephant in the Room, JOTWELL (October 12, 2021) (reviewing Yesha Yadav, The Failed Regulation of U.S. Treasury Markets, 121 Columbia L. Rev. 4 (2021). Pradeep K. Yadav and Yesha Yadav, Fragile Financial Regulation (Sept. 9, 2020), available at SSRN),

Reconstructing the Meaning of “Fair Value” in the Wake of Appraisal Arbitrage

Robert Miller, Stock Market Value and Deal Value in Appraisal Proceedings, 96 Notre Dame L. Rev. 1403 (2021), available at SSRN.

Delaware’s law of appraisal rights has been in an uproar since hedge fund arbitrageurs showed up in the Chancery Court fifteen or so years ago as appraisal petitioners. The shock led to minor changes in the statute and extensive changes in the caselaw. Responsive commentaries continue to appear with regularity. Professor Robert Miller takes a fresh look at the situation in Stock Market Value and Deal Value in Appraisal Proceedings. His paper is well worth a look.

I need to back up those fifteen years in order to frame the paper. Appraisal arbitrage really changed the game. All of a sudden a notoriously plaintiff-unfriendly legal remedy became a play space for Wall Street smart money looking for Alpha. The arbs worked the system by cooking up persuasive discounted cash flow (DCF) valuations that came in above the merger price. Shareholder advocates saw much to like in this development. The Delaware bar and judiciary, along with most of the rest of the establishment, saw things differently. The bar pushed through some minor revisions of the statute through the legislature, but those were not enough to stop the show.

It was left to the bench to shut down the arbs. It rose to the occasion. In a series of decisions—Dell, DFC, Aruba Networks, Jarden, and Stillwater—Delaware’s Chancery and Supreme Courts rewrote the playbook for the legal determination of “fair value.” Since the 1983 decision of Weinberger v. UOP, fair value had been the preserve of financial experts presenting state of the art analyses employing DCF, comparable companies, and comparable mergers methodologies. The recent cases leave the door open for such presentations. Their innovation lies in the introduction of two new alternative routes to a fair value result—the merger price (minus synergies) and the pre-merger market price. The decisional pattern makes it clear that the merger price (minus synergies) is preferred to the old analyses, even as the cases also make it clear that approaches to fair value are to be made on all the facts of the particular case. The status of market price is less clear, but it now certainly has a place on appraisal’s methodological menu.

Merger price (minus synergies) and market price hold out two great advantages. First, they are transactionally-based rather than hypothetical. They as such warm law and economics hearts—Jonathan Macey and Joshua Mitts have taken the occasion to strike a blow for the Efficient Market Hypothesis and make the case for elevating market price over merger price. Second, whether the court goes for merger price (minus synergies) or pre-merger market price, it pulls the rug out from under appraisal arbitrageurs. Why incur litigation costs to come home with merger price minus synergies? You can get a higher figure (merger price with synergies) by doing nothing. Worse, why run the risk of getting pre-merger market price—a sucker payoff that cuts off all access to the merger premium? The answer is that you don’t run the risk. Appraisal arbitrage is now dead as a door nail.

But where does this leave “fair value” as a matter of legal theory? The pre-arbitrage law review literature speaks emphatically on this topic. Per articles by Bill Carney, Rich Booth and Michael Wachter and Larry Hamermesh, the appraisal petitioner is entitled to a pro rata share of the pre-merger going concern value of the company as opposed to a pro rata share of the company’s value in a third-party sale. Taking this principle to the new world in which the judge chooses between merger price (minus synergies) and pre-merger market price, market price emerges as the choice, as Macey and Mitts have made abundantly clear.

Let us now turn to Professor Miller. He gives us the background with dispatch and then turns to the merger price/market price binary. The search, he reminds us, is in part for a credible figure susceptible of clear proof. Unfortunately, both figures present evidentiary problems despite their hard origins in actual transactions. Merger price presupposes a fact-intensive, Revlon-type showing of a solid sale process. Although this inquiry is factual and the applicable standard is open-ended, fair value is not the issue. The fair value problem arises when the quasi-Revlon test is passed and the synergies to be deducted from the merger price (as required by Delaware section 262) must be calculated. Unfortunately, the synergies are unlikely to show up clearly. Recourse must be made to guesstimates based on expert testimony, which is just the territory the new regime tries to avoid entering. There is also a threshold test respecting market price—a deep, “efficient” market must be shown affirmatively. Once efficiency is established the question is whether the pre-merger price failed to reflect undisclosed material information, information that might well have influenced the negotiated price. Miller holds the plausible view that this often will be the case, again leaving us in an evidentiary morass.

Miller then takes up the old recurring question: Is the appraisal petitioner entitled to a cut of the merger premium? He addresses the question with a broad review of the economics of merger premiums. The discussion shows that the literature’s consensus view—that the premium follows from an allocation of expected synergies and gains from agency cost reduction—does not exhaust the field of possibilities. For example, some bidders (particularly strategic bidders) just overpay. Moreover, in any given merger, there will be deal-specific mix of contributing factors. What then is legal theory, which needs a straightforward set of descriptive assumptions, to do?

