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 THE OXFORD HANDBOOK OF

CORPORATE LAW AND

GOVERNANCE
THE OXFORD HANDBOOK OF

CORPORATE
LAW AND
GOVERNANCE
Edited by
JEFFREY N. GORDON
and
WOLF-GEORG RINGE
 Great Clarendon Street, Oxford, OX2 6DP, United Kingdom
Oxford University Press is a department of the University of Oxford.
It furthers the University’s objective of excellence in research, scholarship, and education by
publishing worldwide. Oxford is a registered trade mark of Oxford University Press in the UK
and in certain other countries
© The several contributors 2018
The moral rights of the authors have been asserted
First Edition published in 2018
Impression: 1
All rights reserved. No part of this publication may be reproduced, stored in a retrieval
system, or transmitted, in any form or by any means, without the prior permission in
writing of Oxford University Press, or as expressly permitted by law, by licence or under
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reproduction outside the scope of the above should be sent to the Rights Department,
Oxford University Press, at the address above
You must not circulate this work in any other form and you must impose this same
condition on any acquirer
Crown copyright material is reproduced under Class Licence Number C01P0000148 with the
permission of OPSI and the Queen’s Printer for Scotland
Published in the United States of America by Oxford University Press
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British Library Cataloguing in Publication Data
Data available
Library of Congress Control Number: 2018931025
ISBN 978–0–19–874368–2
eISBN 978–0–19–106140–0
Links to third party websites are provided by Oxford in good faith and for information only.
Oxford disclaims any responsibility for the materials contained in any third party website
referenced in this work.
 For Jessica
J.G.

For Dorothea
G.R.
 PREFACE

CORPORATE law and corporate governance have been at the forefront

of regulatory activities and scholarly attention across the world for
several decades, but the field has drawn increased public attention
in light of the alleged role of corporate governance in the 2007–2009
Global Financial Crisis. There is a growing need for a global
framework through which to understand the aims and methods of
legal research in this field. The aim of this Oxford Handbook of
Corporate Law and Governance is to supply scholars, students, and
the educated layperson with a comprehensive resource, a common
point of entry into cutting edge work in corporate law and
governance while not giving priority to a particular view. The
approach is cross-jurisdictional, interdisciplinary, and functional. In
doing so, we are proud to say, this handbook is unique; a
comparable resource for corporate governance and law does not
exist.
Experts and leading scholars on corporate law and governance
from across the globe were given the mandate to contribute a
critical reflection on scholarship in their respective subfields. It
turned out that the approaches used by the various contributors are
as diverse as their substance: We are happy to assemble
contributions that develop ground-breaking new insights, provide
critical literature reviews, explain scholarly developments and
methodological controversies, and make policy contributions. In
sum, the fruit of this approach is an extremely rich resource of the
current state of play of scholarship in the field across a broad range
of topics.
The task of putting together a volume of this ambition has been
challenging. Our contributors come from different disciplines and
many different jurisdictions around the globe. They bring a broad
variety of approaches and methodologies to corporate law and
governance, and they come with divergent cultural and historical
traditions. That in itself poses a number of formidable challenges for
the editors. But the greatest trial has been to cope with the
dynamics and the internationalization of the field. Corporate law, as
seen through an economic lens, is not anymore the simple, bi-polar
conflict over power in the corporation as epitomized by the principal-
agency conflict between managers and owners. Research is
mushrooming on different patterns of ownership, of different legal
approaches that are tested and dismissed, of competition between
firms and between regulators, of standard-setting by international
agencies, of trade integration and disintegration, of different
negotiations of the gap between sovereigns and the firm.
Globalization is penetrating into the forays of the law with an
unprecedented force. Non-legal issues, practices, and mechanisms
are becoming more important for both scholarship and corporate
practice. This brings up a number of new challenges and poses
questions of legitimacy, of law enforcement, and of market pressure.
We can make advances on these questions only with a common
canon of scholarship that is grounded in international and
interdisciplinary dialogue. Only by listening to each other, by
understanding each other’s economic problems and legal solutions,
will we learn from each other. The contributors to this volume are all
leading scholars in their fields and provide an international, non-
parochial approach to research that is indispensable for deep
dialogue. During the genesis of this Handbook, we held an authors’
conference under the auspices of the Ira M. Millstein Center for
Global Markets and Corporate Ownership at Columbia Law School,
funding for which we acknowledge gratefully. This conference
facilitated exchange and dialogue between the authors and helped
to create a joint effort with a coherent trajectory.
We hope that this Oxford Handbook will provide a valuable
resource for scholarship and research, but also for practitioners or
students who seek to familiarize themselves with the latest findings
from a particular field of interest. The consequence of our ambition
has been a very hefty book of more than 1000 pages. But the book
is also available on-line on a chapter-by-chapter basis at
www.oxfordhandbooks.com.

