Paul Rose

Under an Arrowian framework, centralized authority and management provides for optimal decision making in large organizations. However, Kenneth Arrow also recognized that other elements within the organization, beyond the central authority, occasionally may have superior information or decision-making skills. In such cases, such elements may act as a corrective mechanism within the organization. In the context of public companies, this article finds that such a corrective mechanism comes in the form of hedge fund activism, or, more accurately, offensive shareholder activism.

Offensive shareholder activism operates in the market for corporate influence, not control. Consistent with a theoretical framework that protects the value of centralized authority and a legal framework that rests fiduciary responsibility with the board, authority is not shifted to influential, yet unaccountable, shareholders. Governance entrepreneurs in the market for corporate influence must first identify those instances in which authority-sharing may result in value-enhancing policy decisions, and then persuade the board and/or other shareholders of the wisdom of their policies, before they will be permitted to share the authority necessary to implement the policy. Thus, boards often reward offensive shareholder activists that prove to have superior information and/or strategies by at least temporarily sharing authority with the activists by either providing them seats in the board or simply allowing them to directly influence corporate policy. This article thus reframes the ongoing debate on shareholder activism by showing how offensive shareholder activism can co-exist with — and indeed, is supported by — Kenneth Arrow’s theory of management centralization, which undergirds the traditional authority model of corporate governance.

This article also provides a much-needed bridge between the traditional authority model of corporate law and governance as utilized by Professors Steven Bainbridge and Michael Dooley and those who have done empirical studies on hedge fund activism, including Lucian Bebchuk. The bridge helps to identify when shareholder activism may be a positive influence on corporate governance.

This Article considers the role of the corporate governance industry as a voluntary regulator. The corporate governance industry influences (and in some cases effectively controls) the votes of trillions of dollars of equity, and affects the governance policies and fortunes of thousands of companies through proxy voting recommendations and governance ratings. This Article considers the increasing influence of the corporate governance industry, and argues that potential conflicts of interest within some governance firms cast doubt on the reliability of their proxy advice and governance ratings. Additionally, governance firms may be overstepping their expertise in proxy voting decisions and in governance rating, in part because of their reliance on good governance metrics for which there is little evidentiary support. Finally, erroneous governance metrics (and indeed, a reliance on one-size-fits-all governance checklists) promoted by influential governance advisers not only affect important shareholder voting decisions and decisions on whether to invest in or divest from a particular company, but may also have a more general, harmful effect on corporate governance regulation. A number of academics have argued that federal expansion into corporate governance issues has significant negative consequences. Perhaps most importantly, Sarbanes-Oxley mandates specific governance policies rather than setting broad standards, thereby eliminating some vital flexibility in corporate governance. This Article argues that the corporate governance industry may have similarly harmful effects by pressuring companies to adopt a homogenized set of governance rules which may not be suited to the companies' respective requirements.

This Article considers the increasing impact of equity investments made by sovereign wealth funds. Observers have increasingly viewed sovereign investments with a high degree of suspicion due to the potential for the investments to be used as political tools rather than traditional investment vehicles. While this risk is considerable, much of the discussion surrounding sovereign investment ignores or minimizes the mitigating effect of a number of regulatory, economic, and political factors. This Article argues that continued vigilance, but not additional regulation, is necessary to ensure that U.S. interests are not jeopardized by sovereign investment in U.S. enterprises. While the United States is able to protect its interests in domestic markets, it is limited in the steps it can take to ensure that its interests are not harmed by politically-motivated sovereign investments in other countries. Many countries outside the United States do not have the regulatory structure or political power to adequately defend national interests. Due to the potential political harms associated with sovereign investing, this Article argues in support of the Santiago Principles, an international code of conduct for sovereign investments.

Sovereign wealth funds (SWFs)-capital pools created by governments to invest surplus funds in private markets-are increasingly important global financial actors. Many fear that the economic power of SWFs, which is measured in trillions of dollars, will be used strategically and politically. Are fears that SWFs will be used as political tools justified? If political use of SWFs depends on their control of U.S. firms, the answer is almost certainly no. There is no significant evidence that SWFs have or will use control of U.S. firms to implement governmental policy. Indeed, American political and regulatory constraints will pressure SWFs not only to avoid control, but also to avoid exercising significant influence over U.S. companies in their portfolios. Instead, the present cycle of SWF investment is likely to be characterized by passivity.