Professor Miller turns to the downward sloping demand theory of merger pricing. Under this, different shareholders value the company differently, with the lowest valuing holders selling into the pre-merger stock market and with higher valuing holders holding out for their higher reservation prices. The acquirer pays a premium because it must go up the demand curve, offering a sufficiently high price to garner the support of a majority of the shares. By hypothesis, the appraisal dissenter comes from the minority of holders with higher-still valuations.

As Professor Miller notes, the downward sloping demand explanation is simple, complete, and intuitive. Its even there in the law review literature, the subject of distinguished papers by Lynn Stout and Rich Booth, published in 1990 and 1991, respectively. Why then does it have the status of a discarded minority view? As Professor Miller shows us, it is quite consistent with the law of one price. But it also is inconsistent with orthodox financial economic theory, which holds that security pricing has a flat demand curve. Stocks and bonds are not consumed, like widgets. They provide payment streams that finance the consumption of widgets and other goods and services. Demand for money is constant—people always want it. When a stock goes down it is not because demand for the money on offer has decreased, it is because less future money is now projected or the same monetary projection has become a riskier proposition. Portfolio theory backs up this insight with its showing that rational investors will hold stocks in a single optimal market portfolio, addressing their variant tastes for risk as they interpolate risk-free treasuries into the investment mix.

Professor Miller confronts this problem, showing us that downward sloping demand can be interpolated consistently with cutting edge financial economic thinking. In so doing, he draws on the growing corpus of heterogeneous expectation models of stock pricing. The cites are apt. Supply and demand are now factors on the table in the advanced financial economics of stock market pricing.

Professor Miller’s paper is important because it cuts sharply against a consensus view, offering a clear-cut, theoretically-backed alternative that implies higher payouts to appraisal petitioners. It will not by itself displace the consensus. But it destabilizes the consensus, depriving it of the illusion of full-dress support in high church financial economic theory. The appraisal world emerges a more complicated place than ever, and that’s a good thing.

Professor Miller, by the way, is an excellent writer. He is above all else succinct. He accomplishes this presentation in just under seventeen law review pages. I couldn’t have done it in fifty. Of course, I would have added some stuff in those extra thirty-three pages. But not all that much.

Cite as: Bill Bratton, Reconstructing the Meaning of “Fair Value” in the Wake of Appraisal Arbitrage, JOTWELL (December 1, 2021) (reviewing Robert Miller, Stock Market Value and Deal Value in Appraisal Proceedings, 96 Notre Dame L. Rev. 1403 (2021), available at SSRN),

Doing Well While Doing Good: Impact Investing & the Commodification of Marginalization

Cary Martin Shelby, Profiting from Our Pain: Privileged Access to Social Impact Investing, 109 Cal. L. Rev. __ (forthcoming, 2021), available at SSRN.

“Doing well while doing good” has become the mantra for a large segment of investors in today’s capital markets. In the wake of COVID-19, the Black Lives Matter movement, and the increased focus on climate change, many investors today are looking for ways to use their capital to positively impact society and address its various challenges. Responding to this demand, various socially conscious investment vehicles have emerged, such as environmental, social, and governance (ESG) investments, socially responsible investments (SRI), and social impact investing. But as these investments grow in popularity and size, it becomes necessary to question whether they are truly having the positive impact their name suggests.

In Profiting from Our Pain: Privileged Access to Social Impact Investing Professor Cary Martin Shelby explores the underbelly of socially conscious investment, focusing specifically on social impact investing. Social impact investments “seek to positively impact the environment or society at large, while simultaneously yielding a return for the underlying investors.” Because of its express and specific focus on social impact, this type of investing has the greatest potential for generating positive results for targeted communities. Yet, despite the potential benefits of social impact investing, Professor Martin Shelby argues that the public-private divide in U.S. federal securities laws creates opportunities for elite investors to profit at the expense of marginalized communities. This occurs through two interrelated yet distinct ways.

First, most social impact investments are private offerings, placing them outside the mandatory disclosure regime applicable to public offerings. The lack of disclosure allows social impact investments to obscure potential negative externalities that accompany their activities. Professor Martin Shelby notes that in “solving” one problem, social impact investments may only exacerbate other issues within the communities they claim to assist. Or, alternately, these investments may fail to achieve a positive impact and then be abandoned, leaving the affected community to clean up the resulting mess.

Second, due to the nature of the investment vehicle, only specific types of investors can participate in social impact investments—elite, wealthy investors who are unconnected to both the community and the problems to which their investments are directed. Exclusion from the investment process deprives the persons and communities most affected of means to provide inputs on the issues in question, further marginalizing them. Additionally, these marginalized groups are unable to share in the profits generated from the commodification of their community pain. Both factors serve to “increase the collective ‘pain’ experienced by disadvantaged communities” and obscure the magnitude of the resulting harms.