New York and Hamburg, October 2017

Jeffrey N. Gordon
Wolf-Georg Ringe
 CONTENTS

List of Contributors

PART I THEORETICAL APPROACHES,

TOOLS, AND METHODS
1. From Corporate Law to Corporate Governance
RONALD J. GILSON
2. Convergence and Persistence in Corporate Law and Governance
JEFFREY N. GORDON
3. Corporate Governance and Its Political Economy
MARK J. ROE AND MASSIMILIANO VATIERO
4. The “Corporate Contract” Today
MICHAEL KLAUSNER
5. The State of State Competition for Incorporations
MARCEL KAHAN
6. Culture and Law in Corporate Governance
AMIR N. LICHT
7. A Behavioral Perspective on Corporate Law and Corporate
Governance
JAAP WINTER
8. Empirical Studies of Corporate Law and Governance: Some
Steps Forward and Some Steps Not
 MICHAEL KLAUSNER
9. The Benefits and Costs of Indices in Empirical Corporate
Governance Research
ALLEN FERRELL
10. Taxonomies and Leximetrics
MATHIAS M. SIEMS

PART II SUBSTANTIVE TOPICS

11. External and Internal Asset Partitioning: Corporations and Their
Subsidiaries
HENRY HANSMANN AND RICHARD SQUIRE
12. The Board of Directors
STEPHEN M. BAINBRIDGE
13. Executive Remuneration
GUIDO FERRARINI AND MARIA CRISTINA UNGUREANU
14. Institutional Investors in Corporate Governance
EDWARD B. ROCK
15. Shareholder Activism: A Renaissance
WOLF-GEORG RINGE
16. Corporate Short-Termism: In the Boardroom and in the
Courtroom
MARK J. ROE
17. Majority Control and Minority Protection
ZOHAR GOSHEN AND ASSAF HAMDANI
18. Debt and Corporate Governance
CHARLES K. WHITEHEAD
19. Accounting and Financial Reporting: Global Aspirations, Local
Realities
LAWRENCE A. CUNNINGHAM
20. Related Party Transactions
LUCA ENRIQUES
21. Control Shifts via Share Acquisition Contracts with Shareholders
(Takeovers)
PAUL DAVIES
22. Mergers, Acquisitions, and Restructuring: Types, Regulation,
and Patterns of Practice
JOHN C. COATES JR.
23. Groups of Companies: A Comparative Study of the Economics,
Law, and Regulation of Corporate Groups
KLAUS J. HOPT
24. Corporate Social Responsibility and Corporate Governance
CYNTHIA A. WILLIAMS
25. Comparative Corporate Governance in Closely Held Corporations
HOLGER FLEISCHER

PART III NEW CHALLENGES IN

CORPORATE GOVERNANCE
26. Western versus Asian Laws on Corporate Governance: The Role
of Enforcement in International Convergence
HIDEKI KANDA
27. Corporate Governance in Emerging Markets
MARIANA PARGENDLER
28. The Governance Ecology of China’s State-Owned Enterprises
 CURTIS J. MILHAUPT
29. The Rise of Foreign Ownership and Corporate Governance
MERRITT B. FOX
30. Governance by Institutional Investors in a Stakeholder World
GERARD HERTIG
31. New Metrics for Corporate Governance: Shifting Strategies in an
Aging IPO Market
ERIK P.M. VERMEULEN

