The elusive quest for global governance standards

University of Pennsylvania Law Review

Volumn 157, Issue 5, 2009, Pages 1263-1317

  Bebchuk, Lucian A ^a,b   Hamdani, Assaf ^c  

^a Department of Law Economics and Finance ^*

^b HARVARD LAW SCHOOL   (United States)

^c HEBREW UNIVERSITY OF JERUSALEM   (Israel)

Author keywords

[No Author keywords available]

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EID: 67149147186     PISSN: 00419907     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (246)

1. See, e.g., Stijn Claessens, Corporate Governance and Development, 21 WORLD BANK RES. OBSERVER 91, 91 (2006) ("Corporate governance ... has now become a mainstream concern-a staple of thscussion in corporate boardrooms, academic meetings, and policy circles around the globe." (italics omitted));
2. Yair Listokin, Interpreting Empirical Estimates of the Effect of Corporate Governance, 10 AM. L. & ECON. REV. 90, 94 (2008) ("Over the last decade, a series of important empirical articles have evaluated the impact of many levers of corporate governance on firm value and performance.").
3. See, e.g., Sanjai Bhagat & Brian Bolton, Corporate Governance and Firm Performance, 14 J. CORP. FIN. 257, 264-69 (2008) (reporting a correlation between various measures of corporate governance and firms' operating performance);
4. Bernard S. Black et al., Does Corporate Governance Prethct Firms' Market Values? Evidence from Korea, 22 J.L. ECON. & ORG. 366, 410-11 (2006) (reporting evidence that corporate governance is an important factor in prethcting the market value of Korean firms).
5. See, e.g., Rafael La Porta et al., Legal Determinants of External Finance, 52 J. FIN. 1131, 1139 (1997) (finthng evidence that the quality of investor protection affects the size and breadth of capital markets across countries);
6. Ross Levine, Law, Finance, and Economic Growth, 8 J. FIN. INTERMEDIATION 8, 24 (1999) (finthng that legal systems that protect outsiders can aid economic growth).
7. See Stuart L. Gillan, Recent Developments in Corporate Governance: An Overview, 12 J. CORP. FIN. 381, 381 (2006) ("The amount of corporate governance research has increased dramatically during the last decade.").
8. See Sanjai Bhagat et al., The Promise and Peril of Corporate Governance Inthces, 108 COLUM. L. REV. 1803, 1807 (2008) ("[A] market for corporate governance ratings exists, with proxy-advising firms ... using ratings to formulate voting recommendations and other governance-rating providers using them to advise on investment decisions.").
9. For recent reviews of efforts by shareholder-advisory firms to provide commercial governance-ranking services, see id. at 1824-26;
10. Robert Daines et al., Rating the Ratings: How Good Are Commercial Governance Ratings? 8-14 (John M. Olin Program in Law & Econ., Stanford Law Sch., Working Paper No. 360, 2008), available at http:// ssrn.com/abstract=1152093.
11. See Bhagat et al., supra note 5. In Part I, we review the impact of academic and commercial efforts to develop governance-ranking systems.
12. For purposes of this Article, we define a controlling shareholder as one who owns or controls sufficient votes to effectively determine vote outcomes and influence corporate decision making. Cf. Aronson v. Lewis, 473 A.2d 805, 816 (Del. 1984) (defining domination as "threction of corporate conduct in such a way as to comport with the wishes or interests of [those] doing the controlling"
13. (quoting Kaplan v. Centex Corp., 284 A.2d 119, 123 (Del. Ch. 1971))),
14. overruled on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000).
15. See Rafael La Porta et al., Corporate Ownership Around the World, 54 J. FIN. 471, 49193 (1999) (stating that most firms in the United States and United Kingdom are widely held).
16. But see Clifford G. Holderness, The Myth of Diffuse Ownership in the United States, 22 REV. FIN. STUD. (forthcoming 2009) (manuscript at 1), available at http:// rfs.oxfordjournals.org/cgi/reprint/hhm069v1.pdf ("The ownership of U.S. firms is similar to and by some measures more concentrated than the ownership of firms in other countries."). Our analysis holds even if U.S. companies with controlling shareholders are more prevalent than previously thought.
17. See Stijn Claessens et al., The Separation of Ownership and Control in East Asian Corporations, 58 J. FIN. ECON. 81, 82 (2000) ("[M]ore than two-ťhirds of [East Asian] firms are controlled by a single shareholder.");
18. Mara Faccio & Larry H.P. Lang, The Ultimate Ownership of Western European Corporations, 65 J. FIN. ECON. 365, 366 (2002) (reporting that only around thirty-seven percent of Western European firms are widely held) ;
19. Thomas Kirchmaier & Jeremy Grant, Corporate Ownership Structure and Performance in Europe 4. (CEP Discussion Paper No. 0631, 2005), available at http://ssrn.com/ abstract=616201 (finthng that firms in continental Europe are dominated by concentrated ownership). Moreover, in many countries around the world, public firms are owned through pyramids or other forms of business groups.
20. See generally Tarun Khanna & Yishay Yafeh, Business Groups in Emerging Markets: Paragons or Parasites?, 45 J. ECON. LITERATURE 331 (2007) (describing a variety of ownership structures and their prominence throughout the world).
21. For works thscussing thfferences between the agency problems in widely held and controlled companies, see, for example, Luca Enriques & Paolo Volpin, Corporate Governance Reforms in Continental Europe, 21 J. ECON. PERSP. 117 (2007);
22. Ronald J. Gilson & Jeffery N. Gordon, Controlling Controlling Shareholders, 152 U. PA. L. REV. 785 (2003);
23. Henry Hansmann & Reinier Kraakman, Agency Problems and Legal Strategies, in THE ANATOMY OF CORPORATE LAW 21 (Reinier Kraakman et al. eds., 2004) ;
24. Howell E. Jackson & Mark J. Roe, Public and Private Enforcement of Securities Laws: Resource-Based Evidence,J. FIN. ECON. (forthcoming 2009);
25. Mark J. Roe, The Institutions of Corporate Governance, in HANDBOOK OF NEW INSTITUTIONAL ECONOMICS 371 (Claude Ménard & Mary M. Shirley eds., 2005);
26. Andrei Shleifer & Robert W. Vishny, A Survey of Corporate Governance, 52 J. FIN. 737 (1997).
27. But see Katharina Pistor, The Standarthzation of Law and Its Effect on Developing Economies, 50 AM. J. COMP. L. 97, 122-123 (2002) (noting that the OECD principles of corporate governance focus on the problems underlying widely-held firms).
28. See Simeon Djankov et al., The Law and Economics of Self-Dealing, 88 J. FIN. ECON. 430, 432-33 (2008) (creating the Anti-Self-Dealing Index);
29. Rafael La Porta et al., Law and Finance, 106 J. POL. ECON. 1113, 1126-28 (1998) (establishing the Anti-Director Rights Index).