Professor Martin Shelby’s insights are both relevant and poignant. Social impact investing and other forms of socially conscious investments are only likely to grow in the coming years as there is a greater demand from investors to “do good” with their investments. This makes it all the more important to recognize that social impact funds may result in negative externalities that undercut the very “good” they are supposed to accomplish. Examples of such negative externalities include: (i) clean energy investments that destroy a surrounding habitat; (ii) displacement of lower funded but higher quality products that would have a greater level of impact than their replacement; and (iii) gentrification.

Professor Martin Shelby proposes regulatory reform and intervention to address these negative externalities. She proposes closing the public/private divide in securities laws applicable to social impact funds, stating: “Categorizing funds as private simply because they are restricted to elite investors who can fend for themselves no longer works in a world where their investments can generate massive negative externalities.” Her proposal is to create a new series of exemptions under the Securities Act of 1933 and the Investment Company Act of 1940—the Social Impact Exemptions. The proposed exemptions change existing rules related to disclosure and access and create new mechanisms to increase accountability and community involvement and expand management structure.

Professor Martin Shelby’s proposals aim to increase regulatory and community involvement in addressing the harms that accompany social impact funds. She recognizes that social impact funds need regulatory flexibility to invest in illiquid and possibly short-term unprofitable ventures, but she proposes providing this flexibility in exchange for compliance with the new framework. Professor Martin Shelby’s proposal is nuanced and practical. And, importantly, it addresses the ways in which marginalized communities are excluded from participating in or profiting from the commodification of their collective pain, while minimizing the likelihood that these same communities are left to deal with the negative consequences of wealthy investors trying to “do good.”

Professor Martin Shelby’s exploration of who gets to profit from the commodification of marginalization is both nuanced and necessary at this juncture. Impact investing is poised only to increase as ESG, SRI, and social impact investing increasingly become mainstream. However, the ability of impact investing to operate opaquely, passing off negative externalities to already disadvantaged communities is an under-explored issue that is rooted in the federal securities laws’ notions of “publicness.” Ensuring that social impact investing does not result in significant harms for the communities they claim to serve requires a holistic approach of more disclosure, innovative community access, better accountability, and a broadened management structure. If investors truly want to do well while doing good regulators must first ensure that these investments do not exacerbate existing harms, expose communities to additional risks, or operate to the exclusion and detriment of the persons they’re supposed to help.

Cite as: Gina-Gail Fletcher, Doing Well While Doing Good: Impact Investing & the Commodification of Marginalization, JOTWELL (November 3, 2021) (reviewing Cary Martin Shelby, Profiting from Our Pain: Privileged Access to Social Impact Investing, 109 Cal. L. Rev. __ (forthcoming, 2021), available at SSRN),

The Governance of Nonprofit Organizations

Peter Molk & D. Daniel Sokol, The Challenges of Nonprofit Governance, 62 B.C. L. Rev. 1497 (2021).

Peter Molk and D. Daniel Sokol’s recent article The Challenges of Nonprofit Governance addresses a less-examined area of the governance literature: namely, the governance of nonprofit organizations. As the authors note, nonprofit governance failures have made the news in the past few years, as with, for example, the allegations against the National Rifle Association for self-dealing and fraud, or those against the University of Southern California related to sexual assault, discrimination, and corrupt admissions dealings. This article fills a notable gap in the governance literature by addressing important differences between corporate and nonprofit governance mechanisms; discussing currently available methods to monitor nonprofit activities, as well as the shortcomings of those approaches; and proposing solutions to promote more robust oversight and to better safeguard the interests of the nonprofit stakeholders and beneficiaries, as well as those of the general public.

Molk and Sokol identify several issues inherent in and unique to nonprofit governance. State attorneys general are usually tasked with nonprofit oversight. The authors note that such monitoring is often hampered by a lack of resources, as well as a dearth of required financial disclosures that could be used to evaluate nonprofits’ fiscal health. The authors attribute these shortcomings to the structural flaw that nonprofits may operate in numerous states, but that the mission of an individual state attorney general centers primarily around the protection of citizens of only its own state. As such, a problem of the commons arises whereby the resulting observed level of enforcement is less than would be optimal, but no one state attorney general has sufficient incentive to increase enforcement to detect wrongdoing outside of its own jurisdiction.

As the authors note, nonprofits are required to make various disclosures by way of IRS Form 990, with more extensive disclosures required depending on gross receipts and/or total assets. These forms, however, are not made public until at least a year after filing. Moreover, the IRS’s mission is focused on ensuring the collection of taxes, not ensuring good governance; as such, nonprofits without preferential tax treatment escape IRS scrutiny, as do nonprofits suffering from governance issues that do not relate to the misuse of funds as relevant to the tax code.

Nor do conflict of interest policies, where they are in place, always adequately protect nonprofits form director self-dealing. The authors identify numerous shortcomings in conflict of interest policies as implemented by nonprofits, which may include the lack of written policies, the absence of a requirement that conflicts be disclosed, and insufficient monitoring and enforcement of conflict of interest policies.