This paper, presented at the “Regulating Risk” symposium at the University of Connecticut School of Law, April 16, 2010, briefly reviews the connection between risk and corporate governance, then examines the “strengthening corporate governance” provisions of Subtitle G of the Restoring American Financial Stability Act of 2010 (also known as the “Dodd Bill”). The corporate governance provisions, covering majority voting for director elections, proxy access, and the separation of the roles of CEO and chairman of the board, seem likely to have one of two possible effects. On the one hand, the provisions may be pernicious, in that they further enhance shareholder power without a clear justification for increased shareholder power, and more particularly without a justification for shareholder power as a risk management device. Indeed, the Dodd Bill’s corporate governance provisions may work at cross-purposes to the risk management intent of the remainder of the Dodd Bill: the corporate governance provisions operate under the assumption that enhanced shareholder power will result in better monitoring of managerial behavior, which presumably will help to prevent future crisis, but both theory and evidence suggests that diversified shareholders generally prefer companies to take risks that other constituencies (including taxpayers) would not prefer.

On the other hand, the Dodd Bill may have very little effect on investor behavior or risk management. Increases in shareholder power over the past years (fundamentally the result of increased federal regulation) have made management more responsive to - and in some cases probably overly responsive to - shareholder concerns over agency costs. Indeed, some of the proposed reforms already have been or were likely to have been put in place at most public companies. If private ordering is already working, what is the point of imposing strict governance constructs across the market as a whole, especially when most of the affected firms are victims of, rather than contributors to, the Financial Crisis‘

This essay, prepared for the Georgetown Journal of International Law's 2009 symposium on sovereign wealth funds (SWFs), considers SWF investment from a novel perspective: How do the external forces acting on sovereign wealth funds and target firms, such as recipient country public sentiment and regulatory burdens, affect SWF dealmaking, and how do recipient country preferences compare with target firm preferences with respect to investor selection‘ Target firms are sensitive to the transaction costs associated with SWF investment, and will structure transactions in a way that matches up with recipient country ideals in order to avoid higher transaction costs. After reviewing several high-profile transactions, I conclude that target firms and SWFs will also attempt to reduce transaction costs through public disclosure. This disclosure has two functions. First, it eases public concern about SWF investment (which as a result will ease pressure on regulators that have approved the transaction). Second, it conditions the market for future transactions, which may reduce transaction costs for transactions with other SWFs and for subsequent investments by the same SWF.

This paper considers the possibilities for company law convergence in the aftermath of the European Court of Justice's landmark Centros decision. The Centros decision introduces the possibility of regulatory competition among EU Member States for company charters. However, entrenched cultural and political features may dissipate the competitive pressures that would give rise to formal convergence of company law statutes. This paper argues that Member States' statutes are more likely to functionally converge in an effort to effectively compete for new incorporations. This paper also considers the possibility of specialization among EU Member States' statutes. Rather than offering a bundle of corporate goods that attempt to appeal to all businesses seeking to incorporate within a jurisdiction, Member States may attempt to craft their corporate codes and associated regulatory institutions to appeal to certain types of companies or industries.

We examine firm lifecycles of 3,081 IPOs from 1996-2012. We find that small IPOs have a different lifecycle than other, larger companies. Within five years of an IPO, only 55% of small IPOs remain listed on a public exchange, compared to 61.3% and 67.1% for middle and large capitalized companies, respectively. Small IPOs largely either voluntarily or involuntarily delist while medium and large-sized companies largely exit the markets through takeover transactions. Those small companies that remain listed largely fail to grow, remaining in the small capitalized category. We use our findings to examine various theories explaining the decline of the small IPO. We find only minor evidence that regulatory changes caused the decline of the small IPO. The decline appears instead to be more attributable to the historical unsuitability of small firms for the public markets. Absent economic or market reforms which change small firm quality, further regulatory reforms to enhance the small IPO market are thus likely to be either ineffective or bring firms into the public markets which lack the horsepower to remain publicly listed.

Accumulating evidence suggests that several recent regulations enacted by Congress and the SEC, including the Sarbanes-Oxley Act, have disproportionately burdened smaller public companies in a negative manner, such that many of these companies are exiting the public markets. This Article describes these regulations, reviews their effects, and proposes several options that the SEC might choose to address the imbalance of costs and benefits for small businesses. The simplest option would provide for a waiver or postponement of certain regulations imposed under the Sarbanes-Oxley Act More significant possible measures include the expansion of the SEC's small business regulatory regime under Regulation S-B, and the creation of a securities market for small-business issuers.