30. See, e.g., Mark J. Roe, Legal Origins, Politics, and Modern Stock Markets, 120 HARV. L. REV. 460, 463-64, 463 n.1 (2006) (describing the influence of the Anti-Director Rights Index and the extensive literature in its aftermath on policymakers at international economic organizations);
31. see also Holger Spamann, 'Law and Finance' Revisited (Harvard Law Sch., John M. Olin Ctr. Discussion Paper No. 12, 2008), available at http://ssrn.com/abstract=1095526 (documenting the large number of stuthes on the Anti-Director Rights Index).
32. See RISKMETRICS GROUP, CORPORATE GOVERNANCE QUOTIENT, http:// www.riskmetrics.com/cgq (last visited Mar. 15, 2009).
33. See Jeffrey Sonnenfeld, Good Governance and the Misleathng Myths of Bad Metrics, ACAD. MGMT. EXECUTIVE, Feb. 2004, at 108, 111.
34. See, e.g., Craig Doidge et al., Why Do Countries Matter So Much for Corporate Governance?, 86 J. FIN. ECON. 1, 11-12 (2007) (using firms' CGQ scores as a proxy for the quality of their corporate-governance arrangements);
35. Vidhi Chhaochharia & Luc Laeven, Corporate Governance Norms and Practices (European Corp. Governance Inst., Finance Working Paper No. 165/2007, 2007), available at http://ssrn.com/abstract=965733 (studying the relationship between CGQ scores and their components and firm value);
36. Reena Aggarwal & Rohan Williamson, Did New Regulations Target the Relevant Corporate Governance Attributes? 21-24 (Apr. 14, 2006) (unpublished manuscript), available at http://ssrn.com/abstract=891411 (reconstructing the CGQ Index to find correlation between governance and firm value).
37. See John C. Coates IV, Takeover Defenses in the Shadow of the Pill: A Critique of the Scientific Evidence, 79 TEX. L. REV. 271, 338 (2000) (noting the limited nature of the empirical research done on takeover defenses).
38. See, e.g., Bhagat et al., supra note 5, at 1808 ("[T]here is no one 'best' measure of corporate governance: The most effective governance institution depends on context and on firms' specific circumstances.");
39. Paul Rose, The Corporate Governance Industry, 32 J. CORP. L. 887, 908 (2007) (arguing that one-size-fits-all methodologies "may not capture relevant nuances in corporate governance policies and behaviors");
40. see also J. Harold Mulherin, Corporations, Collective Action and Corporate Governance: One Size Does Not Fit All, 124 PUB. CHOICE 179, 180 (2005) ("The multithmensional nature of corporate governance inthcates that the focus in many reform proposals on a narrow set of mechanisms ignores the substitutability and complementarity provided by the broad set of forces operating on the corporation.").
41. See Doidge et al., supra note 17, at 2 ("Better governance enables firms to access capital markets on better terms, which is valuable for firms intenthng to raise funds.").
42. See Thorsten Beck & Ross Levine, Legal Institutions and Financial Development 32 (Nat'l Bureau of Econ. Research, Working Paper No. 10417, 2004), available at http://ssrn.com/abstract=476083 (citing stuthes showing a positive correlation between legal institutions that protect property rights and firm- and stock-price efficiency).
43. See, e.g., Lucian Bebchuk et al., What Matters in Corporate Governance?, 22 REV. FIN. STUD. 783 (2009) (documenting the negative effect of certain "entrenchment" corporate-governance practices);
44. Paul Gompers et al., Corporate Governance and Equity Prices, 118 Q.J. ECON. 107, 110-14 (2003) (measuring the effects of thfferent corporategovernance provisions on equity prices).
45. For example, the World Bank's "Doing Business" survey, which provides objective measures of business regulations and their enforcement across 181 economies, relies on the Anti-Self-Dealing Index, which we thscuss below, to measure countries' level of investor protection. See Doing Business, Protecting Investors, http:// www.doingbusiness.org/MethodologySurveys/ ProtectingInvestors.aspx (last visited Mar. 15, 2009). The IMF's Financial Sector Assessment Program uses the World Bank's Doing Business database to assess countries' level of investor protection. See IMF, FINANCIAL SECTOR ASSESSMENT: A HANDBOOK 74 box 4.1 (2005), available at http://www.imf.org/external/pubs/ft/fsa/eng/ pdf/ch04.pdf.
46. See, e.g., Marco Becht et al., Corporate Governance and Control 4-13 (European Corp. Governance Inst., Finance Working Paper No. 02/2002, 2005), available at http://ssrn.com/abstract=343461 (noting the impact of institutional investors' growing presence and the demand for governance-related services).
47. See, e.g., U.S. GOV'T ACCOUNTABILITY OFFICE, CORPORATE SHAREHOLDER MEETINGS: ISSUES RELATING TO FIRMS THAT ADVISE INSTITUTIONAL INVESTORS ON PROXY VOTING 8 (2007), available at http://www.gao.gov/new.items/d07765.pdf (describing ISS as "the dominant advisory firm" and perhaps even "a potential barrier to competition in this industry");
48. Rose, supra note 19, at 889-90 (reporting some executives' belief that RiskMetrics-then ISS-"may control a third or more of the shareholder votes" in the industry).
49. RiskMetrics Group, Inc., Amended Registration Statement for Face-Amount Certificate Companies (Form S-1/A), at 14, 87 (Nov. 2, 2007), available at http:// investor.riskmetrics.com/phoenix.zhtml?c=215573&p=irol-sec (click "last"; then choose document).
50. Id. at 87.
51. Id. at 88.
52. Id. at 87.
53. See Thomas W. Briggs, Corporate Governance and the New Hedge Fund Activism: An Empirical Analysis, 32 J. CORP. L. 681, 693 (2007) ("Getting a favorable ISS recommendation is therefore frequently essential to victory.");
54. see also Jie Cai et al., Electing Directors, J. FIN. (forthcoming 2009) (manuscript at 4), available at http://ssrn.com/ abstract=1101924 (finthng that threctors with negative ISS recommendations receive nineteen percent fewer votes than other threctors);
55. Ying Duan, The Role of Mutual Funds in Corporate Governance: Evidence from Mutual Funds' Proxy Voting and Trathng Behavior 2 (Jan. 2008) (unpublished manuscript), available at http:// ssrn.com/abstract=1028367 (stating that mutual funds are more likely to vote against management than to sell when management's recommendations on proposals conflict with those of ISS).
56. See, e.g., Stephen Choi et al., Director Elections and the Influence of Proxy Advisors 1 (NYU Ctr. for Law, Econ., & Org. Working Paper No. 08-22, 2008), available at http://ssm.com/abstract=1127282 (noting that ISS was "claimed to sway" between twenty and thirty percent of proxy votes);
57. Cindy R. Alexander et al., The Role of Advisory Services in Proxy Voting 2 (2006) (unpublished manuscript), available at http://ssrn.com/abstract= 966181 (quoting one Merrill Lynch analyst describing an ISS recommendation, "If it had gone the other way, the deal would have been dead. Now, it's a horse race.").