The authors propose a variety of solutions to address these nonprofit governance issues. For example, they propose mandating enhanced disclosures in order to allow for reputational penalties that would deter poor governance practices. They also call for third-party private certifications to signal and verify good governance structures and practices. Most significantly, they call for a unified system of nonprofit monitoring by state attorneys general, much as the insurance industry is regulated at the state level but subject to coordinated minimum solvency standards across states. The authors argue that this system is preferable to designating the IRS as a monitor, due to IRS understaffing and a mismatch between the IRS purpose of tax collection and the broader evaluation of robust governance that the authors envision. The designation of the particular state tasked with oversight would depend on either the state of incorporation (the authors’ favored approach) or the state in which the nonprofit’s operations are most significantly located.

The authors envision that allowing nonprofits to essentially select their own set of monitors and applicable law will lead states to develop a robust set of nonprofit legal protections, much as allowing corporations to choose applicable state law depending on their state of incorporation has led to Delaware’s development of business-favorable corporate law. Challenges to this proposed system including defining the scope of oversight and preventing a race to the bottom (namely, laws that allow for minimal oversight of nonprofits).

The authors note the importance of the nonprofit sector to the American economy; as they state, nonprofit organizations total 5.6% of U.S. GDP and employ twelve million people. The examples of nonprofit governance failures cited by the authors—as well as a slew of others—highlight the pressing need to remedy poor governance issues at nonprofits. Molk and Sokol’s article presents helpful, creative solutions to these issues.

Cite as: Christine Abely, The Governance of Nonprofit Organizations, JOTWELL (October 5, 2021) (reviewing Peter Molk & D. Daniel Sokol, The Challenges of Nonprofit Governance, 62 B.C. L. Rev. 1497 (2021)),

The Path Toward Corporate Accountability on Human Rights

Corporate law readers: Do not let this excellent new work by Erika George escape your attention. It is a book focused on human rights. But make no mistake it is about corporations and it richly deserves a spot on your reading list.

The motivating problem in this area is relatively well understood: global human rights slip through the cracks of different regulatory regimes. As Professor George explains: “[C]orporate law fails to adequately address the external effects of the modern corporation and its relationship to society.” Further, “public international law fails to adequately govern the conduct of private nonstate actors.” Multinational corporations influence the ability of many millions of people to enjoy human rights, but these corporations are not currently understood to have the requisite international legal personality to become a party to an existing, binding international human rights treaty. Global competitive pressures discourage home and host states from adopting a level playing field with high standards. Efforts at creating a new, legally-binding international treaty to regulate business have been unsuccessful. The U.S. Supreme Court has narrowed access to courts under the Alien Tort Statute and litigation has proven an unreliable source for a remedy to human rights abuses.

Solutions to this regulatory gap have largely focused on corporate social responsibility (CSR) efforts (and what is more recently described as environmental, social, and governance or ESG). Voluntary standards, soft law norms, and CSR initiatives have grown rapidly in recent years. The effectiveness of these measures to influence corporate conduct is much less well understood than the problem itself.

Critics have viewed voluntary CSR initiatives with skepticism as cosmetic “bluewashing” or as inappropriate distractions from the primary profit-making purpose of corporations. Human rights advocates have regarded voluntary CSR initiatives as weak and unenforceable commitments and have instead pushed for binding international law.

Professor George enters this debate with cautious optimism after years of first-hand research. She argues that the emerging mix of standards, norms, and CSR initiatives “can evolve to become sufficiently strong and influence corporate conduct to become better aligned with respect for fundamental human rights and basic human dignity.” Soft laws and norms are hardening, she observes.

The highlight of the book is the ethnographic research in which Professor George has engaged at the UN Annual Forum on Business and Human Rights since its inception in 2012. Through excerpts from her interviews, the perspectives of stakeholder constituencies and business participants emerge and paint a picture of progress taking place. Legal advisers are counseling companies to treat soft laws as hard law given reputation risk. Companies are slowly integrating the UN Guiding Principles into their existing systems. Human rights issues are reframed as routine due diligence, codes of conduct in supplier contracts, and impact assessments. Human rights advocacy organizations are monitoring corporate activity and providing recommendations instead of just naming and shaming – and companies in turn are recognizing the need to take such reports seriously in order to maintain their social license to operate. Professor George provides a valuable window into years of learning by various constituencies involved in this work.

Further, she explores other mechanisms that have developed to encourage corporate accountability such as industry-specific multistakeholder initiatives across areas ranging from labor rights to security. Ranking and reporting also hold some promise to encourage corporations to take human rights into account. Professor George’s clear discussion helps readers cut through an area filled with acronyms and jargon. She follows with a series of case studies and discourse analyses that give insight into how major corporations such as Nestle, Nike, ExxonMobil, and Microsoft respond through their communications to “crises” related to human rights abuse allegations.

