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99 B.U. L. Rev. 1229 (2019)
Corporate Governance by Index Exclusion

handle is hein.journals/bulr99 and id is 1247 raw text is: CORPORATE GOVERNANCE BY INDEX EXCLUSION SCOTT HIRST* & KOBI KASTIEL** ABSTRACT Investors have long been unhappy with certain governance arrangements adopted by companies undertaking initial public offerings (IPOs), such as dual-class voting structures. Traditional sources of corporate governance rules-the Securities and Exchange Commission, state law, and exchange listing rules-do not constrain these arrangements. As a result, investors have turned to a new source of governance rules: index providers. This Article provides a comprehensive analysis of index exclusion rules and their likely effects on insiders' decision-making. We show that efforts to portray index providers as the new sheriffs of the US. capital markets are overstated. Index providers face complex and conflicting interests, which make them reluctant regulators, at best. We putforward an analysis of insider incentives in light of index exclusions and apply it to one of the most important applications of index exclusion rules to date, the recent decision by index providers to exclude from their indexes certain companies with dual-class share structures. We conclude that the efficacy of index exclusions in preventing disfavored arrangements such as dual-class structures is likely to be limited, but not zero. Index exclusions are a corporate governance experiment, one that has important lessons. We examine these lessons, and the way forwardfor corporate governance. These lessons are all the more important because of the central place of index funds, and therefore index providers, in our capital markets. * Associate Professor, Boston University School of Law; Director of Institutional Investor Research, Harvard Law School Program on Corporate Governance. ** Assistant Professor, Tel Aviv University Faculty of Law; Research Fellow, Harvard Law School Program on Corporate Governance. For helpful comments and discussions, we are grateful to Lucian Bebchuk, Jill Fisch, Steven Davidoff Solomon, Assaf Hamdani, Peter Molk, and Holger Spamann; participants in the 2018 National Business Law Scholars Conference and the Boston University Law Review's symposium, Institutional Investor Activism in the 211 Century: Responses to a Changing Landscape; and a number of representatives of index providers, index funds, and law firms that prefer to remain anonymous. We are grateful to David Azimov, Ehud Ephraim, and Steven Mercadante for excellent research assistance, and to Boston University and the Harvard Law School Program on Corporate Governance for financial support. 1229

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