* Professor of Law and Carville Dickinson Benson Research Professor of Law, George Washington University, B.S. 1975, University of Arizona, J.D. 1978, Harvard. The author would like to acknowledge, with thanks, the research assistance of Bryan Sillaman and Jason Wyrick, the inspiration of William T. Palmer, the insights and efforts of Robert L. Palmer, and the comments of Mitu Gulati and his class at Georgetown Law Center.
1 For a discussion and summary of this trend, see, for example, Marianne M. Jennings & Jon Entine, Business with a Soul: A Reexamination of What Counts in Business Ethics, 20 Hamline J. Pub. L. & Pol’y 1, 3 (1998) and Colloquium, Corporate Citizenship: A Conversation Among the Law, Business and Academia, 84 Marq. L. Rev. 723, 724–25 (2001).
2 See Jennings & Entine, supra note 1, at 5–7.
3 See id. at 9.
4 See Simon Deakin, Squaring the Circle? Shareholder Value and Corporate Social Responsibility in the U.K., 70 Geo. Wash. L. Rev. 976, 986–87 (2002).
5 See, e.g., Dennis Hastert, Bush Leading Us Back to Fiscal Recovery, Chi. Trib., Jan. 10, 2003, at N21; Mike Ivey, No Doubt, Markets Need a Positive; Analyst Zempel Remains Bullish, Capital Times, Jan. 23, 2003, at 1E.
6 See N.Y. Stock Exch., Listed Company Manual � 303(A)(1) (2003) [hereinafter NYSE Manual] (addressing corporate governance standards); Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto by the New York Stock Exchange, Inc. Relating to Corporate Governance, Exchange Act Release No. 34-47672, 68 Fed. Reg. 19,051, 19,052 (Apr. 17, 2003).
7 See NYSE Manual, supra note 6, � 303(A)(7).
8 Id. � 303(A)(8); Self-Regulatory Organizations; Notice of Filing and Immediate Effectiveness of Proposed Rule Change, by the New York Stock Exchange, Inc. Extending the Pilot Regarding Shareholder Approval of Stock Option Plans Through June 30, 2003, Exchange Act Release No. 34-47409, 68 Fed. Reg. 10,560, 10,560 (Mar. 5, 2003).
9 See NYSE Manual, supra note 6, � 303(A)(12).
10 Id. � 303(A)(10).
11 Order Requiring the Filing of Sworn Statements Pursuant to Section 21(a)(1) of the Securities Exchange Act of 1934, Exchange Act Order 4-460 (June 27, 2002).
12 Additional Form 8-K Disclosure Requirements and Acceleration of Filing Date, Exchange Act Release No. 34-46084, 67 Fed. Reg. 42,914, 42,914 (June 25, 2002).
13 See generally Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745 (2002) (codified in scattered sections of 11, 15, 18, 28, and 29 U.S.C.A.).
14 Id. � 301.
15 Id. � 307.
16 Id. � 806.
17 Id. � 903.
18 Sarbanes-Oxley Act of 2002 � 807.
19 Id. � 802.
20 Id. � 402.
21 Id. � 302.
22 Id. � 306.
23 Sarbanes-Oxley Act of 2002 � 804.
24 Id. � 406.
25 Id. � 409.
26 See infra notes 43–89 and accompanying text.
27 See infra notes 43–69 and accompanying text.
28 See infra notes 70–78 and accompanying text.
29 See infra notes 90–139 and accompanying text.
30 See infra notes 90–111 and accompanying text.
31 See infra notes 112–139 and accompanying text.
32 See infra notes 120–139 and accompanying text.
33 See infra notes 120–139 and accompanying text.
34 See infra notes 137–139 and accompanying text.
35 See infra notes 140–159 and accompanying text.
36 See infra notes 140–159 and accompanying text.
37 See infra notes 153–159 and accompanying text.
38 See infra notes 160–201 and accompanying text.
39 See infra notes 184–187 and accompanying text.
40 See infra notes 191–193 and accompanying text.
41 See infra notes 194–201 and accompanying text.
42 Pinocchio (Walt Disney Studios 1940).
43 See Theresa A. Gabaldon, The Lemonade Stand: Feminist and Other Reflections on the Limited Liability of Corporate Shareholders, 45 Vand. L. Rev. 1387, 1391–92 (1992); see also Louis K. Liggett Co. v. Lee, 288 U.S. 517, 567 (1933) (Brandeis, J., dissenting).
44 See David Millon, Theories of the Corporation, 1990 Duke L.J. 201, 206; Larry E. Ribstein, The Constitutional Conception of the Corporation, 4 Sup. Ct. Econ. Rev. 95, 97–100 (1995); see also Trs. of Dartmouth Coll. v. Woodward, 17 U.S. (44 Wheat.) 518, 636 (1819) (describing the corporation as “an artificial being, invisible, intangible, and existing only in contemplation of law”).
45 See William W. Bratton, Jr., The New Economic Theory of the Firm: Critical Perspectives from History, 41 Stan. L. Rev. 1471, 1475, 1480–81 (1989); Michael Jensen & William Meckling, The Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Principles, 3 J. Fin. Econ. 305, 311 (1976) (stating that the corporation is a “nexus of contracts”); David Millon, Communitarianism in Corporate Law: Foundations and Law Reform Strategies, in Progressive Corporate Law 3–4 (Lawrence E. Mitchell ed., 1995) (rejecting the “nexus of contracts” approach in favor of a “communitarian” approach).
