 Well, good afternoon everybody, and thank you for coming along to the first 3CL seminar of Lent Term. I'm delighted to introduce Professor Irene Lynch Fannan from University College Cork in Ireland. Just to tell you a small bit about Professor Lynch Fannan, she's a graduate of University College Dublin, Oxford University and the University of Virginia. And she qualified as a solicitor in 1985, having trained in Dublin and practised in London. Irene has published extensively in a number of areas, particularly corporate and solvency law, and also corporate governance and employment law. And in addition to commenting on current matters related to corporate and personal insolvency, Professor Lynch Fannan maintains a strong interest in comparative corporate governance and regulation. And within, certainly within the corporate law sphere, she's most well known for her very influential and excellent book working within two kinds of capitalism, which deals essentially with the crossover between corporate law, particularly corporate governance, and also labour law and labour relations. And it's in the corporate law sphere that Irene will be speaking this afternoon. Her papers titled From Genius to Quackery, Corporate Law Theory and Boards, which we're excited to hear more about. Irene will speak for roughly about half an hour, and then the rest of the session up until 2pm will be reserved for questions. Irene has also pointed out that she will be happy to accept interruptions, which may be a dangerous move, but feel free. Irene has given you a licence to interrupt if you wish during her talk, so without further ado. Okay, thanks very much Mark, and I just want to thank Mark for extending the invitation to me to come here. Now I should explain that the last time I was really interested in comparative corporate law theory, as Mark has mentioned, was when I published the book Working Within Two Kinds of Capitalism, which I think in retrospect was probably misnamed, because it's really about corporate law theory comparing US and EU corporations and how employees are considered as stakeholders. But anyway, that was published in 2003, and after that I became more interested again in insolvency law because of the economic situation, had a stint in management, and so I'm now coming back to corporate law theory. But the first time I met Mark was I think the last SLS, and he was giving a paper and I intervened, and he said, oh, are you Irene Lynch Fanon? And I thought for the first time in my life he expects me to be dead, I think, or something. No, no, it was just a rock star name. Well, I think it's only you that think I'm a rock star name actually. So anyway, so thank you very much for inviting me. I'm revisiting corporate law theory. I've just come back to teaching from this year of sabbatical leave. And so this paper, which is nearly finished, and the discussion today is really generated from some reading I managed to do while I was on sabbatical, and particularly in the last bit of it, which was as a visitor at Oxford Law Faculty. So as is said, the title is from Genius to Quackery, and I've referred to the work, which I'm my own work, which I'm sort of reflecting back on just in the first slide. So just to get started, the purpose of the paper is to rethink corporate law theory in terms of the time I've had to reflect on it, and to examine certain kinds of initiatives which have been passed or legislated for recently, particularly as they affect directors. So the focus is on the regulation of corporate directors and also on internal corporate governance matters. So the starting point is the use of this term genius, which is generated from a book written by Professor Roberta Romano called the Genius of American Corporate Law, where she had been asked as a task to consider the role of Delaware as the provenance of corporate law in the United States in the light of a sort of a creeping federalism or federal regulation of corporate law in the United States. And she described what was the genius of corporate law and particularly Delaware corporate law in that book. In contrast then, she also used this term quack corporate governance to criticise certain kinds of legislative initiatives which were implemented post particular kinds of crises. So, as you can see, she wrote an article in relation to the Submarines Oxley Act, but this term quack corporate governance has been used by other risers including Stephen Bainbridge, with whom I have in common the fact that we were both mentored by Professor Mike Dooley at the University of Virginia. And interestingly, most recently it's been used by Luca Enriquez, who I believe has been here recently and teaches here sometimes, to describe the regulation of directors under the new EU bank regulation. So that is describing the provenance of the title. So, from Romano's analysis, the characteristics of the genius of corporate law are as follows. Firstly, from her point of view as an American writer, the idea that the regulation is state based and the importance of Delaware as opposed to federal regulation, which doesn't necessarily have any real comparison in the UK or in Europe, except perhaps regarding a drive towards harmonisation. But more importantly, the genius of corporate law for her is that it is an enabling kind of legal framework that relies on private ordering of relationships within the corporation. That it is responsive to commercial realities. This includes everything from the ease of incorporation to the responsiveness of the commercial bar and the courts. Also, part of Romano's description is that the Delaware court is responsive. The judges are commercially astute, specialised as is the bar. Now, one characteristic that I've also