June 23, 2022 53Steinberg focuses instead on proposed
federal legislation that he believes
would rectify many of the dangers and
excesses in corporate conduct permit-
ted by current state law.
For example, he proposes the total
“federalization of corporate gover-
nance.” This would include, among
other things, a federally mandated
requirement that the chair of a com-
pany’s board of directors be an inde-
pendent director holding no position
in the company’s management, on the
theory that such independence would
provide a greater check on manage-
rial malfeasance. Steinberg would also
have federal law require that at least
one member of the board be an “em-
ployee representative,” chosen by the
company’s nonmanagement employees,
and that this representative be part of
the board’s compensation committee.
And while federal securities law now re-
quires disclosure of top executives’ com-
pensation, Steinberg, again addressing
substance rather than just disclosure,
would impose a cap on the percentage
of disparity between the CEO’s compen-
sation and that of the median employee.
While most states hold that man-
agers owe a fiduciary duty—that is, a
duty of honesty and loyalty—to their
corporation, states vary considerably
on what that duty entails in practice.
In particular, Delaware and other
states often turn a blind eye to an ex-
ecutive’s using his position to promote
his self- interests, provided that he is
still exercising a reasonable “business
judgment” on behalf of the corpora-
tion. Steinberg proposes instead that
“federal securities laws,” not state laws,
“should regulate substantive fiduciary
conduct.” This would include, for ex-
ample, making managers strictly liable
for self- dealing, even when it is argu-
ably in the company’s interest as well.
Also, while Delaware, like many
states, allows a corporation’s charter
to limit managerial liability for almost
any kind of misconduct to intentional
acts, Steinberg would expand such li-
ability to negligent acts. Further, he
would entirely eliminate the current
requirement, derived from state and
common law precedents though pres-
ent in some federal laws as well, that a
shareholder prove that she personally
relied on management’s false or mis-
leading statements before she can bring
suit seeking to hold management liable
for such statements.
Steinberg does not neglect enhanced
disclosure. For example, he would elim-
inate the current guideline that man-
agement need not disclose “bad news”
if the negative development has had an
insufficient or unknowable impact on
the company’s finances, i.e., is quanti-
tatively “immaterial.” This much- used
loophole allows a company, for exam-
ple, to conceal that one or more of its
top- level executives has engaged in
misconduct ranging from sexual abuse
to financial fraud. Steinberg would re-
place this judicially created loophole
with a federal legislative requirement
that a company disclose virtually any
kind of misconduct or malfeasance on
the part of its executives.Steinberg has combined a reformist
vision with detailed proposals for real-
izing that vision. It all sounds good on
paper. But the question is how to get
Congress to enact even a small portion
of his proposals. With so much of theownership of both public corporations
and private markets controlled by insti-
tutional investors primarily interested
in quick profits (and themselves often
controlled by rich executives), there
is little investor pressure for many of
the reforms Steinberg proposes. And
one may also imagine that the former
senator from Delaware now occupy-
ing the Oval Office might be less than
enthusiastic about shifting the focus of
corporate law from his home state to
Wash i ngton.
A good illustration of the difficulties
in getting Congress to strengthen the
laws against corporate misconduct is
Steinberg’s proposals regarding insider
trading. As he recognizes, insider trad-
ing—in which an executive entrusted
with confidential information (such as
a merger that has not yet been publicly
announced) trades on the basis of that
information for his personal benefit or
discloses it to others so that they may
do so—harms both the company that
generated the information and the
investors who, ignorant of the inside
information, sell their stock to the in-
siders. In theory, then, there should be
a wellspring of support for federal leg-
islation broadly outlawing trading on
inside information.
But this has not been the case. The
SEC initially had to shoehorn regu-
lations of insider trading into its gen-
eral antifraud provision, SEC Rule
10b- 5. But that strategy meant that
insider trading cases had to contend
with the various limitations on fraud
lawsuits that had been developed over
decades—indeed, over centuries—by
state and common law (which dis-
favored such lawsuits because they
tended to “chill” rapid commercial
development). So, for example, since
proof of fraud classically requires a
misrepresentation while insider trading
can occur without any representation
being made at all, the SEC and then the
courts had to develop convoluted theo-
ries for why someone had an affirma-
tive duty to disclose the fact that he
was seeking to trade on inside infor-
mation. But this duty was owed, under
state and common law rules, only to
those who had entrusted him with the
information (such as his employer)
and not those who had sold their
stock to the insider without knowing
he had the unfair advantage of such
information.
Over time, and often in reaction to
difficult cases, the courts developed
even more arcane rules about what was
required to show that insider trading
was genuinely fraudulent under the
terms of Rule 10b- 5. So, for example,
an executive who purposely discloses
confidential corporate information to
an outsider (a “tippee”) who then trades
on it cannot be held liable for insider
trading unless the executive receives a
personal benefit from making the tip.