58. See RISKMETRICS GROUP, FREQUENTLY ASKED QUESTIONS ABOUT CORPORATE GOVERNANCE QUOTIENT, http://www. riskmetrics.com/sites/default/files/CGQ%20FAQ.pdf (last visited Mar. 15, 2009).
59. See Daines et al., supra note 6, at 2, 4 (reporting varied empirical accounts of the influence of governance ratings and noting that RiskMetrics was the largest commercial rater).
60. See Rose, supra note 19, at 898-99 ("Proxy advisers generally base their decisions on corporate governance standards that are derived from the same policies as those used to formulate governance ratings and related governance advice.");
61. see also INSTITUTIONAL S'HOLDER SERVS., ISS US CORPORATE GOVERNANCE POLICY 2007 UPDATES 24 (2007), available at http://www.riskmetrics.com/ sites/default/files/2007-US-PolicyUpdate.pdf (describing steps taken to align governance ratings with the company's voting policy).
62. See, e.g., MICHAEL J. KOLAR & ANDREW J. NEUHARTH, OPPENHEIMER WOLFF & DONNELLY LLP, WHAT'S YOUR "CGQ" IQ? WHAT EVERY CORPORATE EXECUTIVE SHOULD KNOW ABOUT THE CORPORATE GOVERNANCE QUOTIENT (2007), available at http://www.oppenheimer.com/newsletters/CGQ-IQ.pdf.
63. See, e.g., Alliant Techsystems Inc., Corporate Governance, http://www.atk.com/ CorporateGovernance/corpgov-commitment.asp (last visited Mar. 15, 2009) (proudly touting its CGQscore).
64. See U.S. GOV'T ACCOUNTABILITY OFFICE, CORPORATE SHAREHOLDER MEETINGS: ISSUES RELATING TO FIRMS THAT ADVISE INSTITUTIONAL INVESTORS ON PROXY VOTING 10 (2007), available at http://www.gao.gov/new.items/d07765.pdf (noting that ISS "offers corporate governance consulting services to help clients understand and improve their corporate governance ratings").
65. See, e.g., Yahoo! Finance, Microsoft Corporation, http://finance.yahoo.com/q/ pr?s=MSFT (last visited Mar. 15, 2009).
66. See, e.g., Ruth W. Epps & Sandra J. Cereola, Do Institutional Shareholder Services (ISS) Corporate Governance Ratings Reflect a Company's Operating Performance?, 19 CRITICAL PERSP. ON ACCT. 1135 (2008) (presenting methodology for comparing CGQ scores and corporate performance and concluthng that there is no relationship).
67. See Lawrence D. Brown & Marcus L. Caylor, Corporate Governance and Firm Valuation, 25 J. ACCT. & PUB. POL'Y 409, 411 (2006) (identifying seven governance factors that are the key drivers of the link between governance and valuation).
68. See Chenchuramaiah Bathala et al., Industry Differences in Corporate Governance: The Case of Banking and Non-Banking Firms, 13 ICFAIJ. APPLIED FIN. 17 (relying on CGQ scores to study governance thfferences between bank and nonbank firms).
69. For a list of the U.S. governance attributes, see RISKMETRICS GROUP, SUMMARY: CGQ RATINGS CRITERIA FOR US COMPANIES, http://www.riskmetrics.com/sites/ default/files/CGQ-Criteria-US.pdf (last visited Mar. 15, 2009) [hereinafter RISKMETRICS, U.S. CRITERIA].
70. For a list of the non-U.S. governance variables, see RISKMETRICS GROUP, SUMMARY: CGQ RATINGS CRITERIA FOR NON-US COMPANIES, http:// www.riskmetrics.com/sites/default/files/CGQ-Criteria-exUS.pdf (last visited Mar. 15, 2009) [hereinafter RISKMETRICS, NON-U.S. CRITERIA].
71. A more detailed description of the U.S. CGQ factors may be found in RISKMETRICS GROUP, CGQ BEST PRACTICES MANUAL (US) (2008) [hereinafter, RISKMETRICS, U.S. BEST PRACTICES].
72. A more detailed description of the non-U.S. CGQ factors may be found in RISKMETRICS GROUP, CORPORATE GOVERNANCE QUOTIENT: INDICATOR DEFINITIONS (NON-U.S. COMPANIES) (2007) [hereinafter, RISKMETRICS, NON-U.S. INDICATOR DEFINITIONS] . The latter two documents may be requested from RiskMetrics at http://www.riskmetrics.com/contact.
73. See RISKMETRICS GROUP, CORPORATE GOVERNANCE QUOTIENT: METHODOLOGY, http://www.riskmetrics.com/cgq/methodology (last visited Mar. 15, 2009).
74. La Porta et al., supra note 13;
75. see also Rafael La Porta et al., Investor Protection and Corporate Governance, 58 J. FIN. ECON. 3, 24 (2000) (arguing that strong investor protection is empirically linked with "valuable and broad financial markets");
76. La Porta et al., supra note 3, at 1132 ("We compare external finance across 49 countries as a function of the origin of their laws, the quality of legal investor protections, and the quality of law enforcement.").
77. See generally Rafael La Porta et al., The Economic Consequences of Legal Origins, 46 J. ECON. LITERATURE 285, 286-87 (2008)
78. [hereinafter La Porta et al., Economic Consequences] (developing a "Legal Origins Theory" based on historical thfferences between various legal trathtions).
79. See Spamann, supra note 14, at 1-3 (reporting that the Anti-Director Rights Index has been used in almost one hundred such stuthes but challenging the accuracy of the underlying data).
80. See generally Art Durnev & E. Han Kim, To Steal or Not to Steal: Firm Attributes, Legal Environment, and Valuation, 60 J. FIN. 1461 (2005) (studying the extent of variation between firm governance and the strength of the legal regime);
81. Simon Johnson et al., Corporate Governance in the Asian Financial Crisis, 58 J. FIN. ECON. 141, 142 (2000) (presenting "evidence that the weakness of legal institutions for corporate governance had" an impact on the Asian financial crisis);
82. Rafael La Porta et al., Investor Protection and Corporate Valuation, 57 J. FIN. 1147 (2002) (analyzing the theoretical and empirical effects of investor protection on firm valuation);
83. Tatiana Nenova, The Value of Corporate Voting Rights and Control: A Cross-Country Analysis, 68 J. FIN. ECON. 325 (2003) (examining control premia);
84. Christian Leuz et al., Earnings Management and Investor Protection: An International Comparison, 69 J. FIN. ECON. 505, 506 (2003) (provithng "comparative evidence on corporate earnings management across 31 countries"). More recent stuthes have also explored these themes.
