Directors´s Fiduciary Duties in an insolvent company

How should directors behave in the wake of insolvency? Should they still pursue the shareholders` value maximization? Are there other interests that should prevail instead?

This is the topic a March 2018 consultation by the British government tries to clarify, (1). The government seeks to maintain and reinforce a fair, open and attractive environment for businesses, which has benefited from an adequate and updated corporate governance framework. A good insolvency regime includes governance elements so that the events of insolvency due to failures in governance or to a reduced responsibility by directors when approaching difficult times are reduced to a minimum number.

The consultation aims at producing the tools that would help preserve the creditors´ ability to remain in business when debtors face insolvency situations.


 Previous status and context. (3) Read more…


Perpetual Dual-Class Stock, by Commissioner Jackson

February 17, 2018 1 comment

Recently elected commissioner of US SEC Robert J. Jackson Jr. recently shared certain personal remarks regarding the system of perpetual dual-class shares, (1) and (2).

I will simply refer to them in a very short post today, as the argument is very clear.

He first considers the constitutional principles in the US, which led to complete democracy, and rejects the idea that perpetual systems can be used by an elite to keep power and wealth or privileges forever (even after death so that their heirs inherit that package). Read more…

Arguments in favor of Intergenerational Equity as a fiduciary duty by Directors.

January 21, 2018 Leave a comment

Survival. Success. Long-term interests of shareholders (or/and stakeholders). Intergenerational equity.

When analysts consider climate change, the use and (present and future) availability of resources, the population growth, urbanization in modern and developed societies, all above-mentioned concepts naturally arise.

Arjya B. Majumdar (Associate Professor at Jindal Global Law School) reviews this topic in a recently published article, (1).

Every international meeting recognizes our obligations to preserve environment and create broader prospects for future generations. Rawls considered this a matter of justice, (2), and this helps understand a moral duty we all may feel to save (so, sacrifice) and contribute for the future of new generations, (Meyer ,(3)).

What the author tries to unveil though is whether there is a law case in favor of intergenerational equity.

Directors´duties towards future shareholders. Read more…

Increasing shareholder concentration, voice and exit

November 26, 2017 Leave a comment

In my 2017 July 9th post (1) and following Gilson, Ronald J. and Gordon, Jeffrey N., (2) I suggested that the increase of the role of Institutional Investors as well as the concentration in their industry operated against voice as a control mechanism by shareholders. According to them, this also fueled the role of activist investors in assessing performance (Corporate governance, strategy, capital allocation, etc.) and using voice to improve it, (their success needing support from institutional investors when voting is required).

I also tried to understand why and when II prefer exit to voice in certain circumstances, (as in small firms providing wider and cheaper information, or when blockholders prevent voice from being effective), in (3) and following (4). Read more…

The Stakeholder Theory of the Firm. Concepts, Evidence, Implications.

November 12, 2017 Leave a comment

Back in 1932, E. Merrick Dodd Jr. wrote in the Harvard Law Review: “If the unity of the corporate body is real, then there is reality and not simply legal fiction in the proposition that the managers of the unit are fiduciaries for it and not merely for its individual members, that they are . . . trustees for an institution [with multiple constituents] rather than attorneys for the stockholders.”

In 1995 in the Academy of Management Review, Thomas Donaldson (Georgetown Univ.) and Lee E. Preston (U. Maryland) published a remarkable article on the Stakeholder Theory of the Corporation, (1), where they focused in the theory`s descriptive, instrumental and normative validity. They asserted the normative approach to be supportive of the other two.

In this post, we will review the article in order to expose the basics of the Stakeholder theory and its practical implications. The theory could be said to be firstly proposed in 1984, when R.E.Freeman published his book “Strategic Management: a stakeholder approach”, (2). A huge body of literature followed, which Donaldson and Preston try to codify. Read more…

The Case Against Passive Shareholder Voting, by Dorothy Shapiro Lund

The increase in the power of shareholders faces big challenges as regulation is not necessarily followed by a correct valuation of voting (the most powerful of their capacities), by them. The One Share One Vote principle is affected by dual-class share systems and no voting shares; but shareholders also suffer from rational apathy and collective action problems, so that the objective of empowering shareholders is not easily reached. See my previous posts on the topic here (1)

Dorothy Shapiro Lund from the University of Chicago recently published an article in which she analyzes the effect on rational voting practices stemming from the shift of investors (American in her study) from actively managed funds investing into (indexed) passive funds. (2) She states this trend will damage the market for corporate influence, thus lowering the discipline imposed on managers. Their investment in Corporate Governance (CG from now on) and/or in gathering firm-specific information leaves them with the cost and only a small fraction of the eventual profit…so they lack the financial incentive to invest. Furthermore, passive funds are less likely to channel funds to hedge funds, (which could help correct the problem, -see (3)), and will adhere to low-cost governance solutions, following proxy advisors or simple-not-so-smart criteria).

150331130735-motley-index-funds-780x439 Read more…

Why do boards exist? The board as a team and its superiority.

The post follows an article by Stephen Bainbridge, William D. Warren Distinguished Professor of Law at the UCLA School of Law in Los Angeles, (1).

A) The board statutory role.

Boards are given by Corporate Law the power to manage companies, while shareholders are only entitled to vote a few things and react in a limited number of situations. Decisions at the board (or any other group) should be done through “consensus”, efficient when members of an organization have very similar information and interests, or “authority”, efficient when this is not the case and somebody gathers information and adopts the correct decisions, (see (2)).

Boards nevertheless are not there to manage day-to-day operations as Corporate Law grants the role of those under whose authority companies are run (by managers nominated by boards), in a waterfall of authority and power delegation. Companies have nevertheless become more a hierarchy of teams than of individuals.


Although hierarchies are accepted as more efficient in complex organizations, both New Institutional Economics (3) and Behavioral Economics (4) accept their members to be only rationally bounded individuals. Branching hierarchies (waterfall of small groups) are an efficient solution to this reality, (both in production and transfer of information and in limiting agency costs –though with the problems of incomplete contracts, collective action problems, etc-). Contracting is an efficient ex-ante mechanism and governance an ex-post one, leading to reduce shirking and punish it, (see for example the M-form corporation).

At the top though there is a team, the board, not an individual. As there are problems arising for that, (individual input measurement, task often being even non separable, the creation of intra-team specific human capital, social loafing due to coordination, motivation difficulties, etc), the questions arises as to why a collective body at the top has been chosen. Read more…