added, which to be fair, I don't think Romano really gets into, is the idea that part of the genius of corporate law is that it relies on broad based principles rather than specific codification. That's something that's quite dear to my heart because we have in Ireland actually now embarked on a codification of director's duties, which in my view is misguided in the same way that Section 172 might be in my view misguided also. Just to digress a little bit when Roberto Romano was writing in 1993, Ralph Winter in the introduction to the book made these following points because this was considered to be a watershed moment at that time in the development and evolution of corporate governance and corporate law theory. Firstly, he noted that we have now realised at that time that economic analysis could add to our understanding of corporate law. I don't think anybody could argue with that, but I want to bring that a little bit forward now. He also recognised that it is possible when we are using particular kinds of theory to analyse corporate law that we can move from one kind of theory to another. Finally, there was a view at this point that the concern with a race to the bottom, which was the concern about the use or the location of Delaware as a focus of regulation, as distinct from federal regulation, was overstated. I think that's important in the European context. But to go back to point one and two, one of the things that is interesting to me and that I want to develop on as I develop this project is that the economic analysis of corporate law has relied on a particular kind of economic theory. Economic theory is also now changing and behavioural economics is becoming much more dominant in terms of how economists look at issues. Whereas to me it looks like the corporate lawyers are still stuck with the rational wealth maximisation type of economic analysis. And it has always seemed to me that that is a pretty impoverished view of economics and also how corporate lawyers have used economic theory. So this is actually, by the way, a great article written by Charles Schwab about it's entirely co-aids while lawyers listen and economists do not. So the point is that there's more than one economic theory and we can always change. So that's a by the way point. The characteristics of quackery, as far as Romano, Brainbridge and others are concerned, is the idea that federal regulation would become more dominant over the Delaware approach to corporate law. There's a possible comparator here with EU harmonisation. But more specifically the characteristics of quackery assume that one kind of regulation fits all kinds of corporate situations. It tends to be prescriptive. It tends to be specific and rule based. It therefore is not flexible and limits adaptability. It also tends to have a knee jerk or reactive quality in that you will often find these quack pieces of legislation are enacted to respond to particular crises because there's public pressure to respond. For that reason, this kind of specific rule based legislation can sometimes be meaningless in terms of the overall framework of corporate law. Sometimes it can be repetitive in the sense that it actually repeats in specific ways rules and principles which we already have. Sometimes it can be just in its character unenforcable. So there are three examples of quackery that I'm picking on in this particular paper. They really are just examples from which I can develop the discussion. So the first are say on pay initiatives. The second, which I will be focusing on, is about the regulation of independence of directors. And the third, which calls me a bit of a few problems when I gave this talk in Oxford, is section 172 of the Companies Act. Having listened to the comments there, I'm willing to acknowledge that not all of these are similarly egregious in terms of being quackery, but certainly the regulation of the independence of directors is something we can think about. Just by the way, I'm very interested in the IEU initiative, which mandates quotas for women on boards on corporate boards. And that I think from a corporate governance point of view is also an example of quackery, but there are other good reasons why we should have those quotas, which you can ask me about later. So regulation of independence as an example of quackery, what's wrong with it? So I'm going to focus on the EU capital requirements directive, which is one of the latest pieces of legislation that we have in relation to requiring independence of corporate directors in relation to banks. But it is part of a family of legislative initiatives which require independence of directors. But the wording of article 9 of the EU capital requirements directive is just a very good example of this kind of legislation. So it requires that directors of European banks must possess at all times sufficient knowledge skills and experience to perform their duties. And then it goes on to say that they must have honesty and integrity and independence of mind to effectively assess and challenge the decisions of the senior management where necessary. And so it is, as I say, of a piece with other kinds of regulation that you will find in other corporate law systems around the world. And I'm referring here to Lumiere and Gilligan's survey of those kinds of requirements that has been published in the JCLS. And also Luca Enrique's article on this, which has been just published in theoretical inquiries in law. So, just looking at the independence requirement and considering the trouble and the problems with this kind of quack regulation or legislation, this is a knee jerk populist response to the current crisis. In other words, the financial crisis generated a lot of public dismay. There