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GOVERNANCE IN THE RUINS

GOVERNANCE IN THE RUINS. David Skeel 27 November 2008. Roadmap for the Discussion. Backdrop is Milhaupt & Pistor, “Law and Capitalism” 1) Describe the approach 2) WorldCom bankruptcy 3) Bear Stearns (and Lehman Bros bankruptcy). The Milhaupt-Pistor Approach.

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GOVERNANCE IN THE RUINS

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  1. GOVERNANCE IN THE RUINS David Skeel 27 November 2008

  2. Roadmap for the Discussion • Backdrop is Milhaupt & Pistor, “Law and Capitalism” • 1) Describe the approach • 2) WorldCom bankruptcy • 3) Bear Stearns (and Lehman Bros bankruptcy)

  3. The Milhaupt-Pistor Approach • The foil: Rafael La Porta et al studies • The original LaPorta et al studies • Looked at corporate governance measures in 49 countries • Ranked legal protections from 1 to 5 • The general findings: • More growth in countries with investor protections • More growth in countries from common law (vs. civil law origins)

  4. The critique of La Porta et al • Problems with the measures (doesn’t consider enforcement etc) and direction of causation) • Take law as a given • Don’t explain the interaction between demand for law and supply • “Rolling relation between markets and law”

  5. An Alternative Approach • The two parts of the Milhaupt-Pistor approach • Legal system matrix: • Horizontal axis: coordinative to protective • Vertical axis: centralized to decentralized • Institutional autopsies: case studies of high profile corporate crises

  6. Organization of Legal Systems CoordinativeProtective Centralized De-centralized

  7. Organization of Legal Systems CoordinativeProtective Centralized De-centralized Russia China Singapore Korea Japan Germany US

  8. Example: Enron • Enron’s failure was major focus of response to 2001-2002 corp scandals • Primary legislation: Sarbanes-Oxley Act • Also: increased use of criminal enforcement • These responses prompted backlash

  9. 2) The WorldCom bankruptcy • Facts: • Major telecom company • Failure actually triggered Sarbanes-Oxley • Two government appointed reports • Richard Breeden (former chair of SEC) in securities litigation • Dick Thornburgh (former state governor) in bankruptcy

  10. Breeden recommendations • Only one inside director • Separate CEO and board chair • At least one new director a year • Shareholder proposals included if 1% request

  11. Implications: • US governance shifts in time of crisis • Becomes more coordinative and/or centralized (e.g., corporate reorganization law) • New concept of firm-specific governance reform

  12. Bear Stearns • Facts: • Appeared ready to fail in March 2008 • U.S. Treasury and Fed treated bankruptcy as non-option • Brokered sale to J.P. Morgan • Terms of agreement inconsistent with Delaware corporate law

  13. Implications: • Governance of U.S. financial institutions is different (not protective/ decentralized) • Refusal to let Bear, Stearns file for bankruptcy slowed down the political process • Is bankruptcy an option for investment banks?

  14. The Implications of Lehman • Two concerns pre-Lehman: 1) broker-dealers can’t file chapter 11; 2) no automatic stay • Lehman isn’t ideal example of bankruptcy for investment banks • But: most of the concerns raised about chapter 11 (too slow etc) are unfounded

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