The role of proxy advisors has increasing relevance because the Securities and Exchange Commission has recently undertaken a review of the mechanisms of proxy voting - less gracefully but perhaps aptly described as “proxy plumbing” - and the role of proxy advisors in that process. This short essay discusses the role of proxy advisors and their regulation. In particular, the essay addresses why institutional investors purchase corporate governance ratings and advice despite the fact that the advice appears to be of poor quality. The essay then discusses potential regulation of proxy advisors by the Securities & Exchange Commission.

Under the standard agency theory applied to corporate governance, active monitoring of manager-agents by empowered shareholder-principals will reduce agency costs created by management shirking and expropriation of private benefits (through, for example, high compensation and perquisites). But while shareholder power may result in reduced managerial agency costs, an analysis of how that power is often exercised in public corporation governance reveals that it also can produce significant costs: influential shareholders may extract private benefits from the corporation, incur and impose lobbying expenses, and pressure corporations to adopt inapt corporate governance structures. Because of these costs, the simple principal-agent model on which shareholder empowerment is based begins to collapse. This article offers an alternative model - a common agency theory for public corporations. A common agency is created when multiple principals influence a single agent; in the case of a corporation, common agency describes a shareholder/management relationship in which multiple shareholders with competing preferences exert influence on corporate management. The common agency theory set out in this article provides several important contributions to the literature on corporate governance and shareholder empowerment. First, the theory provides a more complete explanation of the motivations for and outcomes of shareholder activism, including the activities of governmental owners, large institutional investors and “social” investors. Second, the theory helps to more clearly delineate the costs and benefits of increasing shareholder power. Finally, building on these findings, the theory suggests possible regulatory changes to ensure that the benefits of shareholder activism outweigh its costs.

The rise of sovereign wealth funds signals a shift in the balance of economic and financial power in the world, with fast-rising powers creating sovereign wealth funds to invest billions in relatively new-found wealth. Discussions and analyses of sovereign wealth thus tend to focus on international relations and politics. But those who study the history of sovereign wealth funds recognize that many SWFs have existed for decades, and that some of these older SWFs are owned by U.S. states, thus also implicating federal relations and domestic politics. A great deal of research has focused on the international aspects of new, foreign sovereign wealth; this article instead examines older (but much less studied) domestic sovereign wealth funds, with a focus on their origins, purpose, and governance, as well as the role they play within a federalist system of government.

Discussions of corporate governance often focus solely on the attractiveness of firms to investors, but it is also true that firms seek out preferred investors. What, then, are the characteristics of an attractive investor? With nearly $6 trillion in assets, sovereign wealth funds (SWFs) are increasingly important players in equity markets in the United States and abroad, and possess characteristics that firms prize: deep pockets, long-term (and for some, theoretically infinite) investment horizons, and potential network benefits that many other shareholders cannot offer. However, despite their economic power, their reach, and their general desirability as investors, SWFs are almost entirely disengaged from corporate governance matters in U.S. firms. Indeed, with the exception of Norway’s Government Pension Fund-Global, SWFs are notable primarily just for their passivity as shareholders.

Given the domestic and external political and regulatory factors that discourage SWF engagement in corporate governance in the United States, how can SWFs provide appropriate stewardship over their equity investments? The article answers this question by describing how SWFs and regulators can create the crucial “space” necessary for SWF engagement in corporate governance. The analysis proceeds in three substantive sections. Part I lays out a definition of SWFs and describes SWF investment patterns. Part II reviews empirical evidence on SWF investment behavior and the effects that the investment has on firm values, and then examines evidence on SWF activities in corporate governance. Part III discusses the key factors that limit SWF involvement in corporate governance activities. Part IV describes how, given these limitations, SWFs may engage in governance without triggering regulatory reprisals, and how regulators can encourage SWF investment and engagement.

As the number of, and assets controlled by, sovereign wealth funds (SWFs) has increased dramatically in recent years, so too has scrutiny about how SWFs are making use of these assets. A consensus appears to be developing that large institutional investors, including SWFs, should be aware of corporate governance issues at their portfolio companies, even if they choose not to actively attempt to influence management. Because they are long-term investors and often under political and regulatory scrutiny that makes them less likely to sell, SWF capital tends to be captive capital. Thus, protecting long-term returns by monitoring governance is a priority for many sovereign investors. The difficulty for most SWFs -- and the issue this brief paper addresses -- is how to hold mangers accountable without selling or directly engaging in ways that would concern regulators.

