Issue 3

The Monitor-“Client” Relationship

After the government discovers wrongdoing by a corporation, the corporation and the government often enter into an agreement stating that the corporation will retain a “monitor.” A corporate compliance monitor, unlike the gatekeeper, is not charged with “monitoring” the corporation in an attempt to detect and prevent wrongdoing. A monitor, unlike the probation officer, is not solely charged with ensuring that the corporation complies with a previously determined set of requirements. Instead, a corporate compliance monitor is responsible for (1) investigating the extent of the wrongdoing already detected and reported to the government; (2) discovering the cause of the corporation’s compliance failure; and (3) analyzing the corporation’s business needs against the appropriate legal and regulatory requirements. A monitor then provides recommendations to the corporation and the government meant to assist the corporation in its efforts to improve its legal and regulatory compliance—the monitor engages in legal counseling. The ad hoc structure of monitorships has, however, failed to facilitate the monitor’s function as a legal counselor. This failure is largely the result of structuring monitorships in an environment lacking binding rules and conceiving of monitorships as if a monitor’s only function is that of a governmental agent.

Yet the current monitorship structure is not necessary to achieve the monitorship’s goal, which is to establish a corporate compliance structure that deters and prevents future misconduct. This Article argues that providing a set of clear, enforceable, predictable rules regarding the scope of monitorships that facilitate a monitor’s function as a legal counselor will improve the long-term effectiveness of monitorships. This Article suggests one mechanism for achieving this goal—a statutory privilege—aimed at encouraging a formalized relationship amongst a monitor, the government, and the corporation, which re-conceptualizes the relationship as “The Monitor-‘Client’ Relationship.”

The Hidden Nature of Executive Retirement Pay

There are two competing theories of why public companies pay executives generous retirement benefits. One is that retirement pay is easier to hide from shareholders than other forms of compensation. The other is that retirement benefits align executives’ interests with those of long-term creditors, since the executives may not receive their payouts if the firm goes bankrupt. The latter view depends on the assumption that retirement benefits put executives in a similar contractual position as the company’s creditors. Yet no previous work has tested that assumption.

This Article provides the first systematic study of the contractual structure of executive retirement payouts. Using retirement pay data for thousands of executives, we show that a large proportion of executives link the value of their payouts to the company’s stock price and receive the bulk of these payouts immediately following their departure—features that contradict the incentive-alignment theory of retirement pay. The evidence also shows that the full amount and structure of retirement pay are undisclosed—findings consistent with the camouflage theory. While the structure of some executives’ payouts can be reconciled with the incentive-alignment theory, current rules do not give investors the information they need to tell the difference between payouts that align incentives and those that camouflage compensation. Lawmakers should require companies to reveal the structure of these payouts, and neither regulators nor commentators should assume that retirement benefits suppress top managers’ appetite for risk.

De Facto Supremacy: Supreme Court Control of State Commercial Law

In 1842, Swift v. Tyson gave federal courts permission to ignore state decisional law in cases that presented commercial questions. Modern writers criticize Swift for attempting to create an exclusive federal forum for commercial cases in order to unify the commercial law. These same writers also criticize Swift for creating less uniformity in the commercial law; Erie R. Co. v. Tompkins, which ended Swift’s ninety-six year reign, relied at least in part on the idea that Swift had promised a uniform commercial law and failed to deliver. Swift has few modern defenders.

This Note shows that Swift may have unified the general commercial law more than modern federal courts theorists suggest. State courts sought to promote uniformity in the commercial law. In deciding their state commercial law cases, they would look not just to their own law, but to the law of other states, the United States, or foreign countries, and choose the position they felt would most likely evolve into a uniform rule. State courts often followed Supreme Court precedent because they felt it would be most likely to become the uniform rule of the country. Through its power to influence the consensus view, the Supreme Court could change not just the commercial law to be applied in federal courts, but the commercial law to be applied in the state courts as well. Contrary to modern federal courts theory, the Supreme Court not only tried, but succeeded in regulating and unifying commercial law in the antebellum United States.

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