is some requirement to be seen to be doing something about this. And so we are deciding that what we need are independent directors in relation to bank boards. And we are going to make sure that these directors are independent. And so the laws are drafted with that in mind. It's very prescriptive. It is requiring directors to specifically exercise independence of mind to effectively challenge management. And it undermines the genius of corporate law because it ignores the broad principles which we already have in relation to directors obligations and tries to have very specific rules, which in my mind add very little to what we already have. And it also then, because it is meaningless and unenforceable, generates to my mind what I call rule of law issues. And so interestingly, in their article Enrique Zanzetti saying, you know, they conclude that the best way to deal with this is to encourage EU member states not to enforce this. So we have implemented the legislation, but the answer is let's just have a sort of a soft approach to enforcement. When you have commentators deciding... Can you say on the... I've read in the... At the start of the time what they didn't do was to look at the extent to which what's in CRD4 was already to be found in the kind of national sectoral regulation. So the boarding with is not a matter of corporate law. We're dealing with issue of financial regulation and that CRD4 is a bite, a package of measures to stabilise the finance sector and would be overseeing and enforce by financial regulators. Yes, yes. So I don't... I think the most part of the world sector in the UK quite a lot already with respect to oversight of senior management and autism by financial institutions that was quite vigorously used by the supervisor. And so in that sense, the fact that it has not been upgraded to an EU-wide sort of harmonised requirement, maybe isn't so odd. We look at it from a... I'm not sure if it's enforced or capable of being enforced by financial institutions. Yeah, but what I mean by being unenforceable is just literally the terms of the regulation that we are asking directors to have independence of mind to effectively challenge direct management. So my view is just simply on the wording. How can you enforce the independence of someone's mind? My view would be that this will become a sort of a compliance, box-ticking kind of regulation enforced on the basis of evidence that yes, we did challenge senior management. My point is just in a theoretical deep kind of way that this really does not add anything to what we have understood that directors are already obliged to do in relation to their duties of supervision and monitoring of management. In any event. And so this kind of legislation, it's not the elevation to the EU directive. It is actually the content of the rule, whether it's EU, domestic or whatever, that it is very difficult to explore the state of mind of a particular director to ask whether he or she has the sufficient independence. So to my mind, the quackery aspect to this is piling more law on to existing law and adding nothing. And certainly to, from what I have understood from people when they sort of expressed, are they worried about this? You asked and they say, oh no, we just say, yes, I did, I did exercise independence of mind that it could be just a tick box compliance mechanism and therefore unenforceable. And interestingly, just in their article, Enrique Zanzetti, they in a way sort of despair, they throw up their hands and say, well look, you know, the answer is to have sort of a soft implementation of this. And my concern about the genius of corporate law is that when you get to that point in terms of having a response to particular kinds of corporate law, that does undermine the rule of law. And it undermines the credibility of a corporate law framework if respected commentators are recommending that this is the appropriate response. So anyway, then going to other corporate law theories such as Stephen Bainbridge, Stephen Bainbridge's view of our focus on directors independence is that he describes it as a fetish. You know that we think that independent directors are going to be the answer to everything. And he highlights at least three problems with directorial independence, which make to my mind common sense or our common sense that you have an informational asymmetry between really outside independent directors and inside management. In other words, if you look at the global financial crisis, you wonder what happened. You wonder about the role of independent directors and there are just so many questions to be asked as to what questions they asked, what answers were given and how that informational gap caused quite a lot of difficulties. There's also, according to Bainbridge, the loss of value of insider representation. Now, I'm not sure that that is the same as institution and knowledge in his analysis, but certainly we can add that. And then he goes on to say that insider representation on the board provides the board with a credible source of information necessary to accurately assess managerial performance. So, about independence particularly, there are those issues. So, in relation to this kind of legislation, as it is directed at directors, the next part of my paper goes back to corporate law theory. And I think this paper is more than one, I think it's more a project really. And it goes back to corporate law theory to ask and to consider what directors really do to consider what we're trying to do from a regulating directors. So, I'm going back to Stephen Bainbridge's analysis and he analyzes corporate law theories in this paper here, which I've referred to, but also in a later book which he published post