In 2007, the U.S. Congress passed the Foreign Investment in the United States Act (FINSA), the most recent in a series of calibrations to a basic regulatory framework that is now nearly 40 years old. FINSA has particularly significant effects on investment by sovereign wealth funds (SWFs) and state-owned enterprises (SOEs). Indeed, FINSA is properly understood as a response to SWF and SOE activity, and is designed to provide a framework in which U.S. regulators can weigh the particular risks presented with investment by state-controlled entities. Although in general FINSA has performed ably and as intended in its first five years of implementation, balancing the risks associated with SOE and SWF investment in a competitively neutral way has historically been a challenge, and now seems to be even more challenging after the passage of FINSA.

Who is a “foreign official” under the Foreign Corrupt Practices Act? This question will take on increasing importance in the coming years for two reasons. First, the Department of Justice and the Securities and Exchange Commission are aggressively pursuing FCPA cases and, as a consequence, testing the boundaries of the statute. Second, many foreign governments appear to be returning to the old time religion of state capitalism. Foreign governments act as state capitalists not just through state-owned enterprises, but also through public pension funds and sovereign wealth funds (SWFs); these funds are perhaps the next frontier for FCPA enforcement. Indeed, in 2011 the SEC put certain banks and private equity funds on notice that the agency’s enforcement staff had begun to take a closer look at the banks’ and funds’ dealings with SWFs. This article examines SWFs and other state-controlled funds, including public pension funds, as “instrumentalities” and their employees as “foreign officials” under the FCPA. The article concludes that although in some cases SWF and state pension fund employees would be “foreign officials” for purposes of the FCPA, in most cases the FCPA should not apply to these funds and their employees because there is no link between the employees and the type of foreign policy concern that motivated the creation of the FCPA.

The period from 2003 to 2013 shows a remarkable shift in the use and effectiveness of shareholder proposals. Shareholders pursued many different types of proposals over the decade, eight of which are identified in this article as most important to corporate governance. The article then provides evidence on how these proposals were used and voted on by shareholders, helping to provide clarity to the role of shareholders in corporate governance. The evidence presented in this article shows that shareholders are increasingly willing to pursue proposals which enhance the accountability of managers. However, reflecting legitimate concerns with the risk of empowering minority shareholders who do not owe fiduciary duties to their fellow shareholders, voting patterns reveal that shareholders are cautious in how they allocate power. While most shareholders support measures that facilitate managerial discipline, they are more cautious in their support of proposals that empower other investors and augment their influence over managers.

This article develops a theory of shareholder voting by suggesting that this behavior reflects shareholder concern over two types of costs. First, the majority of shareholders operate under information cost constraints as diversified investors that generally have significant informational asymmetries with respect to management. Therefore, such shareholders will tend to seek low-cost signals of firm performance, which would predict support for disciplining proposals that allow shareholders to key off basic financial performance measures such as market price; indeed, as other scholars have noted, the majority of shareholders are most interested in defensive, ex-post activism that reduces managerial entrenchment and exposes managers to the market for corporate influence and corporate control.

Second, the significantly lower levels of support for empowering proposals may be explained by common agency costs — costs that arise as numerous shareholder-principals seek to influence a single set of manager-agents. The significant empowering proposals identified in the article have a common feature: they all promote shareholder influence in excess of a commensurate economic interest held by the activist shareholder. This raises concerns that activist shareholders will attempt to use their influence to extract private benefits at the expense of the other shareholder-principals. However, most shareholders appear to recognize the threat presented by a common agency in which small block holders are empowered to influence management, and such proposals receive significantly less support.

On March 8, 2014, the West Virginia Legislature approved the creation of a West Virginia “Future Fund,” the latest in a series of North American sovereign wealth funds (SWFs) created in recent decades. Following a model used by other states and provinces, under the West Virginia legislation, 3% from all severance taxes on coal, oil, natural gas, minerals and timber will be diverted to a permanent trust fund. West Virginia joins a large number of U.S. states and Canadian provinces to create a sovereign wealth fund. And West Virginia’s will almost certainly not be the last SWF: recent estimates by the U.S. Energy Information Administration place the amount of undeveloped, technically recoverable shale oil and shale gas in the United States alone at 862 trillion cubic feet in deposits from New York to California. Saskatchewan is also preparing to launch a wealth fund, using revenues from the same natural resource reserves enjoyed by its southern neighbors.

This article will briefly consider the phenomenon of North American funds — their creation, history, goals, and differences — with a particular focus on their governance and investment decision-making. Although the creation of new funds like West Virginia’s Future Fund and North Dakota’s Legacy Fund have received significant popular attention in recent years, many North American funds have existed for decades, and the legislative history of some funds dates back to 1785 (two years prior to the adoption of the U.S. Constitution). And, with significant oil, natural gas, and mineral wealth remaining to be tapped in the United States and Canada, West Virginia and Saskatchewan’s funds may just be the latest in a continuing wave of North American SWFs.

