Rewiring Corporate Law for an Interconnected World

56 Pages Posted: 1 Apr 2021 Last revised: 17 Nov 2021

See all articles by Luca Enriques

Luca Enriques

University of Oxford Faculty of Law; European Corporate Governance Institute (ECGI)

Alessandro Romano

Bocconi University - Department of Law; Yale Law School

Date Written: October 1, 2021

Abstract

The traditional focus of corporate law is on aligning managers’ preferences to the interests of shareholders. We show that this view is premised on two assumptions that are no longer true. First, the idea that all shareholders want to maximize the net present value of the firm’s earnings per dollar invested. Second, the view that microeconomic shocks do not produce macroeconomic consequences. The rise of institutional investors undermines the first assumption: large asset managers hold the entire market and have been shown to display a preference for maximizing the value of their portfolio as a whole rather than the performance of individual companies. That is, they are portfolio, rather than firm, value maximizers. At the same time, the increasing interconnectedness of the economy, and society more broadly, undermines the second assumption. There is ample empirical evidence that microeconomic shocks to a well-identified subset of “central” firms can propagate through the existing interconnections and generate catastrophic consequences.

We argue that corporate law should reflect these features of contemporary economies. On the one hand, it should aim to ensure that non-central firms maximize their own value, despite the rise of portfolio value maximizers. On the other hand, in central firms it should harness the preferences of portfolio value maximizing shareholders with the goal of minimizing the risk of catastrophic externalities like climate change or financial crises. We develop a framework to guide policymakers in the pursuit of this new fundamental conception of corporate law and illustrate how this rewiring of corporate law could work out by taking ownership disclosure rules as an example.

Keywords: Common Ownership, Corporate Law, Corporate Governance, Universal Owners, Systemic Externalities, Ownership Disclosure, Hedge Fund Activism

JEL Classification: G20, G28, G30, G34

Suggested Citation

Enriques, Luca and Romano, Alessandro, Rewiring Corporate Law for an Interconnected World (October 1, 2021). Forthcoming, Arizona Law Review, Issue 64:1, European Corporate Governance Institute - Law Working Paper No. 572/2021, Bocconi Legal Studies Research Paper No. 3814822, Available at SSRN: https://ssrn.com/abstract=3814822

Luca Enriques (Contact Author)

University of Oxford Faculty of Law ( email )

St Cross Building
St Cross Road
Oxford, OX1 3UL
United Kingdom

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

HOME PAGE: http://http:/www.ecgi.org

Alessandro Romano

Bocconi University - Department of Law ( email )

Via Roentgen, 1
Milan, Milan 20136
Italy

Yale Law School ( email )

New Haven, CT
United States

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