Regulatory Analysis in Corporate Law

AuthorMartin Petrin
Date01 July 2016
Published date01 July 2016
DOIhttp://doi.org/10.1111/1468-2230.12201
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THE
MODERN LAW REVIEW
Volume 79 July 2016 No. 4
Regulatory Analysis in Corporate Law
Martin Petrin
Drawing on recent experiences in the US, UK, and EU, this article suggests that regulatory
analysis of corporate law policies, as currently understood and applied, suffers from severe
weaknesses. The effects of proposed corporate law policies are often difficult to predict and
even more difficult to quantify, which negatively impacts analytical reliability. Moreover, given
its nature and strong intersections with economic, societal and political issues, corporate law is
less amenable to technocratic assessments than other areas of law. Based on three case studies,
the article explores these problems. It outlines a revised ‘procedural’ view, suggesting that
regulatory analysis in corporate law should be understood as a process for enhancing information,
transparency, and monitor ing, independently of specific normativecr iteria. This leads to several
implications. In short, regulatory analysis should combine quantified analysis with leeway for
regulatory judgment and focus on increased consultation, critical engagement, review, and
transparency as the dominant guiding factors.
INTRODUCTION
Legislatures and regulators in many countries have long been required to assess
ex ante the potential consequences of proposed laws and regulations through
various forms of regulatory analysis (RA).1Only upon a satisfactor y outcome
of these analyses may regulators implement new laws, underscoring the impor-
tance of RA in the legislative process. In particular, due to its strongquantitative
elements, RA has attracted both academic support and criticism. This article
contributes to this discussion, focusing however on a more recent develop-
ment, in which RA has begun to affect core areas of corporate and corporate
UCL Faculty of Laws. The author is grateful to the anonymous referee for their insightful comments.
Earlier versions of this article were presented at the National Business Law Scholars Conference at
LoyolaLaw School, Los Angeles and the Centre for Corporate and Commercial Law at the University
of Cambridge. I am thankful to participants at these events and for discussions and comments from
Iris Chiu, Eil´
ıs Ferran, Maria Lee, and Marc Moore.
1 See C. Radaelli and F. de Francesco, ‘Regulatory Impact Assessment’ in R. Baldwin, M.
Cave and M. Lodge (eds), The Oxford Handbook of Regulation (Oxford: OUP, 2010) 279 (stat-
ing that RA ‘has spread throughout the globe’); R. Baldwin, M. Cave and M. Lodge (eds),
Understanding Regulation (Oxford: OUP, 2012) 315–319. For example, almost every OECD
member state has now adopted some form of RA, see ‘Regulatory Impact Analysis’ at
http://www.oecd.org/gov/regulatory-policy/r ia.htm (all URLs were last accessed 10 March
2016).
C2016 The Author.The Moder n Law Review C2016 The Modern Law Review Limited. (2016) 79(4) MLR 537–574
Published by John Wiley& Sons Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA
Regulatory Analysis in Corporate Law
governance law.2Drawing from selected case studies in the United States, the
United Kingdom, and the European Union, the article explores the applica-
tion and avenues for further development of RA in the cor porate law context,
which despite its significance has not previously been examined in the UK.
The first part of the article provides a foundational basis, and begins by
defining the concept of RA and outlining the legal frameworks within which
it operates in the three jurisdictions. This part also discusses various functions
that are most commonly attributed to RA in general.
In the second part, the article shifts to an examination of three recent
examples. First, it considers the US Securities and Exchange Commission’s
rule on proxy access and its controversial cost-benefit analysis of provisions
designed to affect the composition of corporate boards. Second, the arti-
cle explores the role of RA in the UK’s latest executive remuneration re-
forms, which entail the question of which corporate constituency should
be ultimately in charge of executives’ salaries. Third, RA will be discussed
in the context of EU provisions on non-financial corporate disclosure, an
area that in part touches upon contentious corporate social responsibility
questions.
Drawing from an analysis of these case studies, the article’s final part pro-
vides an assessment of RA in corporate law. It suggests that while this tool
may be useful, the inherent uncertainties in measuring the impact of corporate
law policies as well as the biases affecting RA mean that its role is differ-
ent from what it is often perceived. In contrast to other areas with a more
‘scientific’ basis and (to a certain extent) ex ante measurable effects, such as
health and safety law, the consequences of proposed corporate law policies –
which have no connection to physical ‘laws of nature’ – are particularly dif-
ficult to predict and quantify. Contentious issues therefore may need to be
decided based at least in part on expert or regulatory judgment. Moreover,
and relatedly, corporate law is to a large degree influenced by politics, and
regulatory analysis is embedded in the political process, which frames out-
comes and is difficult to reconcile with purely ‘evidence-based’ lawmaking
that is apolitical and technocratic in nature. Indeed, it creates a risk that RA
may be deployed to clothe political judgments in the garb of technocratic
neutrality.
