Prof. Stavros Gadinis, University of California at Berkeley, School of Law Can Private Investors Discipline State-Appointed Managers? Evidence from Greek Privatizations [Open]
There is now considerable empirical evidence that partial privatizations lead to improved company performance, as shown by measures such as labor productivity, profitability, or growth in sales and revenues. A key explanation for this improvement argues that, compared to voters, private investors have stronger incentives to monitor management performance. They will prevent state-appointed managers from favoring the political allies of the government and will ensure that the company’s business relationships are negotiated at arm’s length. But how exactly can private investors discipline managers they cannot fire? While the market for senior corporate officers could provide such a disciplining mechanism, it is not particularly active in many countries. To better understand whether managerial motivations in a partially privatized firm are oriented towards political superiors or the marketplace, the paper follows an alternative approach. It examines in closer detail how these companies behave in two key areas where the risk of corruption and political side-deals remains high: contracts with suppliers and relationships with labor. It finds that, despite the overall improvement in performance, payouts to these two groups increased during the period of partial privatization. The paper presents case study evidence from major privatizations in Greece during the last two decades in telecommunications, energy, and gaming.
Prof. Gerard Hertig, Swiss Federal Institute of Technology at Zurich Governments as Vulture Investors: Credit Crisis Case Studies [Open]
Governments in developed economies have recently acquired significant equity and debt stakes in a number of financial institutions, raising fears that they will use their investments to pursue interventionist goals. The comparative analysis of over 40 bail‐outs in Europe) Austria, Belgium, Germany, France, Ireland, the Netherland, Spain, Switzerland, the UK) and the US provide evidence to the contrary. Fiscal and political considerations have prompted governments to generally avoid common stock investments, limit direct managerial involvement and early (profitable) exits. While this investment strategy may prove detrimental to minority shareholders and contribute to the emergence of national champions, it mimics the approach vulture investors would adopt under the circumstances.
Prof. Mariana Pargendler, GetulioVargasFoundationSchool of Law at São Paulo The Unintended Consequences of State Ownership: The Brazilian Experience [Open]
State ownership of public companies remains pervasive around the world and has been growing in recent years. The focus of scholars and policymakers has accordingly shifted from the defense and promotion of privatization to the design and improvement of corporate governance practices in state-owned enterprises (SOEs). A broad consensus emerged suggesting that state-owned firms should be corporatized, publicly traded and subject to the greatest extent possible to the same legal regime applicable to private firms. However, by focusing exclusively on what corporate and securities laws can do to increase the efficiency of state enterprise, this view ignores the other side of the problem: how does the presence of SOEs affect the efficiency of corporate and securities laws as they apply to private firms?
Drawing from Brazil’s long historical experience with SOEs, this Article argues that state ownership of listed firms can have unintended consequences that go well beyond the potential firm mismanagement if the state pursues political goals inconsistent with shareholder wealth maximization—the concern that dominates most of the existing literature on the relative merits of public and private enterprise. The state’s financial interest as the controlling shareholder of listed firms can lead it to disfavor legal reforms that improve minority shareholder rights, thus impairing the ability of private firms to raise outside financing. In ignoring the state’s conflicts of interest inherent in its dual role as shareholder and regulator, the conventional wisdom has likely overestimated the aggregate benefits of a unitary legal regime for both state-owned and private firms.
Dr. Costanza Russo, University of Bologna, Faculty of Law 1930s Bank Nationalizations in Italy: The IRI Formula [Open]
The paper draws lessons from the Italian history on a possible way for the State to intervene in economic crises without jeopardizing the economy or affecting competition. The paper first describes how and why in the 1930s Italy got to the point where the government had to save the financial system. Italy did this by setting up a public financial holding company (IRI) which became the majority shareholder of banks and companies in the telecommunications, steel, shipping, engineering, and energy industries, among others. The so-called IRI formula has long been considered a model both in the EU and outside, with many countries setting up similar companies (e.g., the UK, with the “Industrial Reorganization Corporation” set up in 1966, France with the “Institut pour Le Developpement Industriel” of 1970, or Canada with the “Canada Development Corporation”). Initially, the IRI performed well in Italy and acted as a market player. In the 1960s, however, its performance deteriorated under pressure from political parties. The combination of this degeneration and pressure from the EU prompted Italy to gradually privatize (or partially privatize) the state-owned companies, a process that ended only recently. Ironically, the pendulum now swings back. As a way of facing the next crisis, Italy is currently planning to go “back to the state”. The paper considers how public intervention can best be shaped in light of this experience.
Prof. Gary Richardson, University of California at Irvine, Department of Economics Recapitalization and Reform of the United States Banking System, 1932 to 1935 [Open]
During the Great Depression in the United States, panics repeatedly beset the banking system. Thousands of banks failed. The commercial banking system collapsed. In response, the federal government attempted unprecedented interventions. Initially, the government extended credit to illiquid institutions. Then, the government attempted to recapitalize banks on the edge of insolvency. These measures failed to stem to falling tide, however, forcing the federal government to take extraordinary measures. The government dramatically expanded its recapitalization efforts, eventually injecting capital into two-thirds of all commercial banks. The government also reformed the legal foundation of the financial system and restructured the central bank. This essay describes the government’s efforts and attempts to understand why the initial efforts failed and they latter succeeded.
Prof. Mark Ramseyer, HarvardLawSchool Why Power Companies Build Nuclear Reactors on Fault Lines:The Case of Japan [Open]
On March 11, 2011, a magnitude 9.0 earthquake and 38-meter tsunami destroyed Tokyo Electric’s Fukushima nuclear power complex. The disaster was not a high-damage, low-probability event. It was a high-damage, high-probability event. Massive earthquakes and tsunami assault the area every century.
