Ronald J Gilson: Winner of the 2017 ECGI Working Paper Law Series

thank you I had I had a moment when Luka announced it noting that our Chairman was once at PwC that we didn’t look we discovered that he pulled the wrong envelope out but it’s a it’s a wonderful honor and it’s particularly an honor coming from this organization in this group of people because it really means something the nice thing in has been that people like it but doesn’t necessarily mean they agree with it but the it was an effort to make a lot of things accessible and so open to open to people who when it would be presented in a more technical fashion would be simply hard to get to whatever else this at least reads easily at one level the paper is as lukas suggested a history it starts in the the 1960s where corporate law was a nice way of putting it it was arid the truth is it was boring as you can imagine and it’s a story about how it went from a bunch of traffic rules to a circumstance where it’s it’s much broader than the law and if that function is to cause companies to produce more so it became it went from rules to being a part of a complicated structure that is designed to generate productivity the point of the history in some ways the best historical methodology comes from a comment that’s ascribed to Mark Twain an American the most wonderful American Humanist there’s really no evidence that he ever said it what he what he would has described to him is the concept that history doesn’t repeat itself but sometimes it rhymes and the process of trying to work through a pattern where corporate law became much broader had much more impact and and as a result much more complicated as it became important in a business environment which became faster which includes increasingly faster moving and itself more complicated if we can figure out what the rhyme is then we can say something intelligent about where it’s going and then it’s a lesson that’s important because the only thing that strikes me about looking forward is a lot to remember my high school calculus the second derivative of change in the business environment is positive it’s not just that things are changing it’s the rate of change is going up and that means you need you don’t have time you need to understand what you’re doing early on and suddenly you begin to get for me the rhyme is that corporate governance is driven by the capital markets capital markets served to allow risk to be shared changes in the capital market generate what kinds of instruments we can use and corporate governance operates to support that risk transfer the faster the capital market moves the faster governance is going to move and the more we understand that connection the more we’re going to be able to look ahead I think the best example is Japan the Japan has been in what may be the longest recession that in recorded history they have made particularly under mister Albay they have made a dramatic change in their corporate law if you just look at the law it’s really quite good it looks like the most progressive legal rules anywhere but nothing has changed because the legal rules operated in bed operated as embedded in a cluster of other institutions other social institutions the labor market in particular the man the the market for managers there is no there is no horizontal market for managers in Japan the change that has to happen is one that involves all of it when you change one thing in an integrated system it performs poorly because everything had been made to fit together and it takes longer to change everything so the irony and the the politically difficult thing is you make a change which is supposed to be wonderful and it is accept the first response is the performance gets worse and that’s disconcerting and discomforting to everybody who supported it but there’s kind of no way around it you have to take it down before you can build it up again and again it’s it’s we are better off if we know what’s coming rather than rather than being surprised Japan is largely still waiting but it’s going to depend on the resiliency of the social institutions that exist because now you’re no longer changing thinking about changing the law that’s easy you your per se you persuade the diet to change the rules that you also have to change the social systems in which those rules operate and those have those change on those change on their own you can’t just tell people change your expectations about what your job is like then that’s a process and I’m if we think is the best I can say is that if we understand that that the systems are both path dependent and depend on the fit of all the elements then we can be more thoughtful about how we try to design the change it becomes even more important where there’s been a debate that’s been going on for twenty years our our corporations managed to short-term or to long term and the short answer is it’s not at management’s choice it’s driven by the underlying technology so Apple computer though Apple even call it a computer anymore Apple is the most valuable company in the world next September they’re going to bring out their Apple ten or eight whatever the number is their tenth anniversary if people don’t think it’s terrific it will knock a third of the market cap off it’s a year and their product cycles a year and a half that’s not long term and it can’t be one would have thought five years ago that the most long-term investment you could imagine is in autonomous automobiles five years ago people thought you couldn’t do it uber is testing autonomous taxis in Phoenix now long-term short-term so debate having this this debate in the governance area where we should be more long-term I don’t know if we should be more long-term it depends on the product but if I’m digging an iron mine it’s going to take a while if I’m doing almost anything else it’s not so the as the market gets more complex as industries get more complex and hence companies get more complex the easy rules the slogans be long-term don’t work it’s key to a company it’s key to particular product cycles and the governance system has to support that kind of flexibility to give an example there was a period in California when buying grapes was terribly political because labor was treated badly and the notion was boycott grapes and things will change familiar grapes were seasonal product then they’re not because the offseason they’re being flown in from Chile and the technology that’s available changes the market so a long term a long term industries like agriculture which has been around for hundreds and hundreds and thousands of years changes quickly because the technology changes and the the ability for what a government in my view but lots of people disagree what a governance system has to do is facilitate a company being adaptive with respect to change because the only thing I think that is obvious is the change is just going to continue to happen and ever more quickly but I hope it does more than anything else is that when people and offer simple answers to complex questions it will help people say that’s nonsense I think the world of ECG i one of the questions that often and my being a fellow of ECG I is one of the nicest things as it’s ever happened in my professional life people on occasion asked why isn’t there an American corporate governance Institute and the short answer is ECG I provides that function there isn’t the room there isn’t room for it or the need for anything else and frankly ECG I just does it better because it integrates the one theme of my paper is that it takes more than one discipline to talk intelligently about corporate governance and ECG and I mesh’s the different disciplines better than any other organization but I’m familiar with so for people like me who do some things but our users of others the access to the access to the range of people that are available through ECG is just it is just a wonderful benefit