While this article focuses on and adds to the literature on RA in corporate
and financial law as key aspects of ‘economic regulation’,3thereare other sectors
with similar characteristics. The analysis and recommendations developed in
this article can therefore be applied more broadly. The dividing line between
2 In this article, the term ‘corporate law’ will be used in a broad sense, encompassing both
traditional corporate (or ‘company’) law and ‘corporate governance law’. On the potential
differences between these two and related terminology, see M. T. Moore, Corporate Governance
in the Shadow of the State (Oxford: Hart Publishing, 2013) 12–14. As such, ‘corporate law’ may
also overlap with aspects of financial and securities regulation, such as evidenced by the SEC’s
proxy access rule, which related to board composition and will be discussed below.
3 See F. Chittenden, T. Ambler and D. Xiao, ‘Impact Assessment in the EU’ in S. Weatherill
(ed), Better Regulation (Oxford: Hart Publishing, 2007) 272, defining ‘economic regulation’
as encompassing ‘regulations that seek to alter the commercial and financial frameworks and
markets’.
538 C2016 The Author. The Modern Law Review C2016 The Modern Law Review Limited.
(2016) 79(4) MLR 537–574
Martin Petrin
areas that are more amenable to traditional RA – such as health and safety – and
those that are not – such as corporate and financial law – can arguably be drawn
based on the extent to which definite, exogenous factors or principles form the
input for an assessment.4In corporate and financial law, fewer such exogenous
factors are available.5Moreover, this area is characterised by its strong impact
on various branches of the economy, intersections with societal and political
issues, and its particularly dynamic nature.6These factors make corporate law
RA especially challenging – although not ‘sui generis’7– and amplify problems
that are also present in other areas.
Against this background, the article suggest that rather than a mechanical
method to unearth the ‘best’ possible laws according to a normative criterion
(such as varying conceptions of ‘efficiency’ or ‘fairness’), RA should be con-
ceptualised as mainly a procedural and informational tool that supplements
open consideration of the political and policy judgments that underpin reg-
ulatory choices. As such, and contrary to common views of RA, the tool’s
main functions are increasing transparency and information for the public and
regulators alike, providing participator y opportunities for interested parties, and
facilitating monitoring of regulators. The article thereby offers an alternative
viewpoint to recent scholarly works that either support or propose to abolish
the current regime of RA in corporate and financial law. To conclude, the
article discusses the revised view’s normative consequences and measures to
improve and better align RA with its model.
BACKGROUND
Ter minology
At the outset of this article, it is important to define RA as the subject matter
at hand. The use of terminology in this area tends to be inconsistent, with at
times overlapping concepts. The most commonly known method for assessing
the impact of regulatory measures is cost-benefit analysis (CBA). Traditionally,
CBA has a strong emphasis on monetary quantification. Originally, CBA was
used in large infrastructure project evaluation.8As such and in its strict sense,
4 See text to notes 153–160 below (discussing, in part, Jeffrey Gordon’s arguments in this respect).
In these areas, it may also be possible to conduct experiments, which is not an option in other
fields.
5 Other examples (based on the policy areas for UK impact assessments) that may suffer from
comparable problems in terms of RA include arts and culture; community and society; equality,
rights and citizenship; foreign affairs; and trade and investment.
6 See J. C. Coates, ‘Cost-Benefit Analysis of Financial Regulation: Case Studies and Implications’
(2015) 124 Yal e L a w J o u r n al 882, 998–1003.
7 On this, see also E. A. Posner and E. G. Weyl, ‘Cost-Benefit Analysis of Financial Regu-
lation: A Response to Criticisms’ (2015) 124 Yale Law Journal Forum 246 at http://www.
yalelawjournal.org/pdf/Posner-WeylPDF_ijby4z9e.pdf (countering arguments that CBA in
financial regulation is different from other fields).
8A.C.M.Meuwese,Impact Assessment in EU Lawmaking (Alphen aan den Rijn: Kluwer Law
International, 2008) 63; OECD, ‘Cost-Benefit Analysis and the Environment: Executive Sum-
mary’ (2006) 16 at http://www.oecd.org/greengrowth/tools-evaluation/36190261.pdf.
C2016 The Author. The Modern Law Review C2016 The Modern Law Review Limited.
(2016) 79(4) MLR 537–574 539

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