As improved but often more environmentally-obtrusive technologies such as hydraulic fracturing facilitate the extraction of billions of dollars in natural resource wealth, more states are now faced with a welcome but exceedingly complex set of problems: Who should benefit from natural resources extracted from public lands? If the state retains much of this wealth in the form of tax receipts, how should these funds be spent? What do states owe to the communities from which these resources were extracted? What do states owe to future generations? While these are questions of first impression for a few, fortunate states, a number of states have been trying to address these issues for decades, and have enacted a variety of responses that have crucial implications for the states, their citizens, and their natural environments.

This article proceeds by providing in Part I historical background on the crucial legal developments which allowed state public natural resource funds to develop. In Part II, the article turns to the first of the two central questions by introducing the principal policy justifications of state public natural resource funds through a review of the stated objectives of the funds, the funds’ governance and distributions mechanisms, the role the funds play in state policy making and budgeting, and the aspects of federalism implicated by the state funds. Part III then analyzes the operations of the funds in light of the policy justifications identified in the article. The article concludes by showing how governance weaknesses often limit the effectiveness of funds in achieving their policy goals, and suggests ways in which states can create appropriate legal and governance structures to enhance their funds’ effectiveness.

Assets under management by public funds, including sovereign wealth funds and sovereign pension funds, continues to grow at a strong pace. As funds grow larger and new sovereign funds come into the market, the identification of suitable investments in an increasingly crowded marketplace become correspondingly more difficult. The universe of potential investments is narrowed by a trust deficit between many sovereign funds and the regulators in countries in which these funds invest; this trust deficit can result in higher regulatory costs that price public funds out of the market, or can create unacceptably high regulatory risks that deter funds from considering certain investments. Because transparency can help foster trust, this report seeks to remedy the trust deficit by suggesting a disclosure framework for public fund investment policies that are most relevant to recipient country regulators. The report then reviews selected policies, as available, for the 25 largest sovereign wealth funds in the world, as listed by the Sovereign Wealth Institute, and the 26 largest sovereign pension funds, as listed in the Pension & Investments/Towers Watson 300 Ranking. The report will be updated annually, and comments are welcome.

The Public Funds Investment Policies Survey is an annual publication, now in its second year, which surveys the current investment policy disclosures of the 25 largest (by AUM) SWFs in the world, as listed by the Sovereign Wealth Fund Institute, and the 26 largest (by AUM) SPFs, as listed in the Pension & Investments/Towers Watson 300 Ranking (2012). The policies reviewed in this survey were obtained directly from the funds when possible, using data available as of summer 2015.

Because a minority of funds (primarily SWFs) does not disclose investment policies, caution should be used in interpreting these results. Many funds may have extensive internal policies but choose not to disclose these policies, and the lack of disclosure should not be taken as evidence that such policies do not exist. When possible, reference was made to other sources of data to corroborate or augment disclosed data

As Sovereign wealth funds (SWFs) mature and as the literature describing and analyzing SWFs continues to develop, some of the primary concerns that initially animated SWF analysis — namely, SWFs as a sign of shifting financial power, SWFs as potential political actors, and the corresponding protectionist responses from governments — have turned to fundamental concerns about how SWFs are governed. Even within this literature, however, questions of governance are often focused not on the domestic impacts of SWF governance, but on SWF governance as risk mitigation for other entities and governments. For some analysts and regulators, SWFs must be quarantined; little thought is given to the health of the SWF itself, so long as it does not adversely affect other entities.

This draft chapter (forthcoming, Oxford University Press Handbook on Sovereign Wealth Funds) discusses SWF governance as a domestic political issue, and not merely as an international political issue. In particular, this chapter adds to the literature on the domestic legitimacy of SWFs, and how poor management of SWFs can create or exacerbate domestic political risks. Among the threats to legitimacy are issues involving ultimate ownership of the fund, corruption, unclear of shifting purposes of the fund and the use of the fund’s earnings, and misalignment of the fund with societal mores and interests.

At the center of foreign investment regulation in the United States is a critical but relatively quiet committee of executive agencies: the Committee on Foreign Investment in the United States. This committee serves an increasingly important role as the U.S. draws hundreds of billions in foreign investment every year, some of it coming from state-controlled entities such as sovereign wealth funds, state-controlled pension funds, and state-owned enterprises. U.S. regulation of investment by these state-controlled and affiliated entities is continually evolving to meet the changing foreign investment landscape. This Note reviews the process of review, recent changes in the process, and the continued evolution of foreign investment regulation in the U.S., particularly as it applies to investment by state-controlled and affiliated entities.