PART IV ENFORCEMENT
32. Corporate Law and Self-Regulation
DAVID KERSHAW
33. The Evolution in the U.S. of Private Enforcement via Litigation
and Monitoring Techniques: Are There Lessons for Germany?
JAMES D. COX AND RANDALL S. THOMAS
34. Private and Public Enforcement of Securities Regulation
HOWELL E. JACKSON AND JEFFERY Y. ZHANG
35. Public Enforcement: Criminal versus Civil
AMANDA M. ROSE
36. Corporate Litigation in Specialized Business Courts
JOSEPH A. MCCAHERY AND ALEXANDER DE ROODE
37. The Compliance Function: An Overview
GEOFFREY PARSONS MILLER

PART V ADJACENT AREAS

38. Comparative Corporate Insolvency Law
 HORST EIDENMÜLLER
39. Corporate Governance and Employment Relations
ZOE ADAMS AND SIMON DEAKIN
40. Corporate Governance, Capital Markets, and Securities Law
ADAM C. PRITCHARD
41. Vertical and Horizontal Problems in Financial Regulation and
Corporate Governance
JONATHAN R. MACEY AND MAUREEN O’HARA
42. Bank Governance
JOHN ARMOUR
43. Tax and Corporate Governance: The Influence of Tax on
Managerial Agency Costs
DAVID M. SCHIZER

Index
 LIST OF CONTRIBUTORS

Zoe Adams is a Ph.D. student at the Faculty of Law, University of

Cambridge.
John Armour is the Hogan Lovells Professor of Law and Finance at
the University of Oxford.
Stephen M. Bainbridge is the William D. Warren Distinguished
Professor of Law at UCLA Law School.
John C. Coates Jr. is the John F. Cogan, Jr. Professor of Law and
Economics at Harvard Law School.
James D. Cox is the Brainerd Currie Professor of Law at Duke
University School of Law.
Lawrence A. Cunningham is the Henry St. George Tucker III
Research Professor of Law at George Washington Law School.
Paul Davies is a senior research fellow and a fellow of the
Commercial Law Centre at Harris Manchester College, University of
Oxford.
Simon Deakin is Professor of Law at the University of Cambridge.
Horst Eidenmüller is the Freshfields Professor of Commercial Law
at the University of Oxford.
Luca Enriques is the Allen & Overy Professor of Corporate Law at
the University of Oxford.
Guido Ferrarini is Professor Emeritus of Business Law at the
University of Genoa.
Allen Ferrell is the Harvey Greenfield Professor of Securities Law at
Harvard Law School.
Holger Fleischer is Director of the Max Planck Institute for
Comparative and International Private Law, Hamburg.
Merritt B. Fox is the Michael E. Patterson Professor of Law and
NASDAQ Professor for the Law and Economics of Capital Markets at
Columbia Law School.
Ronald J. Gilson is the Charles J. Meyers Professor of Law and
Business at Stanford Law School and Marc and Eva Stern Professor
of Law and Business at Columbia Law School.
Jeffrey N. Gordon is Richard Paul Richman Professor of Law at
Columbia Law School.
Zohar Goshen is the Alfred W. Bressler Professor of Law at
Columbia Law School.
Assaf Hamdani is Professor of Law at the Buchmann Faculty of
Law, Tel Aviv University.
Henry Hansmann is the Oscar M. Ruebhausen Professor of Law at
Yale Law School.
Gerard Hertig is Professor of Law at the Swiss Federal Institute of
Technology, Zurich.
Klaus J. Hopt is former director of the Max Planck Institute for
Comparative and International Private Law, Hamburg.
Howell E. Jackson is the James S. Reid, Jr. Professor of Law at
Harvard Law School.
Marcel Kahan is the George T. Lowy Professor of Law at NYU Law
School.
Hideki Kanda is Emeritus Professor at the University of Tokyo and
Professor at Gakushuin University.
David Kershaw is Professor of Law at the London School of
Economics.
Michael Klausner is the Nancy and Charles Munger Professor of
Business and Professor of Law at Stanford Law School.
Amir N. Licht is Professor of Law at the Interdisciplinary Center
Herzliya.
Jonathan R. Macey is the Sam Harris Professor of Corporate Law,
Corporate Finance and Securities Law at Yale Law School.
Joseph A. McCahery is Professor of International Economic Law at
Tilburg University.
Curtis J. Milhaupt is Professor of Law at Stanford Law School.
Geoffrey Parsons Miller is the Stuyvesant P. Comfort Professor of
Law at NYU Law School.
Maureen O’Hara is the Robert W. Purcell Professorship of
Management and Adjunct Professor of Law at Cornell Law School.
Mariana Pargendler is Professor of Law at Fundação Getulio
Vargas Law School, São Paulo.
Adam C. Pritchard is the Frances and Georges Skestos Professor
of Law at the University of Michigan School of Law.
Wolf-Georg Ringe is Professor of Law and Director of the Institute
of Law & Economics at the University of Hamburg.
Edward B. Rock is the Martin Lipton Professor of Law at NYU Law
School.
Mark J. Roe is the David Berg Professor of Law at Harvard Law
School.
Alexander de Roode is a researcher at the Quantitative Research
department of Robeco.
Amanda M. Rose is Professor of Law at Vanderbilt School of Law.
David M. Schizer is Dean Emeritus and the Harvey R. Miller
Professor of Law and Economics at Columbia Law School.
Mathias M. Siems is Professor of Commercial Law at Durham
University.
Richard Squire is the Alpin J. Cameron Chair in Law at Fordham
Law School.
Randall S. Thomas is the John S. Beasley II Professor of Law and
Business at Vanderbilt Law School.
Maria Cristina Ungureanu is Head of Corporate Governance at
Eurizon.
Massimiliano Vatiero is the Brenno Galli Chair of Law and
Economics at the Law Institute (IDUSI) of the Università della
Svizzera Italiana.
Erik P.M. Vermeulen is Professor of Business and Financial Law at
Tilburg University.
Charles K. Whitehead is the Myron C. Taylor Alumni Professor of
Business Law at Cornell Law School and Professor and Director of
the Law, Technology, and Entrepreneurship Program at Cornell Tech.
Cynthia A. Williams is the Osler Chair in Business Law at Osgoode
Hall Law School.
Jaap Winter is President of the Executive Board at VU University
Amsterdam.
Jeffery Y. Zhang is an economist at the Board of Governors of the
Federal Reserve System.
 PART I