Although the big picture is a story of progress, many challenges and obstacles remain. Professor George, in a clear-eyed critique, shows that access to remedy remains a crucial area of weakness. Further, her research raises questions about whether companies that are giving more attention to human rights issues and reporting are also making a real-world difference in the lives of people in affected communities. Consumers and investors could be empowered with better information to enforce expectations.

The book makes a great contribution by combining an illuminated account of the past decade of important changes with a balanced assessment that there is still much more to be done.

Cite as: Elizabeth Pollman, The Path Toward Corporate Accountability on Human Rights, JOTWELL (September 2, 2021) (reviewing Erika George, Incorporating Rights: Strategies to Advance Corporate Accountability (2021)),

Corporate Social Measures

  • Paul Brest & Colleen Honigsberg, Measuring Corporate Virtue—And Vice, in Frontiers in Social Innovation (Neil Malhotra ed., forthcoming 2021), available at SSRN.
  • Veronica Root Martinez & Gina-Gail S. Fletcher, Equality Metrics, 130 Yale L.J. Forum 869 (2021).

Many of today’s investors are not just seeking positive financial returns. They are also seeking positive social impact. Not surprisingly, businesses and entrepreneurs have responded in kind with numerous investment offerings, corporate initiatives, and business ventures to promote social benefit. This shift in capital markets and corporate governance is perhaps most reflected in the incredible growth of environmental, social, and governance (ESG) investments and the increasing activism of America’s largest companies on some of the most pressing social issues of our time.

This shift away from pure profit-seeking towards profit-seeking plus social impact has been the subject of much debate. Less debatable is the sustained and significant nature of this sea change. One critical question that arises in the discussions surrounding this development is how best to compare and measure the efficacy of corporate actions for the betterment of society.

Two engaging, recent articles offer sensible approaches to addressing this critical question. The first article, Measuring Corporate Virtue—and Vice by Professors Paul Brest and Colleen Honigsberg presents a comprehensive general construct for benchmarking ESG performance. The second article, Equality Metrics by Professors Veronica Root Martinez and Gina-Gail S. Fletcher provides a more targeted proposal to address the specific problem of racial inequity in businesses. Each of these articles is distinct in their subject and scope of focus, but both fundamentally share the belief that business can play an important and more effective role in addressing certain social challenges.

In Measuring Corporate Virtue—and Vice, Professors Brest and Honigsberg propose a comprehensive framework for ESG reporting rooted in three factors: “(1) a limited set of metrics, primarily concerned with a company’s key environmental and social impacts; (2) a standard-setting body loosely modeled on the Financial Accounting Standards Board (FASB) to develop and particularize those metrics; and (3) reporting infrastructures that allow companies to collect, report, and verify the relevant metrics accurately.” (P.1.) Bringing to bear the authors’ respective expertise in accounting rules and social enterprise, this framework is designed to bring better standardization and comparability to ESG reporting and practices in a sensible fashion.

This proposal is appealing in large part because it is predicated on the prevailing financial reporting framework, making it readily familiar to businesses and investors. This familiarity is important because it could serve as a significant catalyst for wider adoption and usage. While FASB-based financial reporting has its critics and shortcomings, on net it has also served as the basis for incredibly robust and fruitful capital markets that have enriched business, investors, and society in numerous ways.

In contrast to Professors Brest and Honigsberg’s broad approach for ESG reporting in general, Professors Martinez and Fletcher’s article, Equality Metrics, takes a more targeted aim at the pernicious issue of racial inequity in business organizations. In particular, they advocate that “firms should (i) measure the state of (in)equality in their organizations and supply chains; (ii) identify a list of specific, assessable equality goals; (iii) implement policies and procedures aimed at achieving those goals that can be tested and measured; (iv) disclose their progress toward meeting these goals at regular intervals; and (v) use their own and others’ measured performances on these metrics to direct their future efforts at creating a more equitable organization.” (P. 875.) Reflective of the authors’ deep knowledge of corporate compliance and financial markets, the proposed approach is powerful in its realism and pragmatism.

A large part of the appeal of this approach is twofold. One, the proposal is predicated on institutional investors incentivizing companies to adopt their approach, which could lead companies to act more swiftly since they are highly sensitive to the demands of their largest shareholders. Two, the proposal allows firms ample pliability to craft and create goals and means that are best tailored to their particular shortcomings and circumstances while remaining mindful of the overarching objective of greater demographic equity in business.

The challenges that plague our communities are many, serious, complicated, and real. Every individual and institution can play a role in addressing these challenges, especially businesses. Measuring Corporate Virtue—and Vice and Equality Metrics provide two thoughtful, pragmatic approaches to help businesses become more accountable and effective in their socially beneficial efforts. Despite their contrasts, both articles are ultimately rooted in the idea that better data—properly gathered and disclosed—can improve corporate citizenship. Understandably, not everything that matters can be measured and counted. Data and metrics will invariably be subject to biases, defects, and errors. Nevertheless, better accounting on critical social matters like climate change and racial inequity can build an important, informed foundation for more thoughtful action. In the end, business efforts to do good can be done better. And to make such efforts count more, we can help them count better. For anyone interested in this endeavor, these two articles are excellent places to start.