the crisis in 2012. And he makes a distinction between corporate law theories which focus on shareholder primacy and his own theory which focuses on director primacy. And I find his analysis quite compelling and certainly well worth a read, if you have not looked at his work before. But in this area, I think my view is the corporate law is much better explained by a focus on directorial primacy. But I have two points of disagreement with Bainbridge. The first is that he makes a lot of play about distinguishing this from managerialism, this focus on director primacy. And in my view that's overplayed, I think in reality in most companies management and directors are closer. And so we might consider the exercise of managerial decisions and directorial primacy as the same thing, reflecting the same practical issue in company law as it is lived and as it is often adjudicated upon. The second point that I am developing in relation to my view now of corporate law theory is that a lot of the theories focus on shareholder wealth maximisation. And for somebody like me who I suppose would be a bit left to centre in terms of what I am trying to consider corporate law is trying to achieve. My view is that shareholder wealth maximisation is not actually the driving force behind corporate law theory, but a view of corporate wealth enhancement. That the focus on shareholder primacy and shareholder wealth maximisation has led us into the difficulties in which we find ourselves now. So in terms of directorial primacy just to give you some ideas in terms of food for thought as to why this might be the better view of what corporate law is about. Just to point out to you that the way directors decide matters and strategy in companies is not always aligned specifically to the interests of shareholders in reality. And as you know directors owe their duties to the company not to the shareholders. In particular directors have to deal with issues of risk which are open ended unlike shareholders whose risk is quantifiable even the downside. Directors have risks of liability, risks now increased with the risks that they encounter in relation to compliance with the general legal framework which affects companies. Mark's book Corporate Governance in the Shadow of the State really grapples with very effectively with the public nature of corporate regulation. It raises this point as to the nature of corporate laws is public or private or this issue. And so the point here just briefly is that directors because they're acting on behalf of the corporation have a lot of compliance issues which are of no concern to shareholders specifically. Moving on then directors preside over corporate assets. They have to deploy corporate assets for lots of different reasons. And so their decisions have implications for other stakeholders which again underlines the fact that their decision making is not always aligned to shareholders. So again just a word about my corporate wealth enhancement idea. I think this is also a better fit with corporate law as it is lived and as we really see it happening both in judicial decisions and in the development of corporate law. If you consider the idea that directors must enhance corporate wealth rather than shareholder wealth this reflects the corporate entity theory. It reflects how we think of stakeholders and so even though I'm critical of section 172 I think 172 is trying to encapsulate this idea also. This is not a stakeholder theory. In other words this is not an argument to say that shareholders and stakeholders are equally treated but it is just an acknowledgement of the idea that directors when they're making decisions think of other issues on a day to day basis or managers and directors other than maximising shareholder wealth. In addition it fits in my view better with Bainbridge's director primacy theory which I'm also interested in. It moves us away from short termism which is a good thing and in my view it reflects long term shareholder expectations. I'm thinking of shareholders who invest in corporations as a wealth generation strategy for themselves. Putting these theoretical statements together just to sum up in relation to where we're going in terms of regulating directors in particular. I've set up this dichotomy between the genius of corporate law so in that sense I suppose I have to confess I'm a traditionalist in some ways. As distinct from quack legislation which are specific knee jerk responses. I think there's a very strong argument to be made which has already been made in part by Bainbridge that the functions of corporate law really support an idea of directorial primacy not shareholder primacy which is different from an awful lot of theories at the moment. My own view I think this development of this idea that directors really are motivated by enhancing corporate wealth not shareholder wealth maximisation answers a lot of problems which we have seen in recent years. Finally then I am also proposing that normally company law is about supporting the authority of directors rather than rendering directors accountable on an ongoing basis. The last bit of this theoretical framework that I'm building is that we have been obsessing in the last 10, 20 years about accountability mechanisms for directors. But if any of you who are students of company law if you think about it a company law course if you like is often concerned with these accountability mechanisms we focus on them a lot but that is because in my view they are the exceptional parts of company law. In other words it's when these things become litigated that we develop an interest in them but most of the time when we look at these accountability mechanisms most of us realise they're not that effective. It's