46 See Millon, supra note 44, at 206 (noting that courts frequently have interpreted statutes containing the word “persons” to include corporations); see, e.g., Loudon v. Coleman, 59 Ga. 653, 655 (1877); People ex rel. Bank of Watertown v. Assessors of Watertown, 1 Hill 616, 620–21 (N.Y. Sup. Ct. 1841); Fisher v. Horicon Iron & Mfg. Co., 10 Wis. 351, 355 (1860).
47 See Melvin A. Eisenberg, The Structure of Corporation Law, 89 Colum. L. Rev. 1461, 1461 (1989); Lawrence E. Mitchell, A Critical Look at Corporate Governance, 45 Vand. L. Rev. 1263, 1263 (1992).
48 Lawrence E. Mitchell & Theresa A. Gabaldon, If I Only Had a Heart: Or, How Can We Identify a Corporate Morality, 76 Tul. L. Rev. 1645, 1657 (2002).
49 Jensen & Meckling, supra note 45, at 310–11; see also Frank H. Easterbrook & Daniel R. Fischel, The Economic Structure of Corporate Law 12 (1991); Henry W. Butler, The Contractual Theory of the Corporation, 11 Geo. Mason L. Rev. 99, 99, 100 (1989).
50 See Easterbrook & Fischel, supra note 49, at 34; Jensen & Meckling, supra note 45, at 311.
51 See Bratton, supra note 45, at 1480 (stating that the contractual model implies a limited role for corporate law). Note, however, that these arrangements include the hypothetical bargain between consumer and shareholders conferring limited liability on shareholders.
52 See Easterbrook & Fischel, supra note 49, at 35–39.
53 See Lynn A. Stout, Bad and Not-So-Bad Arguments for Shareholder Primacy, 75 S. Cal. L. Rev. 1189, 1193 (2002).
54 See, e.g., Easterbrook & Fischel, supra note 49, at 37–39.
55 For arguments in support of shareholder primacy, see Milton Friedman, The Social Responsibility of Business Is to Increase Its Profits, N.Y. Times, Sept. 13, 1970 (Magazine), at 32; Jensen & Meckling, supra note 45, at 306. For arguments against shareholder primacy, see Lyman Johnson, New Approaches to Corporate Law, 50 Wash. & Lee L. Rev. 1713, 1714 (1993); Millon, supra note 45, at 1–2.
56 See, e.g., Wai Shun Wilson Leung, The Inadequacy of Shareholder Primacy: A Proposed Corporate Regime That Recognizes Non-Shareholder Interests, 30 Colum. J.L. & Soc. Probs. 587, 591 (1997); Millon, supra note 44, at 238.
57 See, e.g., Marlene O’Connor, Restructuring the Corporation’s Nexus of Contracts: Recognizing a Fiduciary Duty to Protect Displaced Workers, 69 N.C. L. Rev. 1189, 1246 (1991).
58 See Mitchell, supra note 47, at 1263.
59 See Lawrence E. Mitchell, The Fairness Rights of Corporate Bondholders, 65 N.Y.U. L. REV. 1165, 1168–70 (1990) (arguing that fiduciary rights should be extended to corporate bondholders); O’Connor, supra note 57, at 1194 (arguing that fiduciary duties should extend to displaced workers).
60 Margaret M. Blair & Lynn A. Stout, A Team Production Theory of Corporate Law, 85 Va. L. Rev. 247, 249 (1999). Note, however, that the adherents of this model specifically disavow identification as progressives. Id. at 253–54.
61 See, e.g., Kent Greenfield, Using Behavioral Economics to Show the Power and Efficiency of Corporate Law as a Regulatory Tool, 35 U.C. Davis L. Rev. 581, 583 (2002); Christine Jolls et al., A Behavioral Approach to Law and Economics, 50 Stan. L. Rev. 1471, 1473 (1998).
62 See supra notes 60–61 and accompanying text.
63 Blair & Stout, supra note 60, at 250.
64 Id. at 250–51.
65 Id. at 313–15.
66 See Margaret M. Blair, A Contractarian Defense of Corporate Philanthropy, 28 Stetson L. Rev. 27, 33 (1998) (defending director’s contributions to corporate charities through the team production model).
67 Greenfield, supra note 61, at 588 (indicating that behavioral law and economics “insights may prove to weaken conventional corporate law theory sufficiently so that much of it will have to be reconsidered and replaced”); see, e.g., Donald C. Langevoort, Monitoring: The Behavioral Economics of Corporate Compliance with Law, 2002 Colum. Bus. L. Rev. 71, 73; Donald C. Langevoort, Taming the Animal Spirits of the Stock Markets: A Behavioral Approach to Securities Regulation, 97 Nw. U. L. Rev. 135, 137 (2002). Although it is the author’s belief that at least some of these studies could be interpreted as easily as evidence of the subjects’ preference for gambling as for altruism, that is not the subject of this Article.
68 Greenfield, supra note 61, at 628.
69 Cf. id. at 633–40 (discussing significance of behavioral incentives to share and cooperate for the conduct of directors, without addressing shareholder preference).
70 See Ann C. Scales, The Emergence of Feminist Jurisprudence, 95 Yale L.J. 1373, 1376–79 (1986); Jeffrey J. Pyle, Note, Race, Equality and the Rule of Law: Critical Race Theory’s Attack on the Promises of Liberalism, 40 B.C. L. Rev. 787, 797 (1999).