Tokyo Electric built its reactors as it did because it would not pay the full cost of a nuclear disaster anyway. Given the limited liability at the heart of corporate law, it could use the law to externalize the cost of running reactors. In most industries, firms rarely undertake actions that risk tort damages so enormous that they cannot pay them. In the nuclear power industry, potential catastrophic liability is routine. Yet a privately owned power company will bear the costs of an accident only up to the fire-sale value of its net assets. Beyond that point, it will pay nothing—and the damages from a nuclear melt-down will easily soar past that point.
Given the resulting moral hazard, government ownership may be the only way to align incentives in nuclear power. In most industries, the risk of catastrophic damages remains minor; in most industries, the generally much higher efficiency of private firms militates against government ownership. In nuclear power, government ownership may be the only way to skirt the massive moral hazard.
Prof. Assaf Hamdani, Hebrew University Faculty of Law, and Prof. Ehud Kamar, University of Southern California, School of Law, visiting TelAvivUniversity, Faculty of Law Hidden Government Influence over Privatized Banks [Open]
This article uses Israel’s ongoing process of bank privatization to explore the link between privatization programs and ownership structure of public companies. Our thesis is that concentrated ownership provides the government with a platform for exerting informal influence over corporate decision-making. This platform serves the government as a safety valve when all else fails, especially when the government would like firms to discontinue the employment of senior executives or board members. Communicating with controlling shareholders increases the likelihood that the government’s intervention and the reasons underlying it would remain confidential. Moreover, controlling shareholders can make swift decisions and implement them quickly, with no need for formal group deliberation. When informal influence is important—in the case of banks, for example—the government may prefer firms with controlling shareholders to widely held firms. The government may therefore prefer to privatize by selling a control block rather than by distributing shares through the stock market. To the extent that the preference to privatize through selling control blocks to preserve government influence is present in other countries as well, it contributes to the concentration of corporate ownership in the market.
Dr. Efraim Chalamish, New YorkUniversity, School of Law Global Investment Regulation and Sovereign Funds [Open]
Sovereign Wealth Funds (“SWFs”) have attracted significant attention over the past few years, as a result of their increasing role in global economy and their controversial minority investments in distressed financial and infrastructure companies in Western economies. Although SWFs provide important benefits to home, host, and global markets, they have been perceived by the Western mind as a growing threat to economic supremacy and national security. While the current legal scholarship provides incomplete policy response, by either selectively referring to specific legal instruments within the international law framework or proposing a whole new legal regime, this article attempts to address this crucial lacuna by providing an original comprehensive legal analysis of the SWFs phenomenon and its interaction with the already-existing framework of international law.
The various concerns abovementioned have prompted various Western attempts to block SWF cross-border investments through legislative reforms or ad-hoc protectionism of the executive branch. These governmental policies frequently violate international commitments in the international economic law arena and call for a closer look at the nature of such commitments and their respective implementation in the SWF environment.
The paper will look at recent practices in Western countries that aim to block SWF investments, especially in the context of iconic brands and national champions. Then, it will review various relevant provisions in international legal instruments, which are applicable to these potential investments and examine the question of their violation by capital-importing countries. Additionally, the paper will analyze the exception clause in international investment treaties that has been used to deal with cases of financial crisis and national security threat, and questions its effective use in today’s world of new sources of liquidity and changing West-East balance of power. A proposed innovative adaptation to this new reality will be provided. I would argue that the existing framework of international investment law can provide the adequate solutions to investment protectionism against SWFs. Regarding regulation of SWFs’ investments, since recent experience underlined that sovereign wealth funds function largely as any other commercial entities, there is a need to shift the discussion and terminology towards regulation of sovereign activity and not sovereign fund. Finally, the paper will explore the broad consequences of investment law and corporate governance reforms following the debate around SWF investments on maintaining healthy and productive cross border economic relations in a world of globalization.
Speaker: Prof. James Spindler, University of Texas, School of Law Mandatory Long-term Compensation in the Banking System—And Beyond? [Open]
After the 2008 financial panic, influential commentators have advocated mandatory long term compensation schemes for systemically important institutions, such as large financial firms. Such mandatory measures include restricting stock grants for a period of years and “clawbacks” of bonus compensation in the event of performance reversals. These measures are considered uncontroversial enough that some have suggested that all public companies, not just systemically important firms, should adopt them.
In this article, I argue that benefits of long term compensation have been overstated while the potential downsides have been largely ignored. Restricted periods for equity grants must be relatively large compared to the executive’s tenure in order to have a great effect upon behavior overall, and mandatory clawback provisions end up transferring what would have been bonus pay into salary. Further, to the extent that long-term compensation does affect behavior, these consequences are not necessarily good. I show that given fairly reasonable assumptions of executive risk aversion, information content of long term and short term price signals, and managerial control over the timing of project execution and disclosure, a long-term focus have significant negative effects.
Prof. Amir Licht, Interdisciplinary Center, School of Law State Intervention in Corporate Governance: National Interest, Board Composition, and the Elephant in the Room [Open]
This paper analyzes the composition of the board of directors as a vehicle for state intervention in corporate governance. Like the proverbial elephant in the room, such intervention is ubiquitous, well-known, and is often motivated by goals that stray from shareholder wealth maximization to promote other national interests. Regulating board composition thus is merely the continuation of politics by other means. This paper explicates the mechanisms that enable board composition regulation effectively to undermine (or overcome) fiduciary duties in the very legal systems that prescribe them—in particular, values and other individual traits as well as cultural orientations.