not that they're not effective but they are exceptional in terms of the normal day-to-day living of the corporate law framework so we know that directors duties are very difficult to enforce. We know that shareholders' actions are very rare. We know that derivative actions are almost impossible and we also well certainly I would have a lot of doubts about the efficient capital markets hypothesis just to mention a few. The argument here is that actually a lot of corporate law is about supporting directorial authority so that is the last theoretical point. So where I'm going with this is that on reflecting on corporate law theory and using these various commentators which I've talked about that there's quite a focus and support for directorial discretion. The question then is how does this work in reality in terms of generating corporate wealth and supporting good decisions and my argument is that if we understand that one of the primary functions of corporate law theory is to support directorial discretion we can then go about managing and persuading or influencing the kinds of decisions that directors make in appropriate ways and I suppose the crux for me is that all of the theoretical discussions up until the point of the financial crisis did not seem to generate anything that prevented that happening. Now that said some people will say okay well that isn't really what happens that's not the cause but to of the global financial crisis but to me the risk taking that was involved is certainly something which indicates a favour of corporate governance and corporate law theory. Just to finish off I have mentioned some examples of cases where the courts are very clearly supporting the idea that directors need to have discretion to decide about corporate wealth and the use of corporate assets. I thought that they didn't strike down what Ford wanted to do. I think that he wanted to, that they claimed dividends but that they reached a settlement with them. He lost. He tried to do what he wanted to do and they were in favour of the shareholders. That case was an essential shareholder promise in case. I don't... Well I've misunderstood what the case was about. I thought that the George Brothers sued for non-payment of dividends and I thought they settled it. It was important but they won that case. Okay well we have to take that off the list then. Yeah it would be the one case that would go with the other. It is the quintessential shareholder privacy case. Yeah okay sorry my mistake. I've always thought that he supported the investment in Riverwood. No they told Ford he couldn't do what he wanted to do. Okay well we'll take that off the list then. The exception that proves the rule maybe. Yeah well we'll just take it off the list. I mean I would use paramount. Paramount is the case. I want it in that case. Paramount. So that's just good. Paramount needs to be essential. Okay. The program directors can do whatever they want even in the face of massive older games. Yeah yeah fair enough. Okay so then just another part of the project for me is then what should guide this discussion. So if we have a space in corporate law that allows directors to have this discretion what does guide them and how can we influence it. And the point for me is if we can get to a better understanding of what corporate law is about we will have a better chance of making sure that we have discretionary decision making that is perhaps safer not in all cases but also better in terms of generating wealth. So one of the things that I am interested in is the analysis that is derived from norm scholarship. So we've quite a number of writers in the, they're mostly American writers in the area of norm scholarship and I've provided a list. But the discussion here is about what judges do when they are deciding these kinds of cases in relation to directorial decisions. And so it's also true here and certainly in Jurisprudence in Ireland that when judges are talking about what directors are doing or the decisions that they have made, whether it's taking risks or continuing to trade or doing things which particularly in the United States and Delaware shareholders challenge. The courts a lot of the time consider legal principles, apply them where necessary but also say a lot about what Chancellor Chandler has called aspirational standards of best practice. And so this idea that quite a lot of the time the courts are giving guidance to directors to my mind is quite an attractive proposition that we are setting the parameters and guidance for what directors should do without addressing issues of legal compliance or legal liability. So this quote from Edward Rock I quite like from an article called Saints and Sinners, how does Delaware corporate law work? He says here my claim here which is descriptive is that the Delaware courts generating the first instance the legal standards of conduct largely through what can best be thought of as corporate law sermons. So that there's a lot of guidance being given without necessarily much decision in relation to legal liabilities or some decision in relation to legal liabilities but a whole area of norms which are described. And so the proposition is that corporate law is designed with director primacy in mind with acknowledgement that directors have a considerable amount of discretionary decision making authority. What's motivating this is the enhancement of corporate wealth and the way that this can be influenced in a normatively positive way has been through the way the courts have dealt with issues of liability and with the statements that are also made by the judges by the courts when they're considering particular issues. So that is to I suppose where I'm at at this point.