Discussions of corporate governance often focus solely on the attractiveness of firms to investors, but it is also true that firms seek out preferred investors. What, then, are the characteristics of an attractive investor? With nearly $6 trillion in assets, sovereign wealth funds (SWFs) are increasingly important players in equity markets in the United States and abroad, and possess characteristics that firms prize: deep pockets, long-term (and for some, theoretically infinite) investment horizons, and potential network benefits that many other shareholders cannot offer. However, despite their economic power, their reach, and their general desirability as investors, SWFs are almost entirely disengaged from corporate governance matters in U.S. firms. Indeed, with the exception of Norway’s Government Pension Fund-Global, SWFs are notable primarily just for their passivity as shareholders. Given the domestic and external political and regulatory factors that discourage SWF engagement in corporate governance in the United States, how can SWFs provide appropriate stewardship over their equity investments? The article answers this question by describing how SWFs and regulators can create the crucial “space” necessary for SWF engagement in corporate governance. The analysis proceeds in three substantive sections. Part I lays out a definition of SWFs and describes SWF investment patterns. Part II reviews empirical evidence on SWF investment behavior and the effects that the investment has on firm values, and then examines evidence on SWF activities in corporate governance. Part III discusses the key factors that limit SWF involvement in corporate governance activities. Part IV describes how, given these limitations, SWFs may engage in governance without triggering regulatory reprisals, and how regulators can encourage SWF investment and engagement.

As improved but often more environmentally-obtrusive technologies such as hydraulic fracturing facilitate the extraction of billions of dollars in natural resource wealth, more states are now faced with a welcome but exceedingly complex set of problems: Who should benefit from natural resources extracted from public lands? If the state retains much of this wealth in the form of tax receipts, how should these funds be spent? What do states owe to the communities from which these resources were extracted? What do states owe to future generations? While these are questions of first impression for a few, fortunate states, a number of states have been trying to address these issues for decades, and have enacted a variety of responses that have crucial implications for the states, their citizens, and their natural environments. This article proceeds by providing in Part I historical background on the crucial legal developments which allowed state public natural resource funds to develop. In Part II, the article turns to the first of the two central questions by introducing the principal policy justifications of state public natural resource funds through a review of the stated objectives of the funds, the funds’ governance and distributions mechanisms, the role the funds play in state policy making and budgeting, and the aspects of federalism implicated by the state funds. Part III then analyzes the operations of the funds in light of the policy justifications identified in the article. The article concludes by showing how governance weaknesses often limit the effectiveness of funds in achieving their policy goals, and suggests ways in which states can create appropriate legal and governance structures to enhance their funds’ effectiveness.

Abstract: Under the standard agency theory applied to corporate governance, active monitoring of manager-agents by empowered shareholder-principals will reduce agency costs created by management shirking and expropriation of private benefits (through, for ...

Who is a “foreign official” under the Foreign Corrupt Practices Act? This question will take on increasing importance in the coming years for two reasons. First, the Department of Justice and the Securities and Exchange Commission are aggressively pursuing FCPA cases and, as a consequence, testing the boundaries of the statute. Second, many foreign governments appear to be returning to the old time religion of state capitalism. Foreign governments act as state capitalists not just through state-owned enterprises, but also through public pension funds and sovereign wealth funds (SWFs); these funds are perhaps the next frontier for FCPA enforcement. Indeed, in 2011 the SEC put certain banks and private equity funds on notice that the agency’s enforcement staff had begun to take a closer look at the banks’ and funds’ dealings with SWFs. This article examines SWFs and other state-controlled funds, including public pension funds, as “instrumentalities” and their employees as “foreign officials” under the FCPA. The article concludes that although in some cases SWF and state pension fund employees would be “foreign officials” for purposes of the FCPA, in most cases the FCPA should not apply to these funds and their employees because there is no link between the employees and the type of foreign policy concern that motivated the creation of the FCPA.

As the number of, and assets controlled by, sovereign wealth funds (SWFs) has increased dramatically in recent years, so too has scrutiny about how SWFs are making use of these assets. A consensus appears to be developing that large institutional investors, including SWFs, should be aware of corporate governance issues at their portfolio companies, even if they choose not to actively attempt to influence management. Because they are long-term investors and often under political and regulatory scrutiny that makes them less likely to sell, SWF capital tends to be captive capital. Thus, protecting long-term returns by monitoring governance is a priority for many sovereign investors. The difficulty for most SWFs -- and the issue this brief paper addresses -- is how to hold mangers accountable without selling or directly engaging in ways that would concern regulators.