THEORETICAL APPROACHES, TOOLS,

AND METHODS
 CHAPTER 1

FROM CORPORATE LAW TO CORPORATE

GOVERNANCE

RONALD J. GILSON

1 INTRODUCTION

IN 1962, Bayless Manning, the Yale Law School corporate law scholar
and later Stanford Law School dean, announced the death of
corporate law. Writing evocatively about a subject that was at the
time deadly boring, Manning wrote:
[C]orporation law, as a field of intellectual effort, is dead in the United States.
When American law ceased to take the “corporation” seriously, the entire
body of law that had been built upon that intellectual construct slowly
perforated and rotted away. We have nothing left but our great empty
corporation statutes—towering skyscrapers of rusted girders, internally
welded together and containing nothing but wind.1

Manning bemoaned that the corporate statute—the rusted girders of

his metaphor that provided the formal structure of the enterprise—
no longer was enough to understand what really mattered: how the
corporation performed. Once the formalism of the statute was
recognized as insufficient itself to explain the true matter of concern,
the conclusion followed: nothing was left but wind.
Manning’s lament could be written off as just a law professor’s
realization that his discipline no longer explained enough about
actual corporation behavior. But the concern was not limited to legal
scholars; the same realization was coming to the surface in financial
economics. In 1976, Jensen and Meckling provided what became the
canonical account of the corporation in “Theory of the Firm:
Managerial Behavior, Agency Costs and the Theory of the Firm.”2
Addressing a different literature, Jensen and Meckling educed a
metaphor similar to Manning’s: the theory of the firm in economics
was an “empty box.”3
While the literature of economics is replete with references to the ‘theory of
the firm,’ the material generally subsumed under that heading is not a theory
of the firm but actually a theory of markets in which firms are important
actors. The firm is a “black box” operated so as to meet the relevant marginal
conditions . . . Except for a few recent and tentative steps, however, we have
no theory which explains how the conflicting objectives of the individual
participants are brought into equilibrium so as to yield this result.4