71 See Theresa A. Gabaldon, Corporate Conscience and the White Man’s Burden, 70 Geo. Wash. L. Rev. 944, 952 (2002).
72 See Stephen M. Bainbridge, The Board of Directors as Nexus of Contracts, 88 Iowa L. Rev. 1, 8 (2002) (describing the board of directors as “[p]latonic guardian[s],” those wise few who make decisions in the best interest of the community); Brett W. King, The Use of Supermajority Voting Rules in Corporate America: Majority Rule, Corporate Legitimacy, and Minority Shareholder Protection, 21 Del. J. Corp. L. 895, 923 (1996) (citing the shift to majority voting rules as the reason for the transfer of power to boards of directors).
73 See, e.g., Lawrence E. Mitchell, Corporate Irresponsibility 129–34, 157–61 (2001) (calling for lengthening the term of board members and lengthening the time between mandated disclosure of financial reports as methods of alleviating pressure on boards to focus on short-term results).
74 A 2001 Canadian survey found that only 9.8% of board seats in Canada, and only 12.4% of Fortune 500 board seats in the United States, were held by women. Janis Sarra, The Gender Implications of Corporate Governance Change, 1 Seattle J. Soc. Just. 457, 487 (2002); see Fed. Glass Ceiling Comm’n, U.S. Dep’t of Labor, Good for Business: Making Full Use of the Nation’s Human Capital, 9 (1995), available at http://www.dol.
gov/asp/programs/history/reich/reports/ceiling.pdf (stating that only 0.60% of senior level managers in major companies were African-American when the report was published).
75 See sources cited supra notes 49–53 and accompanying text.
76 See generally Gabaldon, supra note 71, at 952–53 (describing feminist and other reactions to director-centered proposals).
77 See Lynne L. Dallas, The New Managerialism and Diversity on Corporate Boards of Directors, 76 Tul. L. Rev. 1363, 1385–87 (2002) (relating increased representation of women, minorities, and non-nationals on corporate boards to new managerial attitudes); Steven A. Ramirez, Diversity and the Boardroom, 6 Stan. J.L. Bus. & Fin. 85, 90 (2000) (citing demographics and globalization as creating a business need for diversity among boards).
78 For discussion of the co-option process, see, for example, John M. Darley, How Organizations Socialize Individuals into Evildoing, in Codes of Conduct: Behavioral Research into Business Ethics 13 (David M. Messick & Ann E. Tenbrunsel eds., 1996).
79 See Restatement (Second) of Conflict of Laws � 302 (1971).
80 It is thought by some that the “internal affairs” doctrine also encompasses the doctrine of limited liability as a question of the “relationship of shareholders to their corporation.” Robert W. Hamilton, Corporations Including Partnerships and Limited Liability Companies 334 (7th ed. 2001).
81 See sources cited supra notes 44–48 and accompanying text.
82 See, e.g., William A. Klein et al., Business Associations: Agency, Partnerships, and Corporations 1–203, 390–490 (4th ed. 2000) (dealing with agency and partnerships in chapters 1 and 2, and briefly discussing securities and disclosure laws in chapter 4, sections 3 and 4).
83 Proxy rules governing communications in the course of shareholder vote-taking, including the election of directors, are a prime example. Section 14(a) of the ’34 Act governs the solicitation of proxies in connection with shareholders’ meetings, at which the business conducted is a matter of state law. 15 U.S.C. � 78n(a) (2004).
84 For cases illustrating the conflict between federal tender offer legislation and state takeover statutes, see CTS Corp. v. Dynamics Corp. of Am., 481 U.S. 69, 74 (1987); Edgar v. MITE Corp., 457 U.S. 624, 626 (1982); Amanda Acquisition Corp. v. Universal Food Corp., 877 F.2d 496, 499 (7th Cir. 1989) and see also Roberta S. Karmel, Reconciling Federal and State Interests in Securities Regulation in the United States and Europe, 28 Brook. J. Int’l L. 495, 503–05 (2003) (discussing the U.S. Supreme Court’s attempts at reconciling federal securities laws with notions of internal corporate governance).
85 See infra notes 149–152 and accompanying text.
86 See Daniel R. Fischel, The “Race to the Bottom” Revisited: Reflections on Recent Developments in Delaware’s Corporation Law, 76 Nw. U. L. Rev. 913, 913–14 (1982) (arguing against a federal corporate law scheme to replace the various state schemes); Marcel Kahan & Ehud Kamar, The Myth of State Competition in Corporate Law, 55 Stan. L. Rev. 679, 682 (2002) (stating that “[w]ith market capitalization of public corporations in the United States in the range of $16 trillion, the dynamics that shape the laws states offer to govern the internal affairs of companies are of substantial importance”).
87 See Greenfield, supra note 61, at 591. Note, however, that the usual ability of a state to bring quo warranto proceedings has the theoretical effect of blurring these distinctions. See id. at 591–601 (describing corporate law as public law).
88 Millon, supra note 45, at 13 (stating that “[t]he multifiduciary label conveniently captures the idea that nonshareholders as well as shareholders ought to be the beneficiaries of managerial decisionmaking”); Mitchell, supra note 59, at 1168–70 (arguing that fiduciary rights should be extended to corporate bondholders); O’Connor, supra note 57, at 1194 (arguing that fiduciary duties should be extended to displaced workers).
