Inside-Out Corporate Governance

Article excerpt

I.  Introduction
II. Proxy Access And Minority Directors
    A. Introduction
    B. History
       1. Pre-2003 Period
       2. Post-2003 Period
    C. The State of Play on Proxy Access
       1. The SEC's Basis for Acting
       2. The Ill-Fated SEC Proxy Access Rule
       3. Delaware's Limited Addition to Proxy Access
       4. Delaware's New Proxy Expense Rule
    D. Proxy Access: Current Scholarly Debate
    E. An Italian Alternative
    F. Proposals
III. Third-Party Gatekeepers: Auditors And Credit Rating Agencies
    A. Introduction
    B. History of Auditing and Credit Rating.
       1. History of the Auditing Industry in the United States
       2. History of the Credit Rating Industry in the United States
    C. Recent Developments in the Regulation of Auditors and CRAs
       1. Developments in the Auditing Industry
       2. Current Developments in the Credit Rating Industry
    D. Auditing: Problems and Solutions from the Current Debate
       1. The Agency Problem
       2. Scholars' Solutions and Skepticism
       3. The Limits of SOX
       4. Scholars' Proposals for Auditing Reform
          a. Ex Post Litigation
          b. Ex Ante Reform: Restructuring the Audit Relationship
    E. Credit Rating Agencies: Problems and Solutions from
       the Current Debate
       1. Introduction
       2. Ratings Shopping and the Debate Whether to End "Issuer Pays"
       3. Ex Ante Approaches (1): Removing the Regulatory Imprimatur
       4. Ex Ante Approaches (2): Enhancing Transparency and Oversight
          a. Mandating Disclosure of Rating Agency Actions
          b. Clarifying Methodology and Symbology
          c. Removing the Disclosure Exemption
       5. Ex Post Enforcement Proposals and Comprehensive Reform
    F. Insights from Italy and the European Union
       1. Auditing in Italy.
       2. Credit Rating Agencies in the European Union and Italy
    G. Where Are We After Dodd-Frank?
       1. Directions for Further Audit Reform?
       2. Credit Rating Reform
IV. Derivatives Regulation.
    A. Introduction
    B. History of Derivatives Regulation
       1. The Development of Derivatives
       2. Derivatives and Regulation in the United States
       3. Inside-Out Corporate Governance and Derivatives
    C. Derivatives Regulation in the Legal Literature
    D. Derivatives Regulation in the Finance Literature
       1. Product-Centric View
       2. Legislatively Driven Collapse
       3. Human Error and the Role of Secondary Actors
    E. The Dodd-Frank Reforms
       1. Exchange-Traded Derivatives
       2. Clearinghouses
       3. Collateral Requirements
       4. Position Limits
       5. Disclosure
       6. Implications for Corporate Governance:
          A Concluding Note
V. Conclusion

I. INTRODUCTION

In the past decade, two major corporate and financial crises have shaken the foundations of corporate governance in rapid succession. In 2001 and 2002, Enron, WorldCom, and several other major U.S. corporations collapsed after evidence of accounting fraud emerged at each company. (1) By the time lawmakers and regulators had finished dealing with the fallout from these scandals and with the Sarbanes-Oxley Act of 2002 (2) and other reforms, a new crisis emerged with the distressed sale of the largest subprime lender, Countrywide Financial, and the subsequent collapses of Bear Stearns, Fannie Mae, Freddie Mac, Lehman Brothers, Merrill Lynch, and AIG. (3)

The earlier corporate scandals were widely viewed as a failure of corporate governance and were centered largely in the United States. (4) The 2008 crisis, however, was far more global in its scope and was closely tied to governance and regulation in the financial services industry. (5) The crisis raised grave concerns about the role of derivatives and other new financing techniques--the so-called shadow banking system--in 21st century governance. (6) Much as with securities analysts and auditors in the earlier crisis,

the principal gatekeeper--in this case, the credit rating agencies that rated mortgage-related securitizations and other debt instruments--proved ineffectual. …