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The conventional view of regulation is that it exists to constrain corporate activity that harms the public. But amid perceptions of government failure, many now call on corporations to tackle social problems themselves. And in this moment of dissatisfaction with government, powerful asset managers have stepped in to serve as regulators of last resort, adopting rules that bind corporate America on issues of great social importance, including climate change and workplace diversity. This Article describes this dynamic--where shareholders have become regulators--which has been made possible by the rise of institutional shareholding (and index investing in particular) and the contemporaneous growth of shareholder power. As a result, the large diversified asset managers that specialize in index funds (the so-called 'Big Three'--Vanguard, State Street, and BlackRock) collectively hold nearly controlling stakes across the public equity market. In addition to intervening in traditional areas of corporate governance, they have adopted sweeping board diversity mandates as well as 'ESG' disclosure and carbon emission reduction requirements, and enforced them through their proxy voting policies. And the early consensus is that asset managers have been influential in these areas, driving change where other private (and public) efforts failed. This Article describes these regulatory interventions in detail and concludes that we are witnessing a novel privatization dynamic. It also offers a theory about the incentives that shape it. Asset managers will only supply regulation if it has a positive impact on their profits; therefore, demand from clients--which include not just individuals, but also institutions--will govern the choice of policies and the substance of their rules. And given the breadth of the Big Three's clientele and their interest in avoiding government backlash, their policies are likely to take many interests into account. Nonetheless, serious concerns loom large, including the fact that for-profit asset managers lack democratic accountability and government oversight for their policymaking, with no guarantee that it will further the public interest. To the extent that their policies are shaped by the corporate clients that provide much of the assets they manage, they are unlikely to be as impactful as many perceive. The provision of regulation by asset managers may also take pressure off the government to respond to these issues with policies better calibrated toward advancing social welfare. At bottom, understanding the forces that shape (and potential problems that accompany) this privatization dynamic is of critical importance not just for investors and corporations, but also for the public., INTRODUCTION 79 I. BACKGROUND 90 A. The Modern Public Regulatory Environment 90 B. The Growth of the Big Three and Shareholder Power 92 II. ASSET MANAGERS AS REGULATORS 95 A. [...]

This Article explores the malleability of agency theory by showing that it could be used to justify a "public primacy" standard for corporate law that would direct fiduciaries to promote the value of the corporation for the benefit of the public. Employing agency theory to describe the relationship between corporate management and the broader public sheds light on aspects of firm behavior, as well as the nature of state contracting with corporations. It also provides a lodestar for a possible future evolution of corporate law and governance: minimize the agency costs created by the divergence of interests between management and the public. [ABSTRACT FROM AUTHOR]

Abstract. A growing number of technology companies, including Google, Zillow, and Snap, have issued stock that does not allow investors to vote on corporate decisions. But there is fundamental disagreement [...]

For many years, law and economics scholars, as well as politicians and regulators, have debated whether corporate punishment chills beneficial corporate activity or, in the alternative, lets corporate criminals off too easily. A crucial and yet understudied aspect of this debate is empirical evidence. Unlike most other types of crime, the government does not measure corporate crime rates; therefore, the government and researchers alike cannot easily determine whether disputed policies are effectively deterring future incidents of corporate misconduct. In this Article, we take important first steps in addressing these questions. Specifically, we use three novel sources as proxies for corporate crime: the Financial Crimes Enforcement Network (FinCEN) Suspicious Activity Reports (SARs), consumer complaints made to the Consumer Financial Protection Bureau (CFPB), and whistleblower complaints made to the Securities and Exchange Commission (SEC). Each source reveals an increase in complaints or reports indicative of corporate misconduct over the past decade. We also examine levels of public company recidivism and find that they are likewise on the rise. And we document a potential explanation: recidivist companies are much larger than nonrecidivist companies, but they receive smaller fines than non-recidivist companies (measured as a percentage of market capitalization and revenue). We conclude by offering recommendations for enforcement agencies and policymakers. In particular, our results suggest that enforcers are unlikely to achieve optimal deterrence using fines alone. Enforcement agencies should therefore consider other ways of securing deterrence, such as by seeking penalties against guilty individuals and the top executives who facilitate their crimes. [ABSTRACT FROM AUTHOR]

Although it is well understood that activist shareholders challenge management, they can also serve as a shield. This Article describes -validation capital," which occurs when a bloc holder's-and generally an activist hedge fund's-presence protects management from shareholder interference and allows management's pre-existing strategy to proceed uninterrupted. When a sophisticated bloc holder with a large investment and the ability to threaten management's control chooses to vouch for management's strategy after vetting it, this support can send a credible signal to the market that protects management from disruption. By protecting a value-creating management strategy that might otherwise be misjudged, providers of validation capital benefit all shareholders, including themselves. However, validation capital may also have a dark side: it could be used to entrench under-pedorming management from outside interference that would benefit the company and its shareholders. In this scenario, the bloc holder acts as a hired "bodyguard" who receives a side payment in exchange for the promise to ward of other investors. We argue that legal and market forces do much to constrain the corrupt form of validation capital, and our empirical study of hedgefund activism events from 2015 offers evidence in support of our theory. We find that although side payments from corporate management to hedge funds are relatively common. they tend to be small and not of the magnitude necessary to induce corruption of the sophisticatedfunds capable of generating a persuasive signal. [ABSTRACT FROM AUTHOR]

Recent Delaware jurisprudence establishes a disinterested vote of shareholders as the pathway out of heightened judicial scrutiny. The stated rationale for this policy is that shareholders, the real party at interest, are better protected by the ballot box than by the courtroom. As long as informed, disinterested shareholders with an economic stake in the outcome of the vote can effectively express their preferences through voting--the court need not scrutinize the underlying transaction. Rather, it can defer to the outcome under the business judgment rule. But shareholder voting is not always as direct as this reasoning implies. Instead, voting outcomes increasingly are determined not by those holding the ultimate economic interest but rather by institutional intermediaries who buy, hold, and vote shares on behalf of someone else. In this setting, there are several predictable circumstances under which institutional voting interests will depart from those of the underlying investors. This Article develops a typology of institutional investor conflicts of interest. We focus on mutual fund intermediaries, which are the key deciders of corporate elections and represent the interests of millions of investors when voting. We describe and document instances of Cross-Ownership Conflict (situations in which funds have interests on both sides of a transaction), Corporate Client Conflict (situations in which funds have an interest in currying favor with the managers of portfolio companies), and Uniform Policy Conflict (situations in which fund sponsors enforce a uniform voting policy irrespective of individual fund objectives). Our account provides a basis to reevaluate corporate law's retreat from heightened judicial scrutiny. When mutual fund voting is subject to the conflicts we describe, the real parties in interest have not necessarily spoken in favor of the transaction. As such, courts should consider a broader set of conflicts when deciding whether the protection of the business judgment rule is warranted. [ABSTRACT FROM AUTHOR]