The period from 2003 to 2013 shows a remarkable shift in the use and effectiveness of shareholder proposals. Shareholders pursued many different types of proposals over the decade, eight of which are identified in this article as most important to corporate governance. The article then provides evidence on how these proposals were used and voted on by shareholders, helping to provide clarity to the role of shareholders in corporate governance. The evidence presented in this article shows that shareholders are increasingly willing to pursue proposals which enhance the accountability of managers. However, reflecting legitimate concerns with the risk of empowering minority shareholders who do not owe fiduciary duties to their fellow shareholders, voting patterns reveal that shareholders are cautious in how they allocate power. While most shareholders support measures that facilitate managerial discipline, they are more cautious in their support of proposals that empower other investors and augment their influence over managers. This article develops a theory of shareholder voting by suggesting that this behavior reflects shareholder concern over two types of costs. First, the majority of shareholders operate under information cost constraints as diversified investors that generally have significant informational asymmetries with respect to management. Therefore, such shareholders will tend to seek low-cost signals of firm performance, which would predict support for disciplining proposals that allow shareholders to key off basic financial performance measures such as market price; indeed, as other scholars have noted, the majority of shareholders are most interested in defensive, ex-post activism that reduces managerial entrenchment and exposes managers to the market for corporate influence and corporate control. Second, the significantly lower levels of support for empowering proposals may be explained by common agency costs — costs that arise as numerous shareholder-principals seek to influence a single set of manager-agents. The significant empowering proposals identified in the article have a common feature: they all promote shareholder influence in excess of a commensurate economic interest held by the activist shareholder. This raises concerns that activist shareholders will attempt to use their influence to extract private benefits at the expense of the other shareholder-principals. However, most shareholders appear to recognize the threat presented by a common agency in which small block holders are empowered to influence management, and such proposals receive significantly less support.

In 2007, the U.S. Congress passed the Foreign Investment in the United States Act (FINSA), the most recent in a series of calibrations to a basic regulatory framework that is now nearly 40 years old. FINSA has particularly significant effects on investment by sovereign wealth funds (SWFs) and state-owned enterprises (SOEs). Indeed, FINSA is properly understood as a response to SWF and SOE activity, and is designed to provide a framework in which U.S. regulators can weigh the particular risks presented with investment by state-controlled entities. Although in general FINSA has performed ably and as intended in its first five years of implementation, balancing the risks associated with SOE and SWF investment in a competitively neutral way has historically been a challenge, and now seems to be even more challenging after the passage of FINSA.

ABSTRACT Over the last decade, Defined Benefit (DB) public pension systems have come under greater stress. Pensions have experienced two recessions, demographic shifts and generally bad public budget circumstances. Pensions have modified their allocation strategies over this period, generally shifting away from equities and fixed income allocations in favor of alternatives. What’s more, the stated justification for alternatives has shifted as well, from an emphasis on relative performance (alpha) towards diversification away from systemic shocks (beta). In this paper, we investigate motives for the employment of alternatives and the performance of these investments, considering both governance and financial performance motivations. We consider possible principal-agent and herding problems that may be unique to these portfolios, and find that the prudent person standard is of little protection against herding risks due to its relative benchmarking schema. Controlling for changes in governance, we find that private equity and other less liquid alternatives can be of value because of their relatively consistent pricing, whereas more liquid assets are more susceptible to price volatility. In fact, improvements in diversification (beta) can arise as an artifact of illiquidity.

On March 8, 2014, the West Virginia Legislature approved the creation of a West Virginia “Future Fund,” the latest in a series of North American sovereign wealth funds (SWFs) created in recent decades. Following a model used by other states and provinces, under the West Virginia legislation, 3% from all severance taxes on coal, oil, natural gas, minerals and timber will be diverted to a permanent trust fund. West Virginia joins a large number of U.S. states and Canadian provinces to create a sovereign wealth fund. And West Virginia’s will almost certainly not be the last SWF: recent estimates by the U.S. Energy Information Administration place the amount of undeveloped, technically recoverable shale oil and shale gas in the United States alone at 862 trillion cubic feet in deposits from New York to California. Saskatchewan is also preparing to launch a wealth fund, using revenues from the same natural resource reserves enjoyed by its southern neighbors. This article will briefly consider the phenomenon of North American funds — their creation, history, goals, and differences — with a particular focus on their governance and investment decision-making. Although the creation of new funds like West Virginia’s Future Fund and North Dakota’s Legacy Fund have received significant popular attention in recent years, many North American funds have existed for decades, and the legislative history of some funds dates back to 1785 (two years prior to the adoption of the U.S. Constitution). And, with significant oil, natural gas, and mineral wealth remaining to be tapped in the United States and Canada, West Virginia and Saskatchewan’s funds may just be the latest in a continuing wave of North American SWFs.

