Auditors play a major role in corporate governance and capital markets. Ex ante, auditors facilitate firms’ access to finance by fostering trust among public investors. Ex post, auditors can prevent misbehavior and financial fraud by corporate insiders. In order to fulfill these goals, however, in addition to having the adequate knowledge and expertise, auditors must perform their functions in an independent manner. However, auditors are often subject to conflicts of interest, for example, resulting from the provision non-audit services, but also because of the mere fact of being hired and paid by the audited company. Therefore, even if auditors act independently, investors may have reason to think otherwise. Policymakers and scholars around the world have attempted to solve the auditor independence puzzle through a variety of mechanisms, including prohibitions and rotation requirements. More recent proposals have also included breaking up audit firms and the empowerment of shareholders. This paper argues that none of these solutions is entirely convincing. Drawing from the corporate governance, law and economics, and accounting literatures, we propose a new model to solve the auditor independence puzzle. Our proposal is based on four pillars. First, we argue that, in the context of controlled firms, auditors should be elected with a majority-of-the-minority vote. Second, while auditors in many jurisdictions are subject to certain temporal prohibitions to be hired by previous clients, we propose that the length of these temporal prohibitions should be extended. Moreover, regulators should also restrict the type of services potentially provided to the audit client. Third, policymakers must pay closer attention to the internal governance and compensation systems of audit firms. We argue that increased transparency of audit firms is essential to enhance the independence of auditors. Finally, studies have shown that audit committees often fail to perform their monitoring functions, a major reason being the influence of corporate insiders on the committee. For this reason, we propose to increase the power and presence of public investors in the audit committee.
This Article provides an early assessment of the impact on corporate governance of the most recent wave of SOE reform announced by the CCP in 2013, officially known as the mixed-ownership reform (MOR). It offers a comprehensive and detailed account of the background, policy and regulatory frameworks, and rationale of the MOR in light of the history of ownership reform in China. It also conducts empirical studies of the change in ownership and board composition in over 30 SOEs which have recently completed their MOR experiments, as well as, several case studies including China Unicom’s MOR. We observe that MOR’s impact on SOE corporate governance has been embodied in the “retreat of the state”, the “advance of the (Chinese Communist) Party”, and a limited yet emerging separation of power between the Party and the board in SOEs. On the rationale, we argue that the MOR programme is driven by three current beliefs of the Chinese Party-state on the future of SOEs in China. First, ownership and ownership reform matter. Second, sharing control, rather than dominance by a single state shareholder, improves both the efficiency and governance of SOEs. Third, the MOR was designed to develop partnerships or alliances between the state shareholders and strategic investors in order to help the post-MOR state enterprises improve their efficiency and enhance market opportunities.
The common ownership debate has become one of the most contentious issues in corporate law today. This debate is a by-product of major changes to capital market ownership structure, which have triggered concerns about the rise of institutional investors, the growth of index investing, and the rapid concentration of ownership in major international financial markets. Common ownership theory focuses on concerns about the incentives of large financial institutions holding widely diversified portfolios of shares in competing companies within a particular economic sector. Proponents of the common ownership theory argue that, even where institutional investors have relatively small ownership stakes, their collective holdings in competing companies produce anticompetitive effects. Other scholars, however, have challenged both common ownership theory and its regulatory prescriptions. Although common ownership theory began in the United States, it is now being discussed around the world.This article examines three conflicting narratives that emerge in this literature concerning institutional investors and common ownership theory. The article seeks to position these narratives within the context of the rising influence of institutional investors since the early 1990s and its relation to major international corporate governance developments. It analyzes aspects of common ownership theory in light of these contemporary corporate governance developments, and argues that drawing regulatory and policy conclusions from the current body of conflicting empirical findings on the effects of common ownership is premature.
Shareholder inspection rights allow a shareholder to access the relevant documents of the company in which they hold an interest, so as to address the problem of information asymmetry and reduce the agency costs inherent in the corporate structure. While Chinese corporate governance and American corporate governance face different sets of agency cost problems, this paper shows that shareholder inspection rights play an important role in both China and the U.S.. On the books, while shareholder inspection rights in both countries are broadly similar, there are some important differences on such issues as the proper purpose requirement. Our empirical analysis further sheds light on how inspection rights operate on the ground. We find that many inspection cases are filed in both China and in Delaware. These cases are resolved by the courts relatively quickly. While inspection rights in both countries are frequently used as a pre-suit discovery device, the types of subsequent litigation that can be filed in each country are quite different. Efforts are made to explain, and draw implications from, the similarities and differences on shareholder inspection rights between the two countries.
The turn to identity is reshaping federalism. Opposition to the policies of the Trump administration, from the travel ban to sanctuary cities and the rollback of environmental protections, has led progressives to explore more fluid and contingent forms of state identity. Conservatives too have sought to shift federalism away from the jurisdictional focus on limited and enumerated powers and have argued for a revival of the political safeguards of federalism, including state-based identities. This Article draws on comparative law to study identity as a political safeguard of federalism and its transformation from constitutional discourse to interpretative processes and, eventually, constitutional doctrine. The experience of the European Union, where identity federalism also benefits from a textual anchor, reveals some of the complexities of this process. As an eminently vague concept, identity leaves too much room for judicial discretion and leads to unsolvable conflicts among courts as well as between courts and other branches. Like the old sovereignty-based approaches, identity encourages judges to draw bright lines, resurrects jurisdictional conflicts, and discourages cooperation and compromise. In the age of populism, identity federalism draws courts into new and particularly concerning forms of polarization.
