Abstract
Corporate governance has been the subject of dozens, if not hundreds, of books and articles in legal, accounting, finance, and economic literature since at least 1932. Disclosure has also been the subject of dozens, if not hundreds, of books and articles in legal, accounting, finance, and economic literature, but interest in the subject is a more recent phenomenon. It is important therefore to understand the purpose, scope, limitations, and meaning of corporate governance. It is equally important to understand the purpose, scope, and limitations of the effective transparency of information, i.e., disclosure, for publicly listed companies, including what information is disclosed, how it is disclosed, and why it is disclosed. Therefore, this paper examines the purpose, scope, and limitations of corporate governance and disclosure including what, how, and why information about publicly listed companies is disclosed with the intent of providing a better understanding of corporate governance and disclosure and directions for future research.
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Notes
Veblen (1923) alluded to the separation of ownership and control, but it did not receive the cult-like status as did Berle and Means and is largely overlooked in the literature.
“Shareowner” is used in this paper, rather than the more common “shareholder” because “shareholder” has a connotation of owning a share of the corporation, whereas “shareowner” is more precise since it means owning shares of stock rather than owning shares of the corporation.
Many researchers confuse “director” and “manager” in the context of corporate governance. However, while, as explained below, “the business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors,” directors are not managers.(Huber, 2020) Directors hire the “management team.” (Roychowdhury, Shroff, & Verdi, 2019).
“Corporations whose shares are traded in the market” is used rather than “publicly traded corporations” since is the shares that are traded in the market, not the corporation.
“Transaction cost considerations undoubtedly explain why firms come into existence.” (Coase, 1990, p. 11).
“For the reasons hereinafter enumerated, transactions in securities as commonly conducted upon securities exchanges and over-the-counter markets are affected with a national public interest.” 15 USC §78b.
Delaware General Corporation Law §101. Delaware and New York corporate law will be used in this paper. Most states and other countries have similar provisions regarding formation and operations of corporations.
Delaware General Corporation Law §106.
Trustees of Dartmouth College v. Woodward, 17 US 518 (1819).
Louisville, Cincinnati & Charleston R. Co. v. Letson, 43 US 497 (1844).
Delaware General Corporation Law §122(4).
Delaware General Corporation Law § 141(a).
Delaware General Corporation Law § 203(c)(4).
New York Business Corporation Law, Sec. 701.
Model Business Corporation Act, § 8.01.
Citron v. Fairchild Camera & Instrument Corp., 569 A.2d 53 (DE, 1989).
15 USC §77c(b)(2)(G)(i) and §77c(b) (b)(4).
§78 m(n)(7)(B).
§78qq(a)(2)(A)(iii).
“The stockholders do not confer, nor can they revoke those powers. They are derivative only in the sense of being received from the state in the act of incorporation.” Manson v. Curtis, 119 N.E. 559, 562 (N.Y. 1918).
For proof that shareowners are neither nominal owners nor residual claimants, see Huber, 2020.
There are exceptions, but they are not related to corporate governance. See Huber 2020.
”AN ACT To provide for the regulation of securities exchanges and of over-the-counter markets operating in interstate and foreign commerce and through the mails, to prevent inequitable and unfair practices on such exchanges and markets, and for other purposes.” 15 USC §78.
Authority to set GAAP is conferred on the SEC by the Securities Act of 1933. In 2001 Congress authorized the SEC to recognize private organizations to set GAAP provided the organization met certain conditions. The SEC determined that the FASB met those conditions. However, the SEC still retains ultimate authority and at times will overrule the FASB, or require disclosures beyond those set by the FASB.
Securities and Exchange Commission. Mine Safety Disclosure. 17 CFR PARTS 229, 239 and 249. https://www.sec.gov/rules/final/2011/33-9286.pdf.
Securities and Exchange Commission. Disclosing the Use of Conflict Minerals. https://www.sec.gov/opa/Article/2012-2012-163htm---related-materials.html.
Delaware General Corporation Law §102(a)(3),
All states have similar laws.
Directors and managers’ incentives not to disclose information is beyond the scope of this paper. (See Roychowdhury, Shroff, and Verdi, 2019.).
New York Business Corporation Law, Sec. 717.
Risk for shareowners is already priced in the market by the market risk premium. However, shareowners do not possess all the information they may need to price risk accurately. (See Roychowdhury, Shroff, and Verdi, 2019.).
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Huber, W.D., DiGabriele, J.A. Corporate governance and disclosure: purpose, scope, and limitations. Int J Discl Gov 18, 153–160 (2021). https://doi.org/10.1057/s41310-021-00103-7
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DOI: https://doi.org/10.1057/s41310-021-00103-7