Jensen and Meckling focused centrally on the concept of agency

costs—the cost of techniques to align the incentives of the different
participants necessary to conducting the corporation’s business.
From their perspective, the corporation was a “form of legal fiction
which serves as a nexus for contracting relationships and which is
also characterized by the existence of divisible residual claims on the
assets and cash flows of the organization which can generally be
sold without permission of the other contracting individuals.”5
Reframed in current Silicon Valley terminology, the corporation is a
multi-sided platform that integrates inputs on the one hand and
customers on the other.
The intellectual impact of the agency cost characterization is hard
to overstate: for the last 40 years, the mission of American corporate
law, and of corporate scholarship more broadly, has taken the form
of a search for the organizational Holy Grail, a technique that bridges
the separation of ownership and control by aligning the interests of
shareholders and managers through a series of techniques, over
time highlighting the role of independent directors, hostile takeovers,
and activist shareholders in this effort.6 This coalescence around
corporate law as a vehicle to produce shareholder profits hit its high
point when Henry Hansmann and Reinier Kraakman, in an article
confidently titled “The End of History for Corporate Law,” concluded
that “in key commercial jurisdictions . . . there is no longer any
serious competitor to the view that corporate law should principally
strive to increase long-term shareholder value.”7
The result of Jensen and Meckling’s seminal reframing of
corporate law into something far broader than disputes over
statutory language was that both Manning’s empty skyscrapers and
Jensen and Meckling’s empty box began to be filled. And it was no
coincidence that the term “corporate governance” appeared at about
this time.8 Over a reasonably short period, corporate governance
codes appeared, like that of the OECD,9 which ranged much more
broadly than the limited coverage of a particular national (or state)
corporate statute. Perhaps most aggressively, in 1997 during the
East Asian financial crisis the International Monetary Fund and the
World Bank included corporate governance reform as a condition to
assistance alongside traditional macroeconomic restraints such as
deficit reduction.10 Academic attention followed the same growth
pattern. For example, more than a quarter of all articles published in
the Journal of Financial Economics, one of the two leading finance
journals, from 1995 through August 29, 2013 were related to
corporate governance.11
But with what have the empty skyscrapers and boxes been filled?
The short answer is that the new content has addressed the variety
and interaction of contracts—formal contracts, implicit contracts,12
and the braiding of the two13—that Jensen and Meckling’s treatment
of the corporation as a nexus of platforms invites. In the remainder
of this chapter, I will address three somewhat idiosyncratically
chosen but nonetheless related examples of the implications of the
shift from corporate law to corporate governance, from legal rules
standing alone to legal rules interacting with non-legal corporate
processes and institutions. Of course, the point is not to be
exhaustive, nor even to provide a taxonomy covering the categories
of the new content that is filling empty skyscrapers and boxes; the
number and breadth of the chapters in this book make obvious that
either effort necessarily exceeds my ambition here. Rather, my more
limited goal is to provide examples of how this shift from corporate
law to corporate governance—from a largely legal focus to one that
focuses on the corporation’s inputs, outputs and how they are
managed and, ultimately, the manner in which governance interfaces
with other institutional elements that make up a capitalist system—
complicates the problem corporate scholars, of whatever mix of
disciplines, have to confront.14
The chapter proceeds by tracking how corporate law became
corporate governance through three examples of how we have come
to usefully complicate the inquiry into the structures that bear on
corporate decision making and performance. Section 2 frames the
first level of complication in moving from law to governance by
defining governance broadly as the company’s operating system, a
braided framework encompassing legal and non-legal elements.
Section 3 then adds a second level of complication by treating
corporate governance dynamically: corporate governance becomes a
path-dependent outcome of the tools available when a national
governance system begins taking shape, and the process by which
elements are added to the governance system going forward—driven
by what Paul Milgrom and John Roberts call “supermodularity.”15
That characteristic reads importantly on both the difficulty of
corporate governance, as opposed to corporate law, reform, and the
non-intuitive pattern of the results of reform: significant reform leads
to things getting worse before they get better. Section 3 then further
complicates corporate governance by expanding it beyond the
boundaries of the corporation, treating particular governance
regimes as complementary to other social structures—for example,
the labor market, the capital market, and the political structure—that
together define different varieties of capitalism.
Section 4 then considers commonplace, but I will suggest
misguided, efforts to take a different tack from sections 2 and 3: to
simplify rather than complicate corporate governance analysis by
recourse to now familiar single-factor analytic models in academic
corporate law and governance: stakeholder theory, team production,
director primacy, and shareholder primacy. Section 4 suggests that
these reductions are neither models nor particularly helpful; they
neither bridge the contextual specificity of most corporate
governance analysis nor address the necessary interaction in
allocating responsibilities among shareholders, teams, and directors.
In addition, these “models” are static rather than dynamic, a serious
failing in an era in which the second derivative of change is positive
in many business environments and Schumpeter seems to be getting
the better of Burke. Section 5 concludes by examining the
importance of a corporate governance system’s capacity to respond
to changes in the business environment: the greater the rate of
change, the more important is a governance system’s capacity to
adapt and the less important its ability to support long-term, firm-
specific investment.

