Sale's, Tuch's Scholarship Ranks Among ‘Ten Best Corporate and Securities Articles of 2011’

Two articles authored by Washington University law faculty have been named among the Ten Best Corporate and Securities Articles of 2011. The articles, which were selected through an annual poll of corporate and securities law academics from a field of 580 pieces, will be reprinted in an upcoming issue of the Corporate Practice Commentator.

Hillary Sale, the Walter D. Coles Professor of Law and professor of management, was honored for her article “The New ‘Public’ Corporation,” which appeared in 74 Law and Contemporary Problems 137. Corporate law scholar Andrew F. Tuch —who will join the law faculty as an associate professor on July 1, 2012—was recognized for his article “Multiple Gatekeepers,” which appeared in 96 Virginia Law Review 1583.

Sale is no stranger to the Ten Best Corporate and Securities Articles award; she received it two times previously, for her articles “Securities Fraud as Corporate Governance: Reflections Upon Federalism” (2003) and “Delaware’s Good Faith” (2004). Widely regarded as a securities and corporate governance expert, she focuses on corporate governance and its role in preventing—or contributing to—corporate scandal.

In her 2011 article, Sale first argues for a new definition of the term “public company.” Starting with the standard definition of a public company as one that “has shares listed on a national securities exchange,” Sale illustrates why this definition is now “impoverished.” “Public corporations are not just creatures of Wall Street,” she writes. “They are creatures of Main Street, the media, bloggers, Congress, and the government. . . . It is the failure of the fiduciaries of public corporations to understand their ‘publicness’ that accounts for many of the recent scandals.”

Sale suggests a vicious cycle in which bloggers and the media make the public aware of corporate scandal or malfeasance. The public, in turn, puts pressure on the government to intervene. Government intervention leads to regulation and even greater awareness among the media and the blogosphere, and the cycle starts over again. In this way, changes in notions of “corporate governance” happen incrementally—and inevitably—as public expectations become higher and government regulations become stricter with each turn of the screw.

Finally, Sale uses executive compensation as “a lens through which to view the incremental growth of regulation and publicness.” Once “the domain of directors, officers, and state law, not the federal government and Main Street,” executive compensation is now public knowledge, readily available through the Internet. “In a world of public corporations, it is unrealistic for boards and officers to think that they can set compensation without something more than a nod to the public,” she writes. “Compensation is subject to public scrutiny and provides a salient example of the growing area of public governance.” In the end, “public companies will be regulated,” Sale concludes. “They cannot (and will not) do it themselves, and it is not going away.”

In his article, Tuch focuses on the conduct of “gatekeepers” —actors such as bankers, lawyers, and accountants who are often implicated in scandals for having facilitated transactions and for having failed to avert disclosure errors by their corporate clients. Tuch explains that the literature focusing on the liability of gatekeepers has assumed—often wrongly—that a single gatekeeper acts on a transaction or, where multiple gatekeepers are involved, that each is independently capable of deterring securities fraud. He describes what he calls the “multiple gatekeeper phenomenon” —that “multiple interdependent gatekeepers act on business transactions and thus form an interlocking web of protection against wrongdoing.” His article explains why this pattern of multiple gatekeeper involvement characterizes most high-stakes business transactions.

After explaining the phenomenon, Tuch extends gatekeeper liability theory to account explicitly for the possibility of interdependencies among gatekeepers. He analyzes how the phenomenon alters the prescriptions of optimal deterrence theory, which is the prevailing economic approach for evaluating liability regimes to deter wrongdoing, and resolves a split of opinion in the gatekeeper literature. His analysis “shows that scholars until now have focused only on independent gatekeepers, for which both strict and fault-based regimes are optimal—hence the split of scholarly opinion.” Going further, his article considers “the position of interdependent gatekeepers and [shows] under relevant simplifying assumptions that only a fault-based regime would induce gatekeepers to take optimal precautions.”

Tuch then identifies gaps in U.S. federal securities law and proposes reforms to compel cooperation among gatekeepers to close those gaps. He focuses specifically on practices in the United Kingdom and other jurisdictions designed to compel gatekeeper cooperation as well as the risk-shifting mechanisms gatekeepers adopt themselves to achieve cooperation. In light of his findings, Tuch examines proposed reforms that would add credit rating agencies to the list of gatekeepers that will share some of the liability in corporate scandals.

Most recently a John M. Olin Fellow in Law and Economics and a Fellow in the Program on Corporate Governance at Harvard Law School, Tuch explores in his teaching and research securities regulation, corporate law and governance, the regulation of financial institutions, conflicts of interest in financial transactions, and professional ethics. At Harvard, his work has twice been awarded the Victor Brudney Prize for the Best Paper in Corporate Governance.

By Timothy J. Fox