89 Giving outside regulators such authority is something different. Although outside regulation is not a particular focus of progressives, it is conceded even by neoclassical economic analysis to be appropriate in those circumstances in which public policy dictates an outcome not covered by the bargains of those with recognized stakes in the corporation and its activities. See sources cited supra note 45 and accompanying text.
90 Although there are, of course, subsequent examples, Enron and WorldCom got the ball rolling and will be used as the primary examples for purposes of this discussion.
91 See, e.g., Richard A. Oppel, Jr., Enron’s Many Strands: The Directors; Harsh Words from Senators to the Board, N.Y. Times, May 8, 2002, at C7 (following the Enron scandal as part of a continuous series of articles); Simon Romero, Turmoil at WorldCom: The Overview; WorldCom Facing Charges of Fraud; Inquiries Expand, N.Y. Times, June 27, 2002, at A1 (following the WorldCom debacle as part of a continuing series of articles).
92 See William W. Bratton, Enron and the Dark Side of Shareholder Value, 76 Tul. L. Rev. 1275, 1276–77 (2002) (noting that Enron’s share price at its peak in 2000 was around $90.00 per share and at the time of its bankruptcy had dropped to $0.60 per share); Romero, supra note 91, at A1 (noting that the NASDAQ suspended trading of WorldCom shares after its announcement that it would file for bankruptcy).
93 See, e.g., Bratton, supra note 92, at 1276–81; David Millon, Why Is Corporate Management Obsessed with Quarterly Earnings and What Should Be Done About It?, 70 Geo. Wash. L. Rev. 890, 893–97 (2002).
94 For a timeline illustrating Enron’s dramatic stock plummet for 2001, see Bratton, supra note 92, at 1276–77, 1318–19.
95 See David W. Tice, Big Bear Says, “The Market Is Out of Control”: Just Because Stocks Are Soaring Doesn’t Mean They Aren’t Tremendously Overvalued, On Wall Street, May 1, 1998, 1998 WL 11649455; David W. Tice, Remember the Bottom Line: What’s Going to Happen When Investors Again Demand Profits?, On Wall Street, Dec. 1, 2000, 2000 WL 8695162.
96 See Theresa A. Gabaldon, John Law, with a Tulip, in the South Seas: Gambling and the Regulation of Euphoric Market Transactions, 26 J. Corp. L. 225, 228 (2001); Ron Chernow, Hard-Charging Bulls and Red Flags, N.Y. Times, Sept. 2, 1998, at A31; Jack Willoughby, Gravy Train: Everybody Wants to Be on Board the Express to IPO Riches, Barron’s, Dec. 13, 1999, at 37.
97 Corporate employees thus compose a group of inevitable bag-holders who have received relatively little regulatory recognition post-Enron. See sources cited supra notes 13–25; infra notes 153–157 and accompanying text.
98 Day traders are, of course, the quintessential example of shareholders with short-term interests. See, e.g., Steven Mufson, Master of a New Universe, Wash. Post, May 16, 1999 (Magazine), at W8 (describing the life of a young day trader).
99 See Gabaldon, supra note 96, at 233 (characterizing this practice as “crowd prediction”).
100 For discussion of regulatory reaction to the failures of traditional gatekeepers, see, for example, Lawrence E. Mitchell, The Sarbanes-Oxley Act and the Reinvention of Corporate Governance?, 48 Vill. L. Rev. 1189, 1189–92 (2003).
101 For an excellent description of the interaction of media and market price, see Robert Schiller, Irrational Exuberance 152 (2000).
102 See generally Tharan L. Cook et al., Murphy’s Law? An Examination of the Growth Flow Valuation Method for Technology Stocks, 5 J. Wealth Mgmt., Mar. 22, 2003, at 50, 50 (describing alternative valuation method in light of traditional ratio’s inability to explain pricing); Dave Flessner & Jamee Smith, Meltdown Creates Investor Angst, Chattanooga Times Free Press, July 16, 2002, at C1 (describing then-current stockholder despair), LEXIS, News Library; Stephen Foley, The Investment Column: Vodafone Offers a Bumpy Ride to Wealth, The Independent (London), Aug. 21, 2001, at 15 (predicting return to traditional pricing), LEXIS, News Library; Alan Goldstein, “Clever” Isn’t Cool Anymore, Dallas Morning News, July 3, 2002, at 1D (same), LEXIS, News Library.
103 See Michael Goldsmith, Resurrecting RICO: Removing Immunity for White-Collar Crime, 41 Harv. J. on Legis. 281, 282 (2004).
104 See Philip F.S. Berg, Note, Unfit to Serve: Permanently Barring People from Serving as Officers and Directors of Publicly Traded Companies After the Sarbanes-Oxley Act, 56 Vand. L. Rev. 1871, 1872 (2003). Thus, in the months following the first indication that Martha Stewart might be indicted for insider trading, the stock of her eponymous company declined significantly. See id.
105 John M. Keynes, The General Theory of Employment, Interest & Money 154–56 (1936).
106 See id.
107 It is true, however, that social responsibility financial funds have increased in popularity. See infra note 173 and accompanying text.