2 CORPORATE GOVERNANCE AS THE CORPORATION’S

OPERATING SYSTEM

In teaching corporations, I ask at the beginning of the first class a

seemingly simple question: what is a corporation? After a predictable
series of ever more complicated and sophisticated responses from
very smart students, I dramatically display16 a copy of a California
corporation’s articles of incorporation together with the Secretary of
State’s certifying cover page, on which appear attractive pictures of
the California state animal (the grizzly bear) and state flower (the
California poppy).17 The corporation is nothing but a few pieces of
paper I say, leading up to a point similar to that made by Jensen and
Meckling: corporations are best understood not as a single thing but
as the intersection of different things—recall that Jensen and
Meckling describe then as “legal fictions.”18 To be sure, the
formalities are thin and incomplete, but they are nonetheless
important. For example, the corporate statute gives the entity limited
liability and unlimited life, features that caused the Economist in
1926 to equate the corporation’s invention with the industrial
revolution’s most important technological innovations.19 But these
are passive characteristics. Something more is necessary to bring the
golem to life.
This sets the stage for my real point. A corporation should be
defined functionally by reference to the structure that allows a legal
fiction to operate a business and makes it possible for third parties
to confidently do business with it. Some of these structures are legal
rules that, in specified circumstances, allow the corporation to be
treated, like Pinocchio, as if a real boy. However, the mass of the
business operation, both in importance and in bulk, is not legal at
all. It is processes of information flow, decision making, decision
implementation, and decision monitoring: how people operating the
corporation (1) obtain the information they need to make,
implement, and monitor the results of business decisions (including
information relevant to regulatory compliance); (2) distribute
information from information originators to managers with sufficient
expertise and experience to evaluate it; and (3) make decisions,
communicate decisions to the employees who implement them, and
then gather information about the consequences, for the next round.
It is obvious that the formal corporate legal skeleton covers only a
very small part of how the corporation actually operates to carry out
its business and continually adapts to its business environment. In
Bernard Black’s terms, most of the legal rules concerning the
corporation’s operations are “trivial,”20 in the sense that the rules are
important only if they are ignored despite how easy they are to
satisfy. The rest and obviously most important part of the
governance structure—the dark matter of corporate governance—is
the realm of reporting relationships, organizational charts,
compensation arrangements, information gathering, and internal
controls and monitoring, all largely non-legally dictated policies,
practices, and procedures that do not appear in the corporate
statute or the corporation’s charter or bylaws. To be sure, non-legal
governance processes can morph into the “legal” when legislatures
conclude that self-generated governance is less effective than social
welfare demands. A familiar example: after the Enron/WorldCom
accounting scandals, Sarbanes–Oxley imposed a set of governance
requirements over financial reporting, which included external
monitoring of internal controls, a specified board committee
structure and composition, and mandatory officer responsibilities.
But, in general, even where the board has compliance
responsibilities, the implementation is for the firm to work out.
Put differently, corporate governance is the corporation’s operating
system. This characterization of governance in operational terms is
reflected in the description of corporate governance offered by the
Business Roundtable, an organization composed of the CEOs of
many of the largest US corporations:
A good corporate governance structure is a working system for principled
goal setting, effective decision making, and appropriate monitoring of
compliance and performance. Through this vibrant and responsive structure,
the CEO, the senior management team and the board of directors can
interact effectively and respond quickly and appropriately to changing
circumstances, within a framework of solid corporate values, to provide
enduring value to the shareholders who invest in the enterprise.21

