On the morning of May 10, Robert M. Daines, Global Faculty at Peking University Law School, Associate Dean, Pritzker Professor of Law and Business, and Senior Faculty for the Rock Center on Corporate Governance at Stanford, gave an online academic lecture on the topic of "Introductory Session on Corporate Governance: A Western Approach". The lecture was hosted by Zhang Kangle, Assistant Professor of Peking University Law School. In this lecture, Prof. Daines shared his understanding of corporate governance in the context of U.S. law with reference to cases of U.S. corporate governance. More than 100 students and faculty members participated in the lecture, which received an enthusiastic response.

 

This article presents the core points of the lecture as a transcript.

 

Robert M. Daines:

I. The Concept of Corporate Governance

Corporate Governance  is a relatively recent concept. It was only after the Enron Corporation (Enron) scandal erupted that the concept of Corporate Governance gradually became known in the United States. Corporate governance in the context of U.S. law has the following characteristics.

First, corporate governance is primarily a system of rules affecting the distribution of income derived from corporate operations.

Second, corporate governance aims to protect shareholders' rights and interests, mainly by limiting the discretionary power of the board of directors.

Third, corporate governance needs to be localized.

II. Corporate governance ranking business

Because of the importance of corporate governance to shareholders, some rating agencies in the United States have introduced their own corporate governance rankings, but there are many problems with such rankings.

I have conducted research on rating agencies. By collecting and analyzing data, I found that different rating agencies would give different rankings to the same company, and the differences in the rankings of different rating agencies are not correlated. This may be related to the fact that different rating agencies have different assessment criteria, and there is a lack of consensus among experts on what constitutes good corporate governance, or at least on how to assess the level of corporate governance.

III. Hayes Oyster Co. v. Keypoint Oyster Co.

Coast Oyster, a publicly listed company, was in dire need of funds to pay off its debts. In order to solve the company's imbalance problem, Hayes, who held 23% of the company's shares and was also the company's director and general manager, reached an agreement with Engman, an employee of the company, to sell the oyster farm to Keypoint Oyster, a company in which Engman held a stake, in exchange for cash.The board of directors of Coast Oyster approved Hayes's plan. Subsequently, Engman entered into an agreement with Hayes for Hayes Oyster, a company in which Hayes held a stake, to acquire a portion of Keypoint Oyster to finance the oyster farm transaction. Without knowing the background to the connected transaction, Coast Oyster's shareholders' meeting subsequently approved the transaction. Years later, Coast Oyster sued Hayes, who had left the company, claiming that Hayes had breached the duty of loyalty and seeking restitution of the profits Hayes had received from the oyster farm transaction as a result of his indirect shareholding in Keypoint Oyster.

Viewed from an ex post perspective, the transaction, which Hayes led, may have been fair because Hayes did not receive an additional benefit from the transaction and the price of the transaction did not cause Coast Oyster to suffer. However, the court held that Hayes breached the duty of loyalty. This was not because Hayes was both a buyer and a seller in the transaction; U.S. law does not prohibit such connected transactions as a matter of course. The crux of the matter is that conducting a related transaction requires disclosure of the relevant facts, and in this case Hayes did not disclose information about the related transaction at the time of the company's decision.

The Oyster case exemplifies the principles of U.S. law corporate governance. The rules of U.S. corporate law, particularly Delaware corporate law, can be summarized as follows: first, the board of directors is responsible for the company's material affairs; second, directors may act on their own with diligence and loyalty; and third, directors are required to disclose information related to their decisions.

 

Question One:

Shareholders can make a gain by selling their shares, or they can hold their shares and wait for the share price to rise. Is there a difference between these two modes of gain within the framework of corporate governance?

Robert M. Daines:

I don't think there is a difference because the pricing of stock sold by shareholders is theoretically essentially equivalent to the price of the stock, otherwise the transaction would not occur.

Question Two:

Should corporate governance consider the interests of society in addition to the interests of shareholders?

Robert M. Daines:

Theoretically, it can be considered, but it may not be practicable. If consideration of societal interests is allowed, there is a risk that directors will use societal interests to legitimize their decisions; after all, the concept of societal interests is vague.

Question Three:

What is the business model of a corporate governance ranking agency?

Robert M. Daines:

Corporate governance rankings influence investors' investment decisions, which in turn affects a company's stock price, and rating agencies can therefore sell their rankings to companies.

Question Four:

When listing in Mainland China, companies are required to unwind all special arrangements such as betting agreements, are there similar requirements in the U.S.?

Robert M. Daines:

There is no similar requirement in the U.S., as long as external disclosure is done. Investors can make their own decisions on whether or not to invest in the company once they are informed, and the special arrangements will ultimately be reflected in the share price.

Question Five:

Does law as a discipline have its own unique significance when discussing corporate governance issues?

Robert M. Daines:

For the past 40 years or so, the purpose of the discussion of corporate governance in American law has been to reduce agency costs. In this process, I think the law has played a very critical role. There are still some problems, but the law is doing as much as it can to incentivize the beneficial owners of corporations to make decisions that are in the best interest of shareholders.

 

Profiles of Speakers:

Robert M. Daines is the Pritzker Professor of Law and Business, Associate Dean, and Senior Faculty for the Rock Center on Corporate Governance at Stanford.  He is also Professor of Finance (by courtesy) at the Stanford Graduate School of Business. His research focuses on the intersection between law and finance, including CEO pay, corporate governance, mergers and acquisitions, mandatory disclosure regulations, IPOs, shareholder voting and takeover defenses. Professor Daines’ work has appeared in such top publications as the Journal of Financial Economics, the Journal of Financial and Quantitative Analysis, the Journal of Law, Economics and Organization and The Yale Law Journal. His research has also been covered by The Economist, The New York Times, The Wall Street Journal, Financial Times, Forbes, Fortune and other media.  Before entering academia, he was an investment banker at Goldman Sachs, where he advised firms on bank and bond financings. He clerked for Judge Ralph K. Winter of the U.S. Court of Appeals for the Second Circuit. Prof. Daines was awarded the 2012 John Bingham Hurlbut Award for Excellence in Teaching.

 

Translated by: Xiao Yaning

Edited by: Wang Shulin