85. See, e.g., Jay Dahya et al., Dominant Shareholders, Corporate Boards, and Corporate Value: A Cross-Country Analysis, 87 J. FIN. ECON. 73, 73-76 (2008) (examining the role of board composition and independent threctors in relation to external investor protections in firms with a dominant shareholder);
86. Ivalina Kalcheva & Karl V. Lins, International Evidence on Cash Holthngs and Expected Managerial Agency Problems, 20 REV. FIN. STUD. 1087, 1087-88 (2007) (finthng a relationship between cash management and firm valuation when external investor protection is weak but not when it is strong);
87. Mariassunta Giannetti & Yrjo Koskinen, Investor Protection, Equity Returns, and Financial Globalization 1-3 (Mar. 2008) (unpublished manuscript), available at http://ssm.com/abstract=942513 (arguing that weak investor-protection mechanisms create an incentive for shareholders to purchase controlling stakes).
88. See Jean Imbs, The Real Effects of Financial Integration, 68 J. INT'L ECON. 296, 31819 (2006) (incluthng the Anti-Director Rights Index in the calculation of financial integration).
89. See Sebnem Kalemli-Ozcan et al., Risk Sharing and Industrial Specialization: Regional and International Evidence, 93 AM. ECON. REV. 903 (2003) (using the inthces as part of a study of industrial specialization).
90. See La Porta et al., supra note 13, at 1127-28.
91. Id. at 1127.
92. Id. at 1128.
93. Id.
94. Id. In adthtion to the Anti-Director Rights Index, LLSV also take into account two variables: "one share, one vote" and "mandatory thvidends."
95. See La Porta et al., supranote 13, at 1122-23.
96. Commentators have questioned the Anti-Director Rights Index on a variety of grounds. Some argue that the index does not capture all the arrangements that are important for investor protection. See John C. Coffee, Jr., The Rise of Dispersed Ownership: The Role of Law and the State in the Separation of Ownership and Control, 111 YALE L.J. 1, 4 n.6 (2001) (arguing that the shareholder rights captured by LLSV "supply only partial and sometimes easily outflanked safeguards, which have little to do with the protection of control and the entitlement to a control premium"). Others argue that the index adopts a U.S.-centric approach.
97. See Priya P. Lele & Mathias M. Siems, Shareholder Protection: A Leximetric Approach, 7 J. CORP. L. STUD. 17, 20-21 (2007) (noting that the inclusion of variables like cumulative voting and the exclusion of variables like thrector entrenchment reflect a U.S. bias). Lawyers have been skeptical of the attempt to use a single measure for evaluating the quality of legal protection across countries and have identified some mistakes.
98. See, e.g., Udo C. Braendle, Shareholder Protection in the USA and Germany-"Law and Finance" Revisited, 7 GERMAN L.J. 257, 258 (2006) (arguing that LLSV thd not adequately consider German company law) ;
99. Luca Enriques, Do Corporate Law fudges Matter? Some Evidence from Milan, 3 EUR. BUS. ORG. L. REV. 765, 769-83 (2002) (U.K.) (evaluating thfferences between corporate law on and off the books and the impact of enforcement). Others explore the methodological thfficulties associated with cothng such legal variables.
100. See, e.g., Spamann, supra note 14 (attempting, and failing, to replicate the data presented by LLSV). Our thesis, however, is markedly thfferent. We argue that any attempt to develop a single measure for evaluating corporate governance for both controlled and widely held firms is inherently misguided.
101. Djankov et al., supra note 13.
102. See id. at 432 (thscussing improvements vis-à-vis the Anti-Director Rights Index).
103. See Doidge et al., supra note 17, at 16 (using the Anti-Self-Dealing Index as a measure of investor rights);
104. Valentina G. Bruno & Stijn Claessens, Corporate Governance and Regulation: Can There Be Too Much of a Good Thing? 14 (European Corp. Governance Inst., Working Paper No. 142/2007, 2006), available at http://ssrn.com/abstract= 956329 (using the Anti-Self-Dealing Index as a measure of investor protection);
105. Augusto de la Torre et al., Capital Market Development: Whither Latin America?, 7 (World Bank Policy Res. Working Paper Series, Paper No. 4156, 2007), available at http://ssrn.com/ abstract=967890 (same).
106. For a detailed description, see Djankov et al., supra note 13, at 433-36.
107. See La Porta et al., Economic Consequences, supra note 44, at 294 ("[A] two-standard deviation increase in the anti-self-dealing index is associated with an increase in the stock-market-to-GDP ratio of 42 percentage points, an increase in listed firms per capita of 38 percent, and a reduction in ownership concentration of 6 percentage points.").
108. For an in-depth analysis of the thvergence of interests between shareholders and management in NCS firms, see generally Michael C. Jensen & William H. Meckling, Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure, 3 J. FIN. ECON. 305(1976).
109. See Ronald J. Gilson, Controlling Shareholders and Corporate Governance: Complicating the Comparative Taxonomy, 119 HARV. L. REV. 1641, 1651 (2006) ("[A] controlling shareholder may police the management of public corporations better than the standard panoply of market-oriented techniques employed when shareholthngs are widely held.").
110. See also Enriques & Volpin, supra note 11, at 117 ("[Concentrated ownership can create conthtions for a new agency problem, because the interests of controlling and minority shareholders are not aligned.").
111. See FRANK H. EASTERBROOK & DANIEL R. FISCHEL, THE ECONOMIC STRUCTURE OF CORPORATE LAW 66-67 (1991).
112. Moreover, for a holder of the majority of the votes, the cost of monitoring and thsciplining management is likely to be lower than it is for outside shareholders. For example, threctors and officers are more likely to provide a controlling shareholder with information concerning the company's performance, and the controller does not need to communicate with other shareholders to secure a majority of the votes.
113. See, e.g., Faccio & Lang, supra note 10, at 390 tbl.8 (presenting evidence on the prevalence of pyramidal ownership structures in Western Europe);
114. Khanna & Yafeh, supra note 10, at 332 ("[I]n virtually all emerging markets, group affiliated firms tend to be relatively large and economically important.").
115. See Vlathmir Atanasov et al., Unbundling and Measuring Tunneling (Univ. of Tex. Sch. of Law, Law & Econ. Working Paper No. 117, 2008), available at http:// ssrn.com/abstract=1030529 (thscussing the thfferent ways in which controlling persons may extract wealth from firms).
116. For evidence on self-dealing involving companies within the same business groups, see, for example, Kee-Hong Bae et al., Tunneling or Value Added? Evidence from Mergers by Korean Business Groups, 57 J. FIN. 2695 (2002) ;
117. Marianne Bertrand et al., Ferreting Out Tunneling: An Application to Inthan Business Groups, 117 Q.J. ECON. 121 (2002).
118. For a comprehensive analysis of legal issues that arise in the context of freezeout transactions, see generally Guhan Subramanian, Fixing Freezeouts, 115 YALE L.J. 2 (2005).
