Volume 12, Issue 1

Corporate governance scholarship is typically portrayed as driven by single factor models, for example, shareholder value maximization, director primacy or team production. These governance models are Copernican; one factor is or should be the center of the corporate governance solar system. In this essay, we argue that, as with binary stars, the shape of the governance system is at any time the result of the interaction of two central influences, which we refer to as capital market completeness and policy channeling. In contrast to single factor models, which reflect a stable normative statement of what should drive corporate governance, in our account the relation between these two governance influences is dynamic.

This article argues:

1. The economic effects of many legal rules change over the business cycle.
2. Most legal rules do not change over the business cycle.
3. The time-invariant legal rule chosen tends to be the rule that performs best in ordinary economic conditions.
4. The efficient time-invariant legal rule considers both performance in ordinary economic conditions and performance in recessions.
5. Because recessions cause extraordinary harms, a rule’s performance in recessions deserves a surprising amount of weight when calculating the best time-invariant legal rule.
6. The pursuit of efficiency in law and economics needs to change accordingly.

The creation of trillions of dollars in shareholder wealth by emerging companies has complicated the investor protection policy of securities regulation. The Securities and Exchange Commission (SEC) has not offered a coherent response to the question of when public investors should be permitted to invest in such companies. This Article develops an investor protection framework based on the Knightian distinction between risk and uncertainty that better articulates the challenges of this entrepreneurial age. Securities regulation has traditionally permitted all investors to purchase public securities with measurable risks and restricted them from investing in private securities that are shrouded in immeasurable uncertainty. As private markets have become more sophisticated at valuing companies, it has become more difficult to maintain this traditional divide. Investors believe that the valuations of private companies have become more certain. As a result, emerging companies are going public through Special Pur- pose Acquisition Companies and direct listings without the use of an underwriter that typically assures investors that a company has a reasonable basis for its valuation. This Article argues that protecting investors from uncertainty is essential to distinguishing between investment and speculation. The SEC should be more cautious in permitting companies to access public markets without mea- sures that protect investors from Knightian uncertainty.

Social enterprises—for-profit companies with public-interest missions— are now ubiquitous, yet few have emerged from the realm of small business. The main obstacle to their growth is a gap in trust between managers and investors, with each side lacking any legal assurance that the other will pursue both profits and purpose. Too often, these misgivings limit businesses’ access to capital.