This Article proposes a mechanism, called elective shareholder liability, that allows shareholders of systemically important financial institutions (SIFIs) to alter their corporate structure in order to resolve the continually vexing problems of moral hazard, too-big-to-fail (TBTF), and taxpayer bailouts. In the ongoing debate over the most effective ways to end TBTF - including what ultimately became Dodd-Frank and what will become Basel III - one prominent proposal introduced by respected financial economists was presented but has, so far, been defeated: increased capital adequacy requirements of at least 15%. Although the proposal would undoubtedly and drastically limit the likelihood of taxpayer bailouts, opponents have argued that the economic costs to banks and the rest of society were too great. Dodd-Frank opted instead for a regulatory and liquidation regime that, whatever its virtues, will not prevent future taxpayer bailouts, and may even make them more likely. Basel III takes a capital adequacy approach, but only goes half as far as the economists’ proposal would require.

Elective shareholder liability allows SIFI shareholders, according to their own internal cost-benefit analyses, the option of either changing their capital structure to include dramatically greater equity, consistent with the economists’ recommendations, or adding a bailout exception to the SIFIs’ limited shareholder liability. The second option would be structured as a governmental collection, similar to a tax assessment, for the recoupment of all bailout costs against the shareholders, assessed on a pro-rata basis. It would also include an up-front stay on collections to ensure that there are, in fact, taxpayer losses to be recouped, and to dampen government incentives for over-bailout, political manipulation, and crisis exacerbation. Elective shareholder liability would also give the government the authority to declare the shareholders’ use of the corporate form to evade liability null and void, and require that shareholders who litigate against collection and lose to pay the government’s litigation expenses. After explaining the structure and benefits of elective shareholder liability, the Article addresses more than a dozen potential objections. Close inspection of these objections, however, reveals that the overall case for elective shareholder liability is strong as a matter of history, law, and economics.

• What Do Corporate Directors and Senior Managers Know about Social Media?

New Research Finds a Serious Gap Between Executives’ Knowledge About Social Media and Its Use at Their Companies  

Study by Stanford University’s Rock Center for Corporate Governance, in conjunction with The Conference Board, surveyed CEOs, senior executives, and corporate directors

STANFORD, Calif. — Less than a third of companies today use social media to support their corporate strategy and risk management practices, according to new research conducted by Stanford University’s Rock Center for Corporate Governance, the Center for Leadership Development and Research at the Stanford Graduate School of Business, and The Conference Board.

In the report titled “What Do Corporate Directors and Senior Managers Know about Social Media?” the authors detail the results of a survey of more than 180 senior executives and corporate directors of North American public and private companies. The findings reveal a disconnect between companies’ understanding of social media and the actions they are taking to apply it to their business. The report appears in the latest Directors Notes published by The Conference Board.

“Companies appreciate the potential that social media can have to transform all aspects of their business: branding, reputation, communication, outreach, and identifying strategic risks,” says Professor David F. Larcker of the Stanford Graduate School of Business and lead author of the study. “They also realize the serious threats that it can pose. They’re just not doing very much about it.”

“The world has changed, and consumers, employees, and stakeholders now expect to engage with companies and their brands through social media,” says Matteo Tonello, managing director of corporate leadership at The Conference Board. “That is why we are so pleased to be partnering with Stanford to support this research and help our membership better understand these evolving platforms.”

Conducted this summer, the survey included CEOs, senior executives, and directors across all major industries in the United States and Canada. Unlike most surveys on social media, which rely on a demographic of mostly young practitioners, the survey sample included only representatives from the highest levels of their respective organizations, with the average age of survey respondents in the mid-50s.

Key findings include:

•  While 90% of respondents claim to understand the impact that social media can have on their organization, only 32% of their companies monitor social media to detect risks to their business activities and 14% use  metrics from social media to measure corporate performance.
•  Only 24% of senior managers and 8% of directors surveyed receive reports containing summary information and metrics from social media. Approximately half of the companies do not collect this information at all.
•  Nearly two-thirds of respondents (65%) use social media for personal purposes, and 63% for business purposes. Of those who use social media, 80% have a LinkedIn account and 68% have a Facebook account, demonstrating that executives and board members are familiar with this medium.
• Still, only 59% of companies in the survey use social media to interact with customers, 49% to advertise, and 35% to research customers. Approximately 30% use social media to research competitors, research new products and services, or communicate with employees and other stakeholders.

“We know that executives and board members are using social media. However, familiarity with social media is just not translating into systemic use at their companies,” Larcker explains. According to Larcker, the most frequently cited explanation for this gap is a lack of knowledge about how to set up a system to collect and distill information from social media into a useable form.

“The majority of those we surveyed don’t have social media guidelines in place at their companies, haven’t had a social media expert consult with their company, and don’t have systems in place for gathering key information. They are putting themselves at serious risk by not taking action,” Larcker concludes.

The study’s authors recommend that companies take the following steps to implement a social media strategy that integrates with their corporate strategy and risk management program:

1. Assess their current capabilities with social media
2. Determine how social media fits with their strategy and business model
3. Map their companies’ key performance indicators and risk factors to information available through social media
4. Implement a “listening” system to capture social media data and transform it into metrics
5. Develop formal policies and guidelines for employees, executives, and directors
6. Consider the legal and behavioral ramifications that could be involved if the company’s board receives summary data about social media

FOR FURTHER INFORMATION

Katie Pandes, Stanford Graduate School of Business, 650-724-9152,  pandes_katie@gsb.stanford.edu

Peter Tulupman, The Conference Board, 212-339-0231,  peter.tulupman@conference-board.org