119. Controllers might use generous compensation arrangements to induce managers to facilitate controllers' value thversion through self-dealing and other transactions. Controllers, however, are often quite influential in making a decision to hire or terminate managers. This means that managers who want to get hired or keep their job have an incentive to cater to the controller preferences even without being paid for their cooperation with value thversion.
120. Another thfference is the role of threctors' stock ownership. In NCS companies, stock ownership can incentivize outside threctors to monitor management. See, e.g., Michael C. Jensen, The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems, 48 J. FIN. 831, 864 (1993) (arguing that encouraging threctors to hold substantial equity interests would provide better oversight incentives).
121. But see Assaf Hamdani & Reinier Kraakman, Rewarthng Outside Directors, 105 MICH. L. REV. 1677, 1682-83 (2007) (arguing that equity pay for threctors "cannot substitute for threct monitoring incentives"). In CS firms, however, threctors' stock ownership might be less important. If the thrector is the controller or its affiliate, then equity ownership is unlikely to provide incentives beyond those already provided by owning the control block. Even when the thrector is independent, however, the incentives provided through stock ownership are likely outweighed by the controller's influence over thrector elections.
122. See Mike Burkart & Samuel Lee, The One Share-One Vote Debate: A Theoretical Perspective 28 (European Corp. Governance Inst., Finance Working Paper No. 176/2007, 2007) ("In spite of stock option plans and the like, compensation packages for top executives typically dwindle in comparison to the equity stakes of most large owners.").
123. See Michael C. Jensen, Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers, 76 AM. ECON. REV. 323, 323 (1986) ("Managers have incentives to cause their firms to grow beyond the optimal size.").
124. See David Yermack, Nights of Fancy: Corporate fits, CEO Perquisites, and Inferior Shareholder Returns, 80 J. FIN. ECON. 211 (2006) (finthng that firms whose CEOs personally use company jets underperform market benchmarks).
125. See Lucian Arye Bebchuk, The Case Against Board Veto in Corporate Takeovers, 69 U. CHI. L. REV. 973, 974 (2002) ("In the last thirty years, takeover law has been the subject most hotly debated by corporate law scholars.").
126. See, e.g., MELVIN ARON EISENBERG, CORPORATIONS AND OTHER BUSINESS O RGANIZATIONS 315-24, 1040-1114 (9th ed. 2005).
127. See Lucian A. Bebchuk & Assaf Hamdani, Federal Corporate Law: Lessons from History, 106 COLUM. L. REV. 1793, 1801-02 (2006) (describing three decades of state antitakeover legislation).
128. See Ronald J. Gilson & Reinier Kraakman, Delaware's Intermethate Standard for Defensive Tactics: Is There Substance to Proportionality Review?, 44 BUS. LAW. 247, 248 (1989) (analyzing the standard of review applied by the Delaware courts to defensive measures taken by the target board).
129. See generally Frank H. Easterbrook & Daniel R. Fischel, The Proper Role of a Target's Management in Responthng to a Tender Offer, 94 HARV. L. REV. 1161 (1981) (criticizing managerial resistance to premium tender offers);
130. Ronald J. Gilson, A Structural Approach to Corporations: The Case Against Defensive Tactics in Tender Offers, 33 STAN. L. REV. 819, 819-21 (1981) (noting the conflict of interest that managers face in the tenderoffer setting and proposing a structural solution);
131. Lucian A. Bebchuk, Comment, The Case for Facilitating Competing Tender Offers, 95 HARV. L. REV. 1028 (1982) (advocating a rule of auctioneering to promote competition among premium tender offers).
132. See GEORGESON, 2007 ANNUAL CORPORATE GOVERNANCE REVIEW 6 (2007), available at http://www.georgeson.com/usa/download/acgr/acgr2007.pdf (noting that, while currently in decline, shareholder proposals addressing antitakeover defenses have dominated the proxy landscape for years).
133. We share this view. See Bebchuk & Hamdani, supra note 75, at 1805-07.
134. See Henry G. Manne, Op-Ed., Bring Back the Hostile Takeover, WALL ST. J., June 26, 2002, at A18 ("New scandals will continue until we bring back the most powerful market mechanism for thsplacing bad managers: hostile takeovers.").
135. See, e.g., Marianne Bertrand & Sendhil Mullainathan, Is There Discretion in Wage Setting? A Test Using Takeover Legislation, 30 RAND J. ECON. 535, 545 (1999) (finthng that the adoption of antitakeover statutes led to higher labor costs);
136. Kenneth A. Borokhovich et al., CEO Contracting and Antitakeover Amendments, 52 J. FIN. 1495, 1515 (1997) (stating that executives with stronger antitakeover defenses enjoy higher compensation levels);
137. Gerald T. Garvey & Gordon Hanka, Capital Structure and Corporate Control: The Effect of Antitakeover Statutes on Firm Leverage, 54 J. FIN. 519, 520 (1999) (reporting that antitakeover statutes "allow managers to pursue goals other than maximizing shareholder wealth");
138. Gompers et al., supra note 22, at 111, 129 (concluthng that companies with managers who enjoy more protection from takeovers are associated with poorer operating performance).
139. See Bhagat et al., supra note 5, at 1811-12 ("Firms that adopt devices to impede control changes are ... conventionally characterized as firms with poor corporate governance, because the managers of those firms are not subject to the thsciplining force of hostile bids.");
140. see also Bebchuk et al., supra note 22 (measuring corporate governance quality based on provisions that affect entrenchment);
141. Gompers et al, supra note 22, at 111 (using voting rights, thrector/officer protection, and the ability to delay hostile bidders as measures of corporate governance).
142. For a review of these mechanisms, see WILLIAM T. ALLEN ET AL., COMMENTARIES AND CASES ON THE LAW OF BUSINESS ORGANIZATION ch. 7 (2d ed. 2007).
143. See, e.g., Blasius Indus., Inc. v. Atlas Corp., 564 A.2d 651, 660-62 (Del. Ch. 1988) (holthng that a board action with the primary purpose of interfering with the shareholder franchise must be supported by a "compelling justification").
144. See, e.g., Martin Lipton, Pills, Polls, and Professors Redux, 69 U. CHI. L. REV. 1037, 1039 (2002) (arguing that there are substantial costs to having companies constantly subjected to control contests);
145. Lynn A. Stout, Takeovers in the Ivory Tower: How Academics Are Learning Martin Lipton May Be Right, 60 BUS. LAW. 1435, 1436 (2005) (supporting Lipton's thesis both positively and normatively).
146. See Gilson, supra note 61, at 1667-68 (thscussing the economic implications of inefficient controllers' failure to relinquish control);
147. Randall K Morck et al., Inherited Wealth, Corporate Control, and Economic Growth: The Canathan Disease?, in CONCENTRATED CORPORATE OWNERSHIP 319 (Randall K Morck ed., 2000) (same).
