Saturday, October 14, 2017
We’ve talked about Uber and its tribulations a few times here at BLPB, including what I feel is one of the remarkable aspects of the saga – the fact that a private company is being treated as public in the general imagination.
In keeping with that theme, Renee Jones just posted The Unicorn Governance Trap to SSRN, with the basic thesis that Uber and companies like it (Theranos, Zenefits, etc) are experiencing governance pathologies precisely because they inhabit a hybrid space between public and private. (George Georgiev made an abbreviated version of the same argument in a column for The Hill several months ago.) Jones contends that these unicorn companies feature the separation of ownership and control typical of a public company, but they are not subject to the same disciplining mechanisms from investors of voice (due to dual-class shares), exit (due to the limits on liquidity inherent in private status), and litigation (due to lack of public reporting obligations, and potential securities fraud claims – though on that last point, but see Theranos and Uber litigation). She distinguishes private companies that grew large in an earlier era, where ownership and control are unified (typically, family-owned businesses). She also points out – though she is not the first – that efforts to increase the number of IPOs by limiting regulatory burdens as the Trump Administration would like to do are misguided; IPOs have likely declined because companies do not need them if they can raise capital privately.
To be sure, there are limits to how far the argument can be taken (Exs. A , B, and C.) And the problems at unicorns may have less to do with securities regulation than with the current fashion for treating founders like auteurs. Still, it does seem like the relatively new ability for companies to raise massive amounts of capital without the discipline of the broader markets encourages a degree of corporate governance laxity.
If that's right, then it represents a real-time demonstration of the importance of corporate governance for the broader society. Typically, corporate governance is treated as “private law,” a function of private contracting among investors and managers. Corporate governance principles are designed to protect investors from exploitation, but do not usually take protection of other stakeholders as part of their central mandate. This is, after all, the ideological basis of the internal affairs doctrine. Scott Hirst recently argued that investors should choose the extent to which companies are subject to federal securities regulation, explicitly adopting the position that only corporate governance externalities – and not other kinds of social welfare externalities – are part of the calculus.
But now we can see that, whether by design or happy accident, obligations placed on firms ostensibly for the protection of investors have very tangible effects on employees, customers, competitors, and general compliance with the rule of law. It is not clear that external regulation alone can carry this responsibility, because the whole point is that certain managers/controllers may be undeterrable, or only deterrable at significant cost. They can be contained only via constraints on their power to act in the first place, and that’s where corporate governance comes in.
In sum, as I tell my students on day one, corporate law is about the regulation of power.