Regulatory Analysis in Corporate Law

Legislatures and regulators in many countries are required to assess ex ante the potential consequences of proposed laws and regulations through various forms of regulatory analysis (hereinafter ‘RA’). Only upon a satisfactory outcome of these analyses may regulators implement new laws, underscoring the importance of RA in the legislative process. However, in particular due to its strong quantitative elements (which may include formal cost-benefit analysis), RA remains highly controversial. While some scholars see RA as an indispensable regulatory tool, others have argued that this practice is unreliable ‘guesstimation’, useless, or even counterproductive.

In recent years, the discussion surrounding RA has extended to financial regulation and related fields of law. In a new article on ‘Regulatory Analysis in Corporate Law’, published in the current issue of The Modern Law Review, I contribute to this discussion. The article draws from three selected case studies in the US (proxy access), the United Kingdom (executive remuneration), and the European Union (non-financial disclosure requirements), in which RA has been used to analyze proposed new regulations. Using these real world examples as a basis, the article provides a critique of RA in corporate law, which, in turn, is followed by proposals for improvements and a ‘reconceptualized view’.

The article suggests that while RA is in principle a useful instrument, the inherent uncertainties in measuring the impact of corporate law policies, the biases affecting RA, and the many intersections between corporate law and political or societal issues mean that corporate law is less amenable to purely technocratic assessments than other areas of law. Among other issues, traditional RA is therefore also generally not suitable as an appropriate arbiter of disagreements over fundamental corporate governance questions. These weaknesses, combined with RA’s potential to serve as political cover to justify pre-determined policy decisions, signify that the dominant view of RA needs to be adjusted.

Offering an alternative viewpoint to recent scholarly works that either support or propose to abolish the current regime of RA in corporate and financial law, the article suggests a different approach. It argues that rather than a mechanical method to unearth the ‘best’ possible laws according to a normative criterion (such as efficiency or fairness), RA should be conceptualized as mainly a procedural and informational tool that supplements open consideration of the political and policy judgments that underpin regulatory choices. As such, and contrary to common views of RA, the tool’s main functions are increasing transparency and information for the public and regulators alike, providing participatory opportunities for interested parties, and facilitating monitoring of regulators.

This view also leads to several normative implications. In short, RA that emphasizes procedure should combine quantified analysis with some leeway for regulatory judgment, and focus on increased consultation, critical engagement, clarity in underlying goals, review, and transparency as its dominant guiding factors and major focal points. Those conducting and using RA should be given sufficient discretion to decide based on, but not dictated by, rigid economic analysis, which alleviates at least some of the problems related to the formal or informal requirement to quantify costs, benefits, or impacts. They should also be allowed to define, to an appropriate extent, the fine line between economic analysis and policy choice. In return, those in charge of RA also need to strive for an encompassing, open-minded, transparent, and engaged process, which maximizes meaningful third party input and avoids using RA as camouflage. Ultimately, RA strengthened along these lines will indirectly lead to more reasoned and legitimized corporate law policies.

Martin Petrin is a Senior Lecturer at the University College London Faculty of Laws.