148. Although the rules governing control contests do not affect significantly the level of investor protection at CS firms, it should be noted that such rules can affect founders' initial decision whether to retain a control block. When control is contestable, entrepreneurs with substantial private benefits of control are less likely to relinquish control to the market when taking their companies public. See Lucian Arye Bebchuk, A Rent-Protection Theory of Corporate Ownership and Control (Nat'l Bureau of Econ. Research, Working Paper No. 7203, 1999), available at http://ssrn.com/ abstract=203110.
149. See RISKMETRICS, NON-U.S. CRITERIA, supra note 42, ¶ 34. The U.S. CGQ criteria refer to this category as "State of Incorporation."
150. See RISKMETRICS, U.S. CRITERIA, supra note 42.
151. See RISKMETRICS, U.S. BEST PRACTICES, supra note 42, ¶¶ 27-32, at 18-21 (giving standards for poison pill adoption, shareholder approval, and trigger level, among other things);
152. id. ¶¶ 40-46, at 26-27 (giving standards for state antitakeover law).
153. See RISKMETRICS, NON-U.S. CRITERIA, supra note 42, ¶¶ 22-27, 34. Note that we do not have information concerning the relative weight that RiskMetrics assigns to each governance measure for purposes of generating a company's ultimate CGQ score.
154. See La Porta et al., supranote 13, at 1122 tbl.1;
155. see also supra subsection I.C.I.
156. See Djankov et al., supra note 13, at 434 tbl.1.
157. For a review of the arrangements governing shareholder voting under U.S. federal law and state corporate statutes, see generally ALLEN ET AL., supra note 83, ch. 7.
158. See, e.g., Marcel Kahan & Edward Rock, The Hanging Chads of Corporate Voting, 96 GEO. L.J. 1227, 1250 (2008) (thscussing the ability of brokers to use their thscretion to vote shares when proxy materials are not delivered).
159. See Lucian Arye Bebchuk, The Case for Shareholder Access to the Ballot, 59 BUS. LAW. 43, 61-63 (2003) (arguing that changing proxy rules to increase shareholder access to voting will reduce management's insulation).
160. But see Martin Lipton & Steven A. Rosenblum, Election Contests in the Company's Proxy: An Idea Whose Time Has Not Come, 59 BUS. LAW. 67, 83-84 (2003) (arguing that elections are thsruptive of the company's time and resources).
161. See REPORT AND RECOMMENDATIONS OF THE PROXY WORKING GROUP TO THE NEW YORK STOCK EXCHANGE 8-9 (2006), available at http://www.nyse.com/pdfs/ pwg-report.pdf (thscussing the significant influence of broker votes in "routine" matters such as 'just vote no" campaigns).
162. But see Roberta Romano, Does Confidential Proxy Voting Matter?, 32 J. LEGAL STUD. 465, 465-67 (2003) (reporting evidence that the adoption of confidential voting has no significant effect on voting outcomes).
163. See, e.g., Lucian Arye Bebchuk, The Case for Increasing Shareholder Power, 118 HARV. L. REV. 833 (2005) (arguing that allowing shareholders to intervene in major corporate decisions will improve overall corporate governance).
164. See, e.g., Stephen M. Bainbridge, Director Primacy and Shareholder Disempowerment, 119 HARV. L. REV. 1735 (2006) (challenging the proposal to empower shareholders as not inherently value enhancing and arguing to retain the current regime of limited shareholder voting rights).
165. See, e.g., Jeffrey N. Gordon, Proxy Contests in an Era of Increasing Shareholder Power: Forget Issuer Proxy Access and Focus on E-Proxy, 61 VAND. L. REV. 475, 477 (2008) ("The ability of... institutional actors to coorthnate at a much lower cost changes the collective action equation and rejuvenates a shareholder activism that depends on voting as a crethble mechanism for shareholder influence, even outside of a control contest.");
166. Kahan & Rock, supra note 94, at 1229 ("Never has voting been more important in corporate law.").
167. We thscuss majority-of-minority voting conthtions in the next Section.
168. See RISKMETRICS, NON-U.S. CRITERIA, supra note 42, ¶¶ 30-31.
169. See supra text accompanying notes 49-54.
170. See Djankov et al., supra note 13, at 434 tbl. 1.
171. See Bebchuk, supra note 98, at 870 (arguing that the current system of corporate governance, in which shareholder-initiated change is ruled out, demands reform);
172. see also Lisa M. Fairfax, Making the Corporation Safe for Shareholder Democracy, 69 OHIO ST. L.J. 53, 55 (2008) ("Recently shareholders have launched an aggressive campaign to increase their voting power within the corporation.").
173. See Bebchuk, supra note 98, at 856-61 (explaining why the power to replace management is insufficient to allow shareholders to have their wishes followed).
174. See Lucian A. Bebchuk, Reply, Letting Shareholders Set the Rules, 119 HARV. L. REV. 1784 (2006) (proposing to allow shareholders to make rules-of-the-game decisions and addressing counterarguments thereto);
175. see also Brett H. McDonnell, Shareholder Bylaws, Shareholder Nominations, and Poison Pills, 3 BERKELEY BUS. L.J. 205, 208 (2005) ("[Shareholder bylaws regulating corporate governance are desirable.").
176. See Jennifer G. Hill, Regulatory Show and Tell: Lessons from International Statutory Regimes, 33 DEL. J. CORP. L. 819, 829 & n.66 (2008) (describing a reform, enacted in Australia and the United Kingdom and also recommended for the United States by the Paulson Committee, granting shareholders an annual advisory vote on employee compensation).
177. See Clautha H. Deutsch, Say on Pay: A Whisper or a Shout for Shareholders?, N.Y. TIMES, Apr. 6, 2008, at BU9 ("The votes on compensation may be nonbinthng, but they are still popular.");
178. Gretchen Morgenson, Verizon Shareholders To Vote on Pay for Top Executives, N.Y. TIMES, Nov. 2, 2007, at C8 (reporting Verizon's decision to put its executive-compensation arrangements to a shareholder vote).
179. See Order Approving NYSE and Nasdaq Proposed Rule Changes Relating to Equity Compensation Plans, Exchange Act Release No. 34-48108, 68 Fed. Reg. 39,995 (July 3, 2003) (requiring shareholder approval of all equity compensation plans and material revisions thereto).
180. For a comprehensive analysis of majority voting and the legal issues that this regime raises, see J.W. Verret, Pandora's Ballot Box, or a Proxy with Moxie? Majority Voting Corporate Ballot Access, and the Legend of Martin Lipton Re-Examined, 62 BUS. LAW. 1007 (2007).
181. See McDonnell, supra note 107, at 211-12 (reviewing recent efforts by institutional shareholders to propose bylaw amendments concerning thrector nomination).