We examine firm lifecycles of 3,081 IPOs from 1996-2012. We find that small IPOs have a different lifecycle than other, larger companies. Within five years of an IPO, only 55% of small IPOs remain listed on a public exchange, compared to 61.3% and 67.1% for middle and large capitalized companies, respectively. Small IPOs largely either voluntarily or involuntarily delist while medium and large-sized companies largely exit the markets through takeover transactions. Those small companies that remain listed largely fail to grow, remaining in the small capitalized category. We use our findings to examine various theories explaining the decline of the small IPO. We find only minor evidence that regulatory changes caused the decline of the small IPO. The decline appears instead to be more attributable to the historical unsuitability of small firms for the public markets. Absent economic or market reforms which change small firm quality, further regulatory reforms to enhance the small IPO market are thus likely to be either ineffective or bring firms into the public markets which lack the horsepower to remain publicly listed.

In March 1999, the European Court of Justice (ECJ) returned a decision in the Centros1 case. As Eddy Wymeersch noted," there is not much doubt that this judgment will belong to the leading cases affecting company law this second half of the century." 2

This paper, presented at the “Regulating Risk” symposium at the University of Connecticut School of Law, April 16, 2010, briefly reviews the connection between risk and corporate governance, then examines the “strengthening corporate governance” provisions of Subtitle G of the Restoring American Financial Stability Act of 2010 (also known as the “Dodd Bill”). The corporate governance provisions, covering majority voting for director elections, proxy access, and the separation of the roles of CEO and chairman of the board, seem likely to have one of two possible effects. On the one hand, the provisions may be pernicious, in that they further enhance shareholder power without a clear justification for increased shareholder power, and more particularly without a justification for shareholder power as a risk management device. Indeed, the Dodd Bill’s corporate governance provisions may work at cross-purposes to the risk management intent of the remainder of the Dodd Bill: the corporate governance provisions operate under the assumption that enhanced shareholder power will result in better monitoring of managerial behavior, which presumably will help to prevent future crisis, but both theory and evidence suggests that diversified shareholders generally prefer companies to take risks that other constituencies (including taxpayers) would not prefer. On the other hand, the Dodd Bill may have very little effect on investor behavior or risk management. Increases in shareholder power over the past years (fundamentally the result of increased federal regulation) have made management more responsive to - and in some cases probably overly responsive to - shareholder concerns over agency costs. Indeed, some of the proposed reforms already have been or were likely to have been put in place at most public companies. If private ordering is already working, what is the point of imposing strict governance constructs across the market as a whole, especially when most of the affected firms are victims of, rather than contributors to, the Financial Crisis‘

... Map: Lincoln Institute of Land Policy. ... Or, in the case of some state agency recipients of state SWF funds, there may in fact be no particular goal of providing for ... tax fund, both of the state's SWFs are managed by a single investment entity that may operate as a stand-alone entity. ...

Abstract: This essay, prepared for the Georgetown Journal of International Law's 2009 symposium on sovereign wealth funds (SWFs), considers SWF investment from a novel perspective: How do the external forces acting on sovereign wealth funds and target firms, ...

In March 1999, the European Court of Justice (ECJ) returned a decision in the Centros1 case. As Eddy Wymeersch noted," there is not much doubt that this judgment will belong to the leading cases affecting company law this second half of the century." 2

Accumulating evidence suggests that several recent regulations enacted by Congress and the SEC, including the Sarbanes-Oxley Act, l have disproportionately burdened smaller public companies in a negative manner, such that many of these companies are exiting ...

Abstract: Sovereign wealth funds (SWFs)-capital pools created by governments to invest surplus funds in private markets-are increasingly important global financial actors. Many fear that the economic power of SWFs, which is measured in trillions of dollars, will be used ...

... 28, 1998). 13 Private data, while having some value for the consumer, may have more value to the business tracking the information. ... The server may also set a "cookie,"a file that logs information the client offers during her visit. ...