108 See, e.g., Betty Beard, Personalities Primped for Scholarship Pageant, Ariz. Republic, Apr. 4, 2003, Chandler Community Section, at 1, 2003 WL 17690919; Marshall Carter, 13-Year-Old Welcomes Invitation to Pageant, Sebastian Sun (Sebastian, Fla.), June 6, 2003, at A1, http://web.tcpalm.com/sitetools/archives.html.
109 For example, the percentage of “green” (environmentally friendly) new products in the United States increased from 4.5% in 1989, to 11.4% in 1990, and to 13.4% in 1991. Douglas M. Branson, Corporate Governance “Reform” and the New Corporate Social Responsibility, 62 U. Pitt. L. Rev. 605, 644–45 (2001).
110 See, e.g., Blair & Stout, supra note 60, at 288 (arguing that shareholder primacy is merely the recognized norm because of voting rights and derivative suit standing).
111 Cf. Mitchell, supra note 73, at 115 (stating that “you manage what you measure. Even if the structure and rules of corporate law weren’t such as to keep managements’ eyes focused on the daily stock quotations, the simple fact is that the other set of performance measures available to them are the corporations’ financial statements.”).
112 See id. (linking stock price maximization to numerous examples of unethical corporate behavior).
113 See Millon, supra note 93, at 890.
114 See Bratton, supra note 92, at 1328–32 (pointing out that Enron’s obsession with its stock price may have been a result of its competitive culture and the desire to “win” corporate profits).
115 See id. at 1328. Stock options usually are tied to long-term success, but Enron’s management bonus structure was such that it awarded managers based on the performance of the company’s stock compared to the market as a whole, as well as their ability to meet various periodic performance criteria. Id.
116 See Michael C. Jensen & Kevin J. Murphy, CEO Incentives—It’s Not How Much You Pay, But How, Harv. Bus. Rev., May–June 1990, at 138, 138 (positing that the problem with executive pay at the beginning of the 1990s was that it had no link to corporate performance). But see Charles M. Yablon, Bonus Questions—Executive Compensation in the Era of Pay for Performance, 75 Notre Dame L. Rev. 271, 273–74 (1999) (stating that “while CEOs and their compensation consultants often use the rhetoric of pay for performance to justify higher amounts of compensation, they also may seek to reduce the risk attached by increasing the number of options granted, setting easy performance goals, or repricing underwater options”).
117 For a summary analysis of the ongoing debate, see, for example, D. Gordon Smith, The Shareholder Primacy Norm, 23 J. Corp. L. 277, 277, 280 (1998); Stout, supra note 53, at 1189–90.
118 See Easterbrook & Fischel, supra note 49, at 36.
119 See, e.g., Ronald M. Green, Shareholders as Stakeholders: Changing Metaphors of Corporate Governance, 50 Wash. & Lee L. Rev. 1409, 1411–12 (1993); Lawrence E. Mitchell, Cooperation and Constraint in the Modern Corporation: An Inquiry into the Causes of Corporate Immorality, 73 Tex. L. Rev. 477, 479–81 (1995).
120 See generally Theresa A. Gabaldon, Like a Fish Needs a Bicycle: Publicly Held Corporations and Their Shareholders (Aug. 15, 2004) (unpublished manuscript under submission and on file with the author). This is a different question from whether privately held corporations need shareholders. See id. at 35–36.
121 See Blair & Stout, supra note 60, at 248; Robert B. Thompson, Preemption and Federalism in Corporate Governance: Protecting Shareholder Rights to Vote, Sell, and Sue, 62 Law & Contemp. Probs. 215, 216–18 (1999).
122 See Restatement (Second) of Agency � 14C cmt. a (1958) (stating that a board of director’s “duties are owed to the corporation itself rather than to the shareholders individually or collectively”). The Delaware Supreme Court has stated that the board of directors owes fiduciary duties of care and loyalty to the corporation and the shareholders. See, e.g., Mills Acquisition Co. v. Macmillan, Inc., 559 A.2d 1261, 1280 (Del. 1989).
123 Blair & Stout, supra note 60, at 292–97.
124 Arthur R. Pinto, Corporate Governance: Monitoring the Board of Directors in American Corporations, 46 Am. J. Comp. L. 317, 325–26 (1998) (suggesting that management’s control over corporate information and proxy solicitation at the corporation’s expense allows it to influence a shareholder’s voting decision).
125 See Anup Agrawal & Jeffrey F. Jaffe, Do Takeover Targets Underperform? Evidence from Operating and Stock Returns, 38 J. Fin. & Quantitative Anal. 721, 721–22 (2003).
126 See James Cotton, Another Nail in the Coffin of the Small Investor: The Private Securities Litigation Reform Act of 1995, 17 Touro L. Rev. 733, 738 (2001) (citing the Private Securities Litigation Reform Act, Federal Rule of Civil Procedure 11, and various state statutes as limiting small investors’ ability to bring a derivative action).
127 See Mae Kuykendall, Symmetry and Dissonance in Corporate Law: Perfecting the Exoneration of Directors, Corrupting Indemnification and Straining the Framework of Corporate Law, 1998 Colum. Bus. L. Rev. 443, 469.
128 See Theresa A. Gabaldon, Free Riders and the Greedy Gadfly: Examining Aspects of Shareholder Litigation as an Exercise in Integrating Ethical Regulation and Laws of General Applicability, 73 Minn. L. Rev. 425, 425–26 (1988) (highlighting the ethical problems that arise by lawyer solicitations of various corporate derivative suits).
