Yifat Aran is Assistant Professor of Law at the University of Haifa School of Law and Elizabeth Pollman is Professor of Law and Co-Director of the Institute for Law and Economics at the University of Pennsylvania Carey Law School. This post is based on their symposium article, Ousted, forthcoming in Theoretical Inquiries in Law. Related research from the Program on Corporate Governance includes The Untenable Case for Perpetual Dual-Class Stock (discussed on the Forum here) by Lucian A. Bebchuk and Kobi Kastiel; and Lucky CEOs and Lucky Directors (discussed on the Forum here) by Lucian A. Bebchuk, Yaniv Grinstein, and Urs Peyer.
In an era of “founder-friendly” startup governance, dual-class stock, and technology companies dominating public markets, founder-CEOs are both admired as visionaries and feared as potential governance problems. The entrenchment of founder-CEOs’ control via dual and multi-class stock sparks concern over possible agency costs and insufficient accountability for poor performance, which leads to suspicion that these founders might retain lifetime control. This concern has spurred advocacy for the implementation of sunset provisions and equal treatment agreements, designed to mitigate the risks of enduring control and to promote equal treatment for all shareholders. Amid the twists and turns of this debate, we observe that a small but important point is missing: a substantial number of founder-CEOs have been ousted—forced or pressured to step down from the CEO role despite maintaining important indicia of control.
Scholars have long regarded certain attributes of corporate governance, particularly legal protections of private ownership, as prerequisites for financial development, deep capital markets and economic growth. Yet, the development of the Chinese market challenges many of the underlying assumptions of this “law matters” thesis. For decades, China achieved substantial growth and developed markets while preserving market control, state ownership, and relatively weak legal institutions. Informal means and functional substitutes provided investors with credible assurances that filled in some of the voids of law by incentivizing growth and governing markets.