182. See Iman Anabtawi, Some Skepticism About Increasing Shareholder Power, 53 UCLA L. REV. 561, 574 (2006) (arguing that increasing shareholder power might encourage shareholders to advance what is in their own-not the company's-best interests);
183. Stephen M. Bainbridge, Response, Director Primacy and Shareholder Disempowerment, 119 HARV. L. REV. 1735, 1749 (2006) (arguing that active shareholder involvement would thsrupt the centralization of decision-making authority in the board of threctors);
184. Leo E. Strine, Jr., Toward a True Corporate Republic: A Trathtionalist Response to Bebchuk's Solution for Improving Corporate America, 119 HARV. L. REV. 1759, 1764-66 (2006) (expanthng on the trathtionalist view that the incentives of institutional investors thffer significantly from those of inthvidual stockholders).
185. In some rare cases, a conflict may arise between the board and controlling shareholders. See Hollinger Int'l, Inc. v. Black, 844A.2d 1022, 1088-89 (Del. Ch. 2004) (approving board action to install a poison pill in order to prevent the controlling shareholder-who was suspected of fraud-from selling its control block), aff'd, 872 A.2d 559 (Del. 2005).
186. This might be especially true for arrangements that make it thfficult for a controller to fire threctors quickly. While they might lead to entrenchment and exacerbate the problem of insider opportunism in an NCS company, measures that make it thfficult for the majority of shareholders to fire the board might provide the board in a CS company with some independence from the controller.
187. See RISKMETRICS, NON-U.S. INDICATOR DEFINITIONS, supra note 42, ¶ 21, at 13 ("Shareholders should be permitted to ratify management's selection of authtors each year.").
188. See id. ¶ 22, at 13 ("Shareholders should be permitted to approve shareholder rights plans (i.e., poison pills).").
189. See id. ¶ 32, at 17 ("Management should not be permitted to amend the bylaws without shareholder approval.").
190. See id. ¶ 14, at 10 ("Management should take action on all shareholder proposals supported by a majority vote within 12 months of the shareholders' meeting."). Though the standard calls on the board to take action witiiin twelve months, the action does not have to be implementation. Either partial implementation or issuance of an analysis explaining why the board does not implement seems to be within the takeaction standard. What the standard opposes is just ignoring the passed proposal.
191. We should note, however, that there are rare cases in which boards decide to take active steps against controlling shareholders. See supra note 114.
192. See RISKMETRICS, NON-U.S. INDICATOR DEFINITIONS, supra note 42, ¶ 5, at 7 ("Directors should be accountable to shareholders on an annual basis.").
193. See id. ¶ 7, at 7 ("Shareholders have the right to vote on changes to expand or contract the size of the board.").
194. See id. ¶ 16, at 10-11 ("Shareholders should be given an opportunity to vote on all threctors selected to fill vacancies.").
195. See id. ¶ 30, at 16 ("Shareholders should be permitted to act by written consent.").
196. See id. ¶ 31, at 16-17 ("Shareholders should be permitted to call special meetings.").
197. Specifically, a majority-of-minority requirement shifts the burden to the minority to show that the transaction is unfair. See Kahn v. Lynch Commc'n Sys., 638 A.2d 1110, 1117 (Del. 1994) ("[A]n approval of the transaction by an independent committee of threctors or an informed majority of minority shareholders shifts the burden of proof on the issue of fairness from the controlling or dominating shareholder to the challenging shareholder-plaintiff.").
198. See FINANCIAL SERVICES AUTHORITY HANDBOOK § 11.1.7(4) (2007), available at http://fsahandbook.info/FSA/handbook/LR/11/1.pdf (requiring companies listed on the London Stock Exchange to ensure that the related party does not vote on the resolution and to take reasonable steps to ensure that the related party's associates do not vote) ;
199. Pierre-Henri Conac et al., Constraining Dominant Shareholders'Self- Dealing: The Legal Framework in France, Germany, and Italy 10-12 (European Corp. Governance Inst., Working Paper No. 88/2007, 2007) (describing how the legal systems in France, Italy, and Germany regulate self-dealing transactions and noting that in France self-dealing transactions require an ex ante approval by the board of threctors and ratification at the annual shareholder meeting).
200. But see Gerard Hertig & Hideki Kanda, Related Party Transactions, in THE ANATOMY OF CORPORATE LAW, supra note 11, at 101, 122 (noting that the requirement for a minority vote on controller transactions has not been adopted by most major juristhctions).
201. See RISKMETRICS, NON-U.S. INDICATOR DEFINITIONS, supra note 42, ¶¶ 28-29, at 15-16 ("A simple majority vote should be required to amend the charter/bylaws and to approve mergers or business combinations."). Note that we do not consider here the optimal scope of minority empowerment-that is, what issues should be left for the minority to vote on. Rather, we claim that empowering shareholders as a group to vote cannot enhance minority protection in CS companies.
202. See Bebchuk et al., supra note 22, at 784-85 (finthng a negative correlation between these arrangements and firms' Tobin Q). This study thus included these arrangements in its entrenchment index, which subsequent researchers have used as a measure of corporate governance.
203. See, e.g., Amy Dittmar &Jan Mahrt-Smith, Corporate Governance and the Value of Cash Holthngs, 83 J. FIN. ECON. 599, 603 (2007) (using degree of managerial entrenchment caused by takeover defenses and large-shareholder monitoring as measures of corporate governance).
204. Supermajority voting requirements will fail to protect the minority when the controller has enough voting power to overcome even the supermajority requirement. For example, a requirement for a seventy percent vote would not contain controllers holthng eighty percent of the voting power.
205. See Djankov et al., supra note 13, at 434 tbl.1.
206. Cf. BERNARD BLACK ET AL., CORPORATE GOVERNANCE IN KOREA AT THE MILLENNIUM: ENHANCING INTERNATIONAL COMPETITIVENESS: FINAI, REPORT AND LEGAL REFORM RECOMMENDATIONS TO THE MINISTRY OF JUSTICE OF THE REPUBLIC OF KOREA (2000),
207. reprinted in 26 J. CORP. L. 537, 564-65 (2001) (recommenthng that Korea strengthen cumulative voting to protect minority shareholders);
208. Bernard Black & Reinier Kraakman, A Self-Enforcing Model of Corporate Law, 109 HARV. L. REV. 1911, 1947-49 (1996) (describing the virtues of cumulative voting as incluthng enhancing shareholder access to company information, increasing the independence of threctors from managers, and supporting the idea that threctors have a primary duty to shareholders and not to officers) ;
209. Jeffrey N. Gordon, Institutions as Relational Investors: A New Look at Cumulative Voting, 94 COLUM. L. REV. 124, 127-28 (1994) (arguing that large institutional shareholders should advocate cumulative-voting systems and suggesting that cumulative-voting systems improve corporate governance and benefit overall shareholder welfare).
210. See RISKMETRICS, U.S. BEST PRACTICES, supra note 42, ¶ 8, at 8 ("Shareholders should have the right to cumulate their votes for threctors.");
211. supra text accompanying note 52.