129 Cf. Bernard Black, Shareholder Activism and Corporate Governance in the United States, in 3 The New Palgrave Dictionary of Economics and the Law 459 (Peter Newman ed., 1998) (describing phenomenon in institutional investor activism and its lack of effect).
130 Blair & Stout, supra note 60, at 263.
131 See id. at 262–63.
132 See Frank H. Easterbrook & Daniel R. Fischel, Limited Liability and the Corporation, 52 U. Chi. L. Rev. 89, 89–90 (1985); Larry E. Ribstein, An Applied Theory of Limited Partnership, 37 Emory L.J. 835, 841 (1988).
133 According to Frank H. Easterbrook and Daniel R. Fischel, the Coase theorem demonstrates that the risk of a particular investment always is reflected in its price. Supra note 132, at 97 n.13; see also Ronald H. Coase, The Problem of Social Cost, 3 J.L. & Econ. 1, 2–6 (1960) (explaining theorem and relationship between risk and price).
134 It does, however, permit unsophisticated capital providers to take respectable gambles.
135 See, e.g., Canadian Oil Industry Financings Hit 10-Year High, Oil & Gas J., Mar. 10, 2003, at 38, 38 (debt comprising $9.98 billion (Canadian) total oil financing in 2002), LEXIS, News Library; Australia Q3 Current a/c Deficit 7.871 bln aud vs 7.305 Q2; Consensus 7.6, AFX Eur. Focus, Nov. 29, 2002 (describing $57 billion of equity as opposed $347 billion of debt), LEXIS, News Library.
136 See generally Capitalist Patriarchy and the Case for Socialist Feminism 1 (Zillah Eisenstein ed., 1979) (describing and criticizing the capitalist mystique); Marilyn Waring, If Women Counted: A New Feminist Economics 1 (1988) (same).
137 See, e.g., Eugene F. Fama, Agency Problems and the Theory of the Firm, 88 J. Pol. Econ. 288, 289 (1980) (laying to rest the “attractive concept of the entrepreneur” and distinguishing the separate functions of management and risk-bearing).
138 With respect to the nonessential nature of public shareholders, the public after-markets for equity are equally nonessential. They are, however, traditional repositories for otherwise unused funds, and it would be far too disruptive to abolish them. (Imagine, among other things, what would happen to the price of real estate.) There is, however, no reason related to corporate operations to believe that stock prices that are ungrounded in some sort of reasonable relationship to corporate earnings, or a projection thereof, are a good thing. Once that reasonable relationship is lost, the aftermarket in a particular corporation’s stock becomes no more and no less than a casino in which traders are betting on investor psychology and precisely when the game of musical chairs will stop. Measures tailored to affect corporate operations but that also affect this casino atmosphere could be a good thing, were they to prompt movement back to more long-term holding patterns resembling something akin to traditional “ownership.” See generally Gabaldon, supra note 96, at 229 (discussing regulation of gambling as an analogy for investment regulation).
139 See infra notes 194–201 and accompanying text.
140 See, e.g., Larry E. Ribstein, Market vs. Regulatory Responses to Corporate Fraud: A Critique of the Sarbanes-Oxley Act of 2002, 28 J. Corp. L. 1, 2 (2002); Note, The Good, the Bad, and Their Corporate Codes of Ethics: Enron, Sarbanes-Oxley, and the Problems with Legislating Good Behavior, 116 Harv. L. Rev. 2123, 2123 (2003).
141 See The A.A. Sommer, Jr. Annual Lecture on Corporate Securities & Financial Law: Post-Enron America: An SEC Perspective, 8 Fordham J. Corp. & Fin. L. 335, 342–43 (2003) [hereinafter SEC Perspective] (including the comments of SEC Commissioner Goldschmid that “the Sarbanes-Oxley Act . . . provides the right fundamental framework for our current healing process”).
142 See Ribstein, supra note 140, at 3.
143 SEC Perspective, supra note 141, at 343 (declaring that “[t]his landmark legislation is the most important securities legislation since the New Deal”).
144 See Lisa M. Fairfax, The Sarbanes-Oxley Act as Confirmation of Recent Trends in Director and Officer Fiduciary Obligations, 76 St. John’s L. Rev. 953, 953 (2002) (arguing that Sarbanes-Oxley merely confirms recent case law interpretations of managers’ fiduciary duties); Larry E. Ribstein, Bubble Laws, 40 Hous. L. Rev. 77, 78 (2003) (arguing that regulatory responses to large-scale market breakdowns, such those which occurred after the Enron situation, are unlikely to protect against future occurrences for a number of reasons).
145 See Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, � 301, 116 Stat. 745, 776 (2002) (codified in scattered sections of 11, 15, 18, 28, and 29 U.S.C.A.).
146 See id. �� 301, 307; see also Mitchell, supra note 100, at 1199–211 (describing new regulations).
147 See, e.g., Frank H. Easterbrook & Daniel R. Fischel, Mandatory Disclosure and the Protection of Investors, 70 VA. L. REV. 669, 673–80 (1984); Nicholas Wolfson, A Critique of the Securities and Exchange Commission, 30 Emory L.J. 119, 129–31 (1981).