Cite as: Tom C.W. Lin, Corporate Social Measures, JOTWELL (July 21, 2021) (reviewing Paul Brest & Colleen Honigsberg, Measuring Corporate Virtue—And Vice, in Frontiers in Social Innovation (Neil Malhotra ed., forthcoming 2021) and Veronica Root Martinez & Gina-Gail S. Fletcher, Equality Metrics,130 Yale L.J. Forum 869 (2021)),

Update of Jotwell Mailing Lists



Many Jotwell readers choose to subscribe to Jotwell either by RSS or by email.

For a long time Jotwell has run two parallel sets of email mailing lists, one of which serves only long-time subscribers. The provider of that legacy service is closing its email portal next week, so we are going to merge the lists. We hope and intend that this will be a seamless process, but if you find you are not receiving the Jotwell email updates you expect from the Corporate Law section, then you may need to resubscribe via the subscribe to Jotwell portal. This change to email delivery should not affect subscribers to the RSS feed.

The links at the subscription portal already point to the new email delivery system. It is open to all readers whether or not they previously subscribed for email delivery. From there you can choose to subscribe to all Jotwell content, or only the sections that most interest you.

Law and (Which?) Entrepreneurship

Magnus Henrekson and Tino Sanandaji, Measuring Entrepreneurship: Do Established Metrics Capture Schumpeterian Entrepreneurship?, 44 Entrepreneurship Theory & Prac. 733 (2020).

We often hear that entrepreneurship is important to the economy. But what exactly is “entrepreneurship”? There is a broad and growing literature connecting institutions with entrepreneurship in the fields of law, economics, finance, and business generally. Legal scholars in this field typically focus on the role of “law” and treat “entrepreneurship” as a taken-for-granted concept that does not need any discussion. Yet, it is important to recognize that researchers in the broader non-legal literature on the relationship between institutions and entrepreneurship have been struggling to define and measure “entrepreneurship.” Empirical research that measures entrepreneurship inaccurately may lead to flawed conclusions including legal policy recommendations.

In their article, Measuring Entrepreneurship: Do Established Metrics Capture Schumpeterian Entrepreneurship?, Henrekson and Sanandaji evaluate different country-level measures of entrepreneurship and find that virtually all the widely-used metrics fail to capture high-impact Schumpeterian entrepreneurship – the kind of entrepreneurship that policymakers hope for.

The authors start by analyzing and applying the definition of Schumpeterian entrepreneurship. Schumpeter’s definition focuses on the revolutionary function of entrepreneurship, rather than the employment status, and does not include routine business activity. Based on this, the authors identify four categories of business activity: (1) routine and low impact (e.g. mom and pop shops); (2) routine and high impact (e.g. firms that grow large through routine activity in real estate); (3) Schumpeterian and low impact (e.g. recently created innovative startups); (4) Schumpeterian and high impact (e.g. entrepreneur-founded firms that have grown large through technological or business innovations).

The authors construct four measures of high-impact Schumpeterian entrepreneurship, including venture capital-funded IPOs, self-made billionaire entrepreneurs, unicorn startups, and young top global firms founded by individual entrepreneurs. They also compile six measures of entrepreneurship commonly used in the literature, including: number of new entities with limited liability per capita (source: World Bank), business ownership rate (source: Global Entrepreneurship Monitor (GEM)), low/high expectation total early-stage entrepreneurial activity (GEM), self-employment as a share of total employment, and self-employed with employees as a share of total employment.

Using data based on 64 countries, the authors find that their four independently constructed and manually collected measures of high-impact Schumpeterian entrepreneurship have a strong correlation with one another and share a consistent underlying pattern. The factor underlying the four measures is positively correlated with economic (e.g., GDP per capita, R&D spending as a share of GDP, education and human capital index) and institutional (e.g., international property rights index, corruption perception index) variables. Meanwhile, the six commonly used measures of entrepreneurship, except for the number of new limited liability entities per capita, are explained by a different underlying factor, which is related to small business activity and negatively correlated with the economic and institutional variables. According to the authors, the finding that the number of new limited liability entities per capita appears to capture Schumpeterian entrepreneurship may indicate that incorporated firms have higher growth potential than unincorporated ones.

This article offers insights for the study of law and entrepreneurship. It is important to distinguish different types of entrepreneurship and use relevant metrics. Different legal institutions may produce different kinds of entrepreneurial activity, and different types of entrepreneurship may need different legal infrastructure. Scholars of law and entrepreneurship should be aware that most existing cross-country empirical studies in the field measure entrepreneurship as small business activity, which is distinct from the Schumpeterian entrepreneurship that plays a critical role in innovation and economic transformation. This excellent article gives us interesting and useful metrics of Schumpeterian entrepreneurship with which we may conduct empirical research to further examine the relationship between law and innovative entrepreneurship.

