Janis Sarra


With the proliferation of equity derivatives and related structured financial products, the North American conception of corporate governance faces a new and distinct challenge to its underlying premises.This Article analyzes these developments with a focus on the implications for director and officer accountability and corporate sustainability, using the occasion of the third symposium of the Adolf A. Berle, Jr. Center on Corporations, Law & Society to consider whether Berle’s analysis of corporate accountability offers any insights into how to address the uncoupling of economic interest and legal rights in corporate governance. Part II of this Article sets the context for the discussion, distinguishing the model of corporate governance prevalent in the United States from models applied elsewhere. It also briefly discusses why Berle’s shareholder-accountability model resonated with governance challenges at the time Berle wrote. Part III examines how the introduction of equity swaps and similarly structured financial products has, in a number of instances, uncoupled legal rights and economic interests, fundamentally challenging some of the underlying rationales for the shareholder- primacy model. Part IV discusses director and officer accountability in jurisdictions where equity swaps have become prevalent, and Part V considers directors hedging their own risk through derivatives activities. Part VI briefly examines why some of the current regulatory initiatives do not address the accountability concerns raised by derivativesactivities, and Part VII provides some initial thoughts as to how Berle’s original reasoning might be adapted to a more nuanced model of corporate governance and accountability. Part VIII concludes by noting that Berle’s analysis that the exercise of corporate power is subject to the equitable limitation that it cannot harm the interests of equity holders can potentially be applied to a broader set of stakeholders, and that the good faith conduct of directors and officers may play a role in determining what economic interest is actually at risk.