The result, as Steinberg correctly states,
is that “the US securities law framework
with respect to the regulation of insider
trading is abysmal. Uncertainties and
inconsistencies prevail.”Steinberg urges that Congress should
enact legislation totally prohibiting
persons who are in a position to have
access to nonpublic information from
trading on or tipping others about it.
And even though other developed
countries initially lagged behind the
US in appreciating the dangers of in-sider trading, many of them now have
such laws. This and more modest reform
laws have been repeatedly introduced
in Congress for decades, yet they have
never been enacted.
Partly this is the fault of the SEC,
which originally opposed such legis-
lation in the belief that a conservative
Congress might impose even more ar-
duous limitations on insider trading
prosecutions than the courts had de-
veloped. But such legislative proposals
have also received either opposition or
at best lukewarm support from the US
business community, which seems to
fear that it will place too great a bur-
den on the hard- driving, free- wheeling
executives who foster corporate growth
(and whose compensation is largely
tied to movements in their companies’
stock).
The result is that despite many highly
publicized prosecutions for insider
trading, all the evidence suggests that
it continues to be rampant, as shown by
the frequency with which stock prices
rise or fall in the days immediately pre-
ceding the announcement of good or
bad news.
According to one recent study,
trading records strongly indicate that
substantial insider trading occurs in ad-
vance of one in five mergers and acqui-
sitions.^2 A simpler, broader prohibition
on insider trading would doubtless not
totally eliminate this problem: quick
and easy profits will always be enticing.
But surely it would help. Nevertheless,
despite Steinberg’s well- reasoned ad-
vocacy for his proposals, history sug-
gests that it will take more than logic to
get Congress to act.
In broader perspective, this much
seems apparent. The huge shifts in re-
cent decades in corporate ownership,
private markets, and income distribu-
tion have created regulatory challenges
to achieving fairness and honesty in
the conduct of business in the United
States. The federal government has
for too long relied on state legislatures
and state courts to regulate how com-
panies do business beyond matters of
disclosure, and it is not an even match.
Indeed, given ever- increasing foreign
competition, only the federal govern-
ment has the power to make reforms
that will have any impact on such
companies.
To be sure, when there is a major
financial crisis, Congress sometimes
passes legislation directed at the im-
mediate problems that led to it—for ex-
ample, the Sarbanes- Oxley Act of 2002
in response to the Enron and other
corporate accounting scandals and the
Dodd- Frank Act of 2010 in response
to the crash of 2008. Since foresight is
notoriously not the hallmark of democ-
racy, perhaps that is the best we can
hope for. But this piecemeal approach
has not prevented big business in the
US from getting more concentrated
and more effectively unregulated, and
business executives becoming more of
a separate caste. Until the rest of us
demand that our representatives recog-
nize and reverse these insidious trends,
even as progressive a group of propos-
als as Steinberg presents will be for
naught. Q(^2) V. Patel and T. Putnins, “How Much
Insider Trading Happens in Stock Mar-
kets,” the FinReg Blog of the Global
Financial Markets Center, Duke Uni-
versity School of Law, March 31, 2021.
Available from booksellers and http://www.nyrb.com
BACK IN PRINT!
Richard Howard’s translation
of The Flanders Road by Nobel
Prize winner Claude Simon
On a sunny day in May 1940, the French
army sent out the cavalry against the
invading German army’s Panzer tanks.
Unsurprisingly, the French were routed.
Twenty-six-year-old Claude Simon was
among the French forces. As they re-
treated, he saw his captain shot off
his horse by a German sniper.
This is the primal scene to which Simon
returns repeatedly in his fiction and
nowhere so powerfully as in his most
famous novel The Flanders Road.
Here Simon’s own memories overlap
with those of his central character,
Georges, whose captain, a distant rel-
ative, dies a similar death. Georges re-
views the circumstances and sense—
or senselessness—of that death, first
in the company of a fellow prisoner
in prison camp and then some years
later during an erotically charged visit
to the captain’s widow, Corinne. As he
does, other stories emerge: Corinne’s
prewar affair with the jockey Iglésia,
who would become the captain’s or-
derly; the possible suicide of an eigh-
teenth-century ancestor, whose grim
portrait loomed large in Georges’s
childhood home; Georges’s learned
father, helpless against barbarism
among his books.
The great question throughout, the ques-
tion that must be urgently asked even
as it remains unanswerable, is whether
fiction can confront and respond to
the trauma of history.
“The ferocious drive of the prose, the
images of love and war tossed up
like spray out of the struggling rush
and turmoil of words, is stupendous.”
—Kirkus Reviews
THE FLANDERS ROAD
Claude Simon
Translated from the French by
Richard Howard
Introduction by Jerry W. Carlson
Paperback • $16. 95
Also available as an e-book
On sale July 12th
The Flanders Road is a selection of the
NYRB Classics Book Club.
Rakoff 52 53 .indd 53 5 / 26 / 22 1 : 10 PM