Corporate Governance

Stock Exchanges, Corporate Governance, and Problems of Enforcement

By J. Robert Brown

One of the topics addressed often on this Blog is the role played by the stock exchanges in the corporate governance process.  It is the stock exchanges that require a majority of the board to be independent and that boards have audit, compensation and nominating committees.  But with requirements come concerns.  Particularly as the stock exchanges have converted to "for profit" businesses, with the traditional pressure (indeed fiduciary obligation) to profit maximize, concern arises with its regulatory role.  In the context of listing standards, one of the issues concerns the adequacy of enforcement, a problem that was identified as early as 1934 when Congress held hearings on the role of the NYSE.

Courts have, in the past, found that stock exchanges, because of their regulatory role, have absolute immunity from suit.  But in a for profit era, the courts are being forced to differentiate between the regulatory and non-regulatory role of the exchanges.  The most notable example so far has been the 11th Circuit's decision (en banc) in Weissman allowing a private suit to go forward against Nasdaq for allegedly misleading advertisements.  Michelle Larson, a student at the University of Denver Sturm College of Law, has a post today that examines another step in this direction, a petition for certiorari filed by Calpers in a case that will explore the immunity issue. 

The other issue concerns SEC oversight.  It is the Commission that can sanction the exchanges for failing to enforce their rules.  A second post today by JP Thibeault, examines efforts, based upon a GAO Report, to get the Commission to step up its oversight of the stock exchanges. 

Full post as published by The Race to the Bottom on February 28, 2008 (boomark / email).