148 For a discussion of loans to officers and other self-dealing transactions, see Lucian Arye Bebchuk et al., Managerial Power and Rent Extraction in the Design of Executive Compensation, 69 U. Chi. L. Rev. 751, 831 (2002); Norwood P. Beveridge, Jr., The Corporate Director’s Fiduciary Duty of Loyalty: Understanding the Self-Interested Director Transaction, 41 DePaul L. Rev. 655, 655–59 (1992); and Marleen A. O’Connor, How Should We Talk About Fiduciary Duty? Directors’ Conflict-of-Interest Transactions and the ALI’s Principles of Corporate Governance, 61 Geo. Wash. L. Rev. 954, 954–55 (1993).
149 See Cynthia A. Williams, The Securities and Exchange Commission and Corporate Social Transparency, 112 Harv. L. Rev. 1197, 1209, 1227 (1999).
150 See Sarbanes-Oxley Act of 2002 � 402.
151 See id. � 306.
152 See supra note 83.
153 See, e.g., Rick Bragg, Enron’s Collapse: Workers; Workers Feel Pain of Layoffs and Added Sting of Betrayal, N.Y. Times, Jan. 20, 2002, at 1; Theo Francis & Ellen Schultz, Enron Faces Suits by 401(k) Plan Participants, Wall St. J., Nov. 23, 2001, at C1; Ellen E. Schultz, Enron Workers Face Losses on Pensions, Not Just 401(k)s, Wall St. J., Dec. 19, 2001, at C1.
154 See Sarbanes-Oxley Act of 2002 � 806.
155 See id. � 306.
156 Cf. Mitchell, supra note 100 (analyzing the Sarbanes-Oxley Act without reference to employee-related provisions).
157 Even though undue managerial concern with stock price was criticized resoundingly as contributing to the debacles we witnessed, questioning the importance of shareholders vis-�-vis corporations evidently was not on the regulatory mind.
158 See, e.g., Douglas M. Branson, Corporate Governance “Reform” and the New Corporate Social Responsibility, 62 U. Pitt. L. Rev. 605, 605–06 (2001); David Hess, Social Reporting: A Reflexive Law Approach to Corporate Social Responsiveness, 25 J. Corp. L. 41, 43 (1999); Jay P. Kesan, Encouraging Firms to Police Themselves: Strategic Prescriptions to Promote Corporate Self-Auditing, 2000 U. Ill. L. Rev. 155, 165 n.7 (citing Carole Basri, Corporate Transparency: The Triple Bottom Line Audit, N.Y. L.J., Sept. 30, 1999, at 5); Williams, supra note 149, at 1199.
159 See Williams, supra note 149, at 1293–96.
160 Theresa Gabaldon, Experiencing Limited Liability: On Insularity and Inbreeding in Corporate Law, in Progressive Corporate Law 111–12 (Lawrence E. Mitchell ed., 1995).
161 See id. at 112–15.
162 Greenfield, supra note 61, at 643.
163 Id. at 638.
164 See, e.g., Daniel R. Fischel, The Corporate Governance Movement, 35 Vand. L. Rev. 1259, 1273–74 (1982).
165 See generally Edwin Merrick Dodd, American Business Corporations Until 1860 with Special Reference to Massachusetts (1954) (reviewing early American corporate law); Oscar Handlin & Mary F. Handlin, Origins of the American Business Corporation, 5 J. Econ. Hist. 1, 2 (1945).
166 See Mitchell & Gabaldon, supra note 48, at 1657.
167 See Mitchell, supra note 100, at 1198–202 (describing new statutes and regulations governing the role of the audit committee).
168 See, e.g., Alfred F. Conard, Reflections on Public Interest Directors, 75 Mich. L. Rev. 941, 952 (1977); Lynne L. Dallas, Two Models of Corporate Governance: Beyond Berle and Means, 22 Mich. J. L. Reform 19, 73–77 (1988); Katherine Van Wezel Stone, Labor and the Corporate Structure: Changing Conceptions and Emerging Possibilities, 55 U. Chi. L. Rev. 73, 158–59 (1988).
169 Consistent with the notion of fiduciary responsibilities on the part of individual agents, are requirements that particular officers certify the corporation’s financial statements. See Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, � 302, 116 Stat. 745, 777–78 (2002) (codified in scattered sections of 11, 15, 18, 28, and 29 U.S.C.A.); Order Requiring the Filing of Sworn Statements Pursuant to Section 21(a)(1) of the Securities Exchange Act of 1934, Exchange Act Order 4-460 (June 27, 2002).
170 Fischel, supra note 164, at 1271.
171 Id. at 1272.
172 See supra note 50 and accompanying text.
173 See Williams, supra note 149, at 1287 (describing “dramatic” increase in number of mutual funds using social or environmental screens, and quantifying the assets under professional management in the United States using social screening as nine percent of total).
174 As indicated earlier, self-interest of the participants in business enterprise is a basic assumption of the contractarian approach. See sources cited supra note 49 and accompanying text.
175 See sources cited supra notes 67–69 and accompanying text.
176 See sources cited supra notes 63–66 and accompanying text.
177 See sources cited supra notes 56, 63–66 and accompanying text.
178 See generally Faith Stevelman Kahn, Pandora’s Box: Managerial Discretion and the Problem of Corporate Philanthropy, 44 UCLA L. Rev. 579, 586–87 (1997) (discussing corporate philanthropy and suggesting its mandatory disclosure).