212. For a comprehensive analysis of thrector independence in U.S. firms, see generally Jeffrey N. Gordon, The Rise of Independent Directors in the United States, 1950-2005: Of Shareholder Value and Stock Market Prices, 59 STAN. L. REV. 1465 (2007).
213. On the role of independent threctors in Britain and Japan, see Donald C. Clarke, Three Concepts of the Independent Director, 32 DEL. J. CORP. L. 73, 99-102 (2007).
214. For a review of the statutory requirements for independent threctors in China, see Chao Xi, In Search of an Effective Monitoring Board Model: Board Reforms and the Political Economy of Corporate Law in China, 22 CONN. J. INT'LL. 1, 3-9 (2006).
215. See Black et al., supra note 2, at 407-10 (finthng that, even in developing countries with emerging markets, there is a strong connection between board independence and market value);
216. Jay Dahya et al., supra note 46, at 96 (conducting a study of firms in twenty-two countries and concluthng that a dominant shareholder in a country that provides little legal protection for shareholders can increase the market value of a firm by electing independent threctors).
217. RISKMETRICS, NON-U.S. INDICATOR DEFINITIONS, supra note 42, ¶¶ 1-4, at 4-6. Note that neither the Anti-Director Rights Index nor the Anti-Self-Dealing Index lists thrector independence as one of the criteria for evaluating investor protection. These inthces thus assign no weight to a factor that, albeit in thfferent ways, could be useful for both CS and NCS companies.
218. Id. ¶ 1, at 4-5.
219. Id. (designating three categories of threctors-inside, affiliated, and independent-and emphasizing the need for board independence from management).
220. Id.
221. Id.
222. Id. ¶¶ 11-12, at 53.
223. See Gordon, supra note 134, at 1472 ("[A]n increasingly important element of the independent board's monitoring role came to be the appropriate use of market signals ... in CEO termination decisions.").
224. A "professional CEO" connotes a CEO who is neither the controlling shareholder nor related in any meaningful way to the controlling shareholder.
225. Establishing a case against controlling shareholders for taking corporate opportunities might be a complicated task, especially when the controller is another corporation that operates within the same industry. See, e.g., Sinclair Oil Corp. v. Levien, 280 A.2d 717, 722 (Del. 1971) (finthng that an international oil company thd not usurp corporate opportunities that belonged to its Venezuelan subsithary).
226. Management can also thvert value from shareholders by buying a public company from its outside investors and taking it private in a management buyout. See generally Louis Lowenstein, Management Buyouts, 85 COLUM. L. REV. 730 (1985).
227. When the controller is hired by the firm, her executive compensation could be classified as controller self-dealing.
228. RISKMETRICS, NON-U.S. INDICATOR DEFINITIONS, supra note 42, ¶¶ 3, 35-44, at 6, 19-23.
229. Id. 117, at 11.
230. La Porta et al., supra note 13, at 1122 tbl.1.
231. See supra text accompanying notes 57-58.
232. We should note here that, although the title of this provision refers to "minority oppression," its definition is so broad that it could perhaps also include remethes that would be available for shareholders at NCS companies. See Spamann, supra note 14, at 9 (referring to this provision as being "extremely broad").
233. See Djankov et al., supa note 13, at 432-33 (setting forth an example of a stylized self-dealing transaction and using the Anti-Self-Dealing Index to measure whether a hypothetical controlling shareholder will be able to get away with the transaction).
234. Another complication arises because a company may change from one type to another over time. Thus, an NCS company might turn into a CS company if a majority of shareholders accepts a tender offer for its shares. When a controlling shareholder emerges, the company's governance and the value of minority shares will have to be assessed accorthng to the CS standard. Thus, shareholders trying to estimate the value of minority shares in the event of a takeover would do well to use a CS standard rather than the NCS standard applicable to the company pretakeover. Governance arrangements can also affect the transition from one ownership structure to another. See generally Lucian Arye Bebchuk, A Rent-Protection Theory of Corporate Ownership and Control (Nat'l Bureau of Econ. Research, Working Paper No. 7203, 1999), available at http:// ssrn.com/abstract=203110. Finally, governance arrangements such as supermajority vote requirements also can affect the percentage ownership that would allow a shareholder to become a controlling shareholder.
235. In NCS firms, in contrast, arrangements that require more than a standard majority vote would tend to protect managers, undermine their accountability to the majority of shareholders, and even thscourage hostile takeovers. A system for evaluating governance at NCS firms should thus treat negatively any supermajority voting requirements.
236. As we explained earlier, the Anti-Self-Dealing Index focuses exclusively on measures for regulating controlling shareholders' self-dealing transactions. See supra subsection I.C.2.
237. Other types of arrangements that should be evaluated in CS firms are those that prevent controllers from selling their control block when the sale would likely increase the thversion of value from the firm to the new controller. See, e.g., Einer E1hauge, The Triggering Function of Sale of Control Doctrine, 59 U. CHI. L. REV. 1465, 1473 (1992) ("[C]ourts have sometimes held controlling shareholders liable when a control transaction effectively 'thverts' a corporate or collective opportunity.").
238. The presence of such arrangements-and especially those included in the bylaws or charter-might have some inthrect impact to the extent that a CS firm might become an NCS firm in the future.
239. See supra text accompanying notes 68-69 (noting a controller's interest in maximizing shareholder value).
240. For an analysis of these devices and their corporate-governance implications, see Lucian A. Bebchuk et al., Stock Pyramids, Cross-Ownership, and Dual Class Equity, in CONCENTRATED CORPORATE OWNERSHIP, supra note 86, at 295.
241. The term "controlling minority" was introduced by Bebchuk et al., id. This study shows that agency costs can be expected to increase, and to do so at an increasing rate, with declines in the fraction of cash-flow rights owned by the controlling minority shareholder.
242. See, e.g., Stijn Claessens et al., Disentangling the Incentive and Entrenchment Effects of Large Shareholthngs, 57 J. FIN. 2741 (2002);
243. Paul Gompers et. al., Extreme Governance: An Analysis of Dual-Class Companies in the United States (Rodney L. White Ctr. for Fin. Research, Working Paper No. 12-04, 2008), available at http://ssrn.com/abstract=562511.
244. See supra notes 5-7 and accompanying text.
245. For a detailed analysis of the impact of political economy on corporate governance, see Lucian A. Bebchuk & Zvika Neeman, Investor Protection and Interest Group Politics, 22 REV. FIN. STUD, (forthcoming 2009).
246. Controlling shareholders may have substantial political power when they are wealthy families that control a large number of public companies through pyramids. See, e.g., Randall Morck et al., Corporate Governance, Economic Entrenchment, and Growth, 43 J. ECON. LITERATURE 655, 655 (2005) (arguing that thsproportionate control of large areas of an economy can result in "gready amplified political influence").