Cite as: Li-Wen Lin, Law and (Which?) Entrepreneurship, JOTWELL (June 16, 2021) (reviewing Magnus Henrekson and Tino Sanandaji, Measuring Entrepreneurship: Do Established Metrics Capture Schumpeterian Entrepreneurship?, 44 Entrepreneurship Theory & Prac. 733 (2020)),

Why Shareholder Primacy Persists

Dorothy Lund & Elizabeth Pollman, The Corporate Governance Machine, 122 Colum. L. Rev. (forthcoming, 2021), available at SSRN.

Indictments of shareholder primacy have grown increasingly common. Confronted with the pressing challenges of climate change, structural racism, and the spread of disinformation, legal scholars are revisiting the timeworn question of the purpose of a corporation and its standard answer: to maximize shareholder wealth. For the most part, this discussion has rigidly centered on the role of corporate law. Do cases like Dodge v. Ford and eBay v. Newmark require corporations to have a shareholder-oriented purpose? Is shareholderism the inevitable consequence of laws that place the power to elect corporate directors in the hands of shareholders alone?

Dorothy Lund and Elizabeth Pollman’s thought-provoking new article, The Corporate Governance Machine,1 reminds us however that shareholder primacy is actually the product of a complex system, of which the law is just one component. The “corporate governance machine,” as they define it, is the “governance system in the United States composed of law, markets, and culture that orients corporate decision-making toward shareholders.” Lund and Pollman argue that law may in fact “be the least important” force propelling this machine in its current direction. Market players, such as proxy advisors, stock exchanges, and ratings agencies, as well as entities that propagate cultural norms, such as professional education and media institutions, bear substantial responsibility for amplifying and reinforcing shareholder primacy.

As Lund and Pollman deftly illustrate, ideas that enter the corporate governance machine eventually either develop a shareholder value sheen or fade into irrelevance. Think, for example, of the movement pushing corporations to consider environmental, social, and governance (ESG) goals. ESG co-opted the goals of an earlier corporate movement advocating for “corporate social responsibility” (CSR). As understood by Howard Bowen, who coined the term in the 1950s, CSR referred to a corporation’s moral obligations to society regardless of the impact on investors. It addressed “the obligations of businessmen to pursue those policies to make those decisions, or to follow those lines of action which are desirable in terms of the objectives and values of our society.” But starting in the 1980s, spurred by the rise of the law and economics movement, scholars began to discuss the “business case” for CSR and explore the link between it and financial performance. In turn, CSR shed its prosocial justifications and adopted investor-oriented ones instead, transforming into ESG.

Lund and Pollman show how legal and extralegal players in the corporate governance system both fueled this shift. Once ESG became perceived as beneficial for investors, it gained the enthusiastic support of the legal community because it elided the difficult debate over the proper ends for corporate decisionmaking. In turn, market participants who had ignored CSR embraced ESG because they saw a profit opportunity: “[a]s investors started to accept the notion that integrating ESG measures could mitigate risk and create shareholder value . . . ratings agencies began providing ESG metrics, institutional investors offered ESG funds, and thousands of investment professionals billed themselves as ‘ESG analysts.’” Today, calls for greater attention to and transparency surrounding corporate ESG initiatives nearly all use the language of shareholderism. This orientation, in turn, shapes cultural and managerial perceptions about the kinds of ESG activities a corporation should undertake.

Appreciating how the corporate governance machine functions can broaden our understanding of the U.S. corporate landscape. It can explain features that law, by itself, cannot. The language of corporate reform, for example, has been decidedly shareholder-centric for decades. Even proposals that aim to enhance corporate accountability to the public as a whole, such as mandatory ESG disclosures and board diversity mandates, are primarily justified as benefitting investors economically in the long run (possibly resulting, as Lund has suggested in other contexts, in a type of “discursive harm”). The corporate governance machine also illuminates the near universality of certain pro-shareholder governance structures in public U.S. companies, such as annual elections, majority voting, and independent directors. These arrangements are not required by law and may even be suboptimal in some cases, but as soon as companies go public, they are all pushed to conform to a common shareholder-oriented blueprint by stock exchanges, ratings agencies, proxy advisors, and other market and cultural forces.

Most importantly, the corporate governance machine explains the stickiness of shareholder primacy in the United States. Because shareholderism is not the product of law alone, incremental legal reforms that offer corporate managers more discretion to consider stakeholders’ interests will not by itself change corporate behavior so long as the other components of the apparatus (the institutional actors and our cultural acceptance of shareholder primacy) remain intact. Lund and Pollman offer this conclusion bluntly, saying “the larger war has been won” by shareholderists. But they also put forth a partial silver lining for critics of shareholderism by noting that the definition of shareholder value can and has evolved to incorporate broad stakeholder interests.