179 See sources cited supra note 49 and accompanying text.
180 The roles of structure and nomenclature in shaping human thinking and behavior have been the subject of much examination. See generally Theresa A. Gabaldon, Feminism, Fairness, and Fiduciary Duty in Corporate and Securities Law, 5 Tex. J. Women & L. 1, 13–16 (1995) (discussing pitfalls and possibilities of symbols in corporate and securities law); O’Connor, supra note 148, at 963 (discussing linguistic shaping of moral and social world); Robert L. Palmer, When Law Fails: Ethics, Commerce, and Tales of Value, 2 S. Cal. Interdisc. L.J. 245, 267–71 (1993) (discussing role of stories in shaping thinking and behavior).
181 See Gabaldon, supra note 71, at 955.
182 See Gabaldon, supra note 180, at 19.
183 See John W. Bagby et al., How Green Was My Balance Sheet?: Corporate Liability and Environmental Disclosure, 14 Va. Envtl. L.J. 225, 230–31 (1995) (discussing environmental liability and arguing for increased environmental disclosure).
184 See Mitchell, supra note 100, at 1198–99. The concept of corporate conscience committees demands further line crossing, in that such committees would not be charged with matters of direct benefit to the traditional interests of shareholders.
185 Failure to produce the desired result of accurate financial statements results in strict liability for the corporation and what is akin to negligence-based liability for the directors. See Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, � 301, 116 Stat. 745, 776 (2002) (codified in scattered sections of 11, 15, 18, 28, and 29 U.S.C.A.).
186 See Joel Seligman, The Transformation of Wall Street: A History of the Securities and Exchange Commission and Modern Corporate Finance 71 (2d ed. 1995).
187 See Gabaldon, supra note 180, at 16–21.
188 See Gabaldon, supra note 71, at 955 (explaining criticism that both types of committee-based reform are sops).
189 See, e.g., Kenneth J. Arrown, Social Choice and Individual Values 2–3 (2d ed. 1963) (describing and criticizing law making process); Daniel A. Farber & Philip P. Frickey, Law and Public Choice 23–24 (1991) (same); see also Martha Chamallas, The Market Excuse, 68 U. Chi. L. Rev. 579, 580 (2001) (reviewing Robert L. Nelson & William P. Bridges, Legalizing Gender Inequality: Courts, Markets, and Unequal Pay for Women in America (1999) (discussing issues raised by political exclusion)); Mark Strasser, Unconstitutional? Don’t Ask; If It Is, Don’t Tell: On Deference, Rationality, and the Constitution, 66 U. Colo. L. Rev. 375, 375–76 (1995) (same).
190 See sources cited supra notes 74, 77.
191 The perils of corporate diffusion have been well described by, for example, Brenda S. Hustis & John Y. Gotanda, The Responsible Corporate Officer: Designated Felon or Legal Fiction?, 25 Loy. U. Chi. L.J. 169, 171 (1994); V.S. Khanna, Is the Notion of Corporate Fault a Faulty Notion?: The Case of Corporate Mens Rea, 79 B.U. L. Rev. 355, 359–60 (1999); William S. Laufer, Corporate Bodies and Guilty Minds, 43 Emory L.J. 647, 648–51 (1994); Eli Lederman, Models for Imposing Corporate Criminal Liability: From Adaptation and Imitation Toward Aggregation and the Search for Self-Identity, 4 Buff. Crim. L. Rev. 641, 668 (2000); and Jennifer A. Quaid, The Assessment of Corporate Criminal Liability on the Basis of Corporate Identity: An Analysis, 43 McGill L.J. 67, 69 (1998).
192 See, e.g., John C. Coffee, Jr., “No Soul to Damn: No Body to Kick”: An Unscandalized Inquiry into the Problem of Corporate Punishment, 79 Mich. L. Rev. 386, 401 (1981) (noting that monetary penalties assessed against corporations penalize innocent shareholders).
193 See generally sources cited supra note 191 (describing possibilities of evasion and related issues).
194 See Coffee, supra note 192, at 401.
195 See id.
196 At most, it might have an incidental moderating effect on future financial bubbles. For discussion of financial bubbles generally, see, for example, Gabaldon, supra note 96, at 235–36 and Schiller, supra note 101, at 118–32.
197 See James D. Cox, Rethinking U.S. Securities Laws in the Shadow of International Regulatory Competition, 55 Law & Contemp. Probs. 157, 159–61 (1992) (describing capital flight and international regulatory competition). Cf. Henry Hansmann & Reinier Kraakman, The End of History for Corporate Law, 89 Geo. L.J. 439, 440–43 (2001) (arguing that corporate governance structures will converge across developed economies upon the Anglo-American, “shareholder-oriented” model).
198 The most usual explanation of the relative attraction of the United States capital markets has to do with financial transparency. See, e.g., SEC Commissioner Isaac C. Hunt, Jr., A Securities Regulator’s Top Accounting and Auditing Priorities for 1998, Remarks at the National Conference on Current SEC Developments of the American Institute of Certified Public Accountants (Dec. 9, 1997), at http://www.sec.gov/news/speech/speecharchive/
1997/spch198.txt.
199 See generally Gabaldon, supra note 96, at 229 (discussing gambling and the creation of market bubbles).
200 See, e.g., Louis Lowenstein, Financial Transparency and Corporate Governance: You Manage What You Measure, 96 Colum. L. Rev. 1335, 1340–41 (1996).
201 See sources cited supra note 197.
202 Pinocchio (Walt Disney Studios 1940).