Through richly historical accounts and a range of detailed examples, The Corporate Governance Machine adds much-needed complexity to conventional narratives on why shareholder primacy has dominated over competing theories in the United States and proven so hard to dislodge. At a time when companies’ actions and impact are increasingly under scrutiny, this article will almost certainly spark important conversations.

  1. I commented on an earlier draft of the article for a workshop.
Cite as: Da Lin, Why Shareholder Primacy Persists, JOTWELL (May 21, 2021) (reviewing Dorothy Lund & Elizabeth Pollman, The Corporate Governance Machine, 122 Colum. L. Rev. (forthcoming, 2021), available at SSRN),

If It Is Discoverable, It May Count: From Shareholder Rights to Inspect Books and Records to Implementing Caremark Duties

Roy Shapira, A New Caremark Era: Causes and Consequences, 98 Wash. U. L. Rev. __ (forthcoming, 2021), available at SSRN.

It is well known that corporate compliance departments’ effectiveness depends on the quality of information they receive.1 In A New Caremark Era: Causes and Consequences, Professor Roy Shapira argues that providing information to attorneys for plaintiffs also can enhance compliance. Delaware courts have broadened and are broadening shareholder inspection rights, interpreting DGCL §220. When plaintiff attorneys take advantage of this procedural change, their cases can survive motions to dismiss. Shapira traces out the substantive consequences of this expansion of access: It puts teeth into their Caremark arguments.

Demonstrating a confidence in their abilities to prevent fishing expeditions and quickly dismiss strike suits, and generally to engage in what Shapira calls “micro-management,” Delaware courts minimize the costs to corporations of expanding discovery. Also demonstrating a confidence in corporations’ abilities to properly respond to discovery requests, Delaware courts also have found that the absence of records can demonstrate a violation of Caremark duties. As a result, corporations increasingly will paper their decision-making. Even if this is only window-dressing, Shapira insightfully explains that when it is known that these papers are discoverable, internal compliance will be enhanced.

This Article reviews a chain of cases in which the Delaware Supreme Court reversed Chancery dismissals of Caremark claims. Substantively, their important contribution is that board failure to monitor “mission critical risks” violates the duty of loyalty. Procedurally, their important contribution is an expansion of pre-filing inspections under section 220.

The Article then reviews developments in Delaware regarding shareholder rights to inspect a corporation’s “books and records.” Shapira calls it “The Liberation of Section 220.” The limitations that inspection requests must show both proper purpose and scope have been eased. Hearsay, especially news reports, has been held to show a credible basis for a proper purpose. Informal communications such as emails and social media postings are now within the proper scope. Section 220 inspections are no longer limited to meeting minutes and similar corporate records.

Courts regularly have dismissed derivative actions because the complaints merely restate public information. Expanding pre-filing discovery enables attorneys who take advantage of section 220 to get their complaints past motion to dismiss. When courts then ensure that cases proceed in the best interests of the corporation, their results both formally and informally, especially in the presence of reputational sanctions, enhance corporate compliance.

One of the most interesting aspects of Shapira’s argument is that he traces how these Delaware Supreme Court reversals are played out in law firm news releases. Shapira sees these as “advisory memos.” He finds that they “implore” directors to “start working harder” on compliance and “make sure that proper documentation exists.” They “admonish their clients to create better reporting and information system and documentation.” As a result, Shapira concludes, better Caremark compliance will result.

Lauren Edelman has studied similar self-advertisements by HR consultants and she found that they led to greater power and security for HR actors, in part by overstating the results of judicial decisions. It is clear that the news releases that Shapira analyzes sell reasons to employ lawyers. They are advertisements for how the firm can be hired to help corporations. It is less clear if they go beyond the holdings of the judicial decisions to which they respond. If Shapira is right that these memos change corporate behaviors in the directions suggested by the Caremark line of cases, then perhaps we should praise the increasingly competitive corporate law environment that generates these “want ads,” and not be overly concerned about their accuracy. Even if I am less sanguine than Shapira about what lawyers will supply once hired, Shapira deserves credit for bringing into legal literature the analysis of these self-advertisements. They exist in many areas of the law and have consequences that deserve analysis, as Shapira has demonstrated.

  1. Shapira at note 103, citing Eugene Soltes, Evaluating the Effectiveness of Corporate Compliance Programs: Establishing a Model for Prosecutors, Courts, and Firms, 14 N.Y.U. J. L. & Bus. 965, 976 (2018). See also, Robert Rosen, If you count it, it will count:” From Directives to Reports Refined, JOTWELL (April 20, 2017) (reviewing Oren Perez, The Green Economy Paradox: A Critical Inquiry into Sustainability Indexes, 17 Minn. J. L. Sci. & Tech 153 (2016)).
Cite as: Robert Rosen, If It Is Discoverable, It May Count: From Shareholder Rights to Inspect Books and Records to Implementing Caremark Duties, JOTWELL (April 22, 2021) (reviewing Roy Shapira, A New Caremark Era: Causes and Consequences, 98 Wash. U. L. Rev. __ (forthcoming, 2021), available at SSRN),