The end of the odd journey from corporate law to a more complex
corporate governance system would give Dean Manning solace. His
skyscrapers have been filled to overflowing, but formal law—the
corporate statute and cases interpreting it—occupy far fewer floors
in the building. The outcome of this integration of law and
managerial mechanisms puts law in an important but plainly
subordinate role in the corporation’s operating system:
Investors provide to a corporation the funds with which it acquires real
assets. The investors receive in return financial claims (securities) on the
corporation’s future cash flows. The size of these future cash flows then
depends importantly on management’s choice of what real assets to acquire
and how well these assets are managed over time. The capital market’s
pricing of the financial claims acquired by investors is in effect a valuation of
these future cash flows. Corporate law provides a framework within which a
firm’s managers make these investment and operating decisions. Properly
designed, this legal framework helps spur management to choose and deploy
assets in ways that maximize the value of the firm’s expected future cash
flows . . . The better corporate and securities law perform these tasks, the
more valuable the corporation’s underlying business and correspondingly, the
financial claims that the corporation issues.22
 3 PATH DEPENDENCE: CORPORATE GOVERNANCE,
COMPLEMENTARITY, AND SUPERMODULARITY

The second effort to complicate corporate governance adds a

dynamic dimension. Corporate governance is path dependent—
history matters significantly.23 In a path-dependent environment
with factors such as increasing returns and network externalities, an
observed equilibrium may be inefficient compared to arrangements
possible at the time of the comparison that were not available when
the arrangements arose. Initial conditions, determined by fortuitous
events or non-economic factors such as culture, politics, or
geography, can start the system down a specific path. For example,
Silicon Valley’s development near to the San Francisco Bay next to
Stanford University, as opposed to the shores of Lake Michigan
where Northwestern and the University of Chicago are about the
same distance from each other as Stanford and the University of
California at Berkeley, depended importantly on initial conditions.
These included, importantly, Stanford’s hiring Frederick Terman as
dean of the engineering school shortly after World War II. Terman
had directed one of the Cambridge, Massachusetts wartime labs that
sought to bring cutting-edge science to bear in support of the war
effort and so recognized the value of translational research, that is,
the link between university research and its practical application.24
Put simply, “history matters.”25
That history matters influences the dynamics of the system to be
understood. In particular, history’s shadow can make it difficult to
reform existing institutions or adjust to changes in a company’s
product market even if current alternatives exist that, absent
transition costs, would be more efficient. In the context of corporate
governance as defined here, the role of complementarities drives the
system down a path from which it is difficult later to depart. By
“complementarities” I have in mind governance elements that create
value because they make the existing system work better as a
whole, and the fact that the “efficiency” of an element cannot be
separated from the question of “fit.”
One of the major corporate governance questions to which path
dependence and complementarity gives rise can be usefully framed
in terms of the operating system metaphor: in a world of
increasingly global product and capital markets, is there room for
multiple corporate operating systems? Do particular corporate
governance systems give rise to sustainable competitive advantage
in particular product markets? What happens if a particular
governance system is efficient until a change in the market renders
it less efficient than that of new competitors and path dependency
slows adjustment?26

3.1 The Japanese Example

The development of Japanese corporate governance exemplifies the
influence of complementarities on the persistence of corporate
governance structure as broadly defined in section 2. Suppose one
begins with an initial condition of a commitment to lifetime
employment for a large number of employees, as was the case in
the development of postwar Japanese corporate governance.27 The
next question relates to the influence of that initial condition on a
corporation’s production process. Because the norm of lifetime
employment makes human capital a long-term asset, the company
will sensibly make substantial firm-specific human capital
investments in its employees, thus developing a work force that
supports team and horizontal coordination.28
In turn, the need to protect this long-term investment in human
capital fits best with bank, as opposed to stock market-based,
financing, to prevent the stock market from upsetting the company’s
implicit commitments to labor. Bank-based finance elevates the role
of the bank as the monitor of managerial performance, rather than
the public shareholders; this means suppressing public shareholders’
rights and expectations relative to those of the bank. The need to
monitor the performance of a management freed from stock market
oversight thus led to the post-World War II Japanese main bank
system. A single bank (typically leading a syndicate of banks)
directly monitored a company’s investment choice through the
company’s need to borrow to fund new projects, and through the
information about the company’s cash flow and performance that
came to the bank through its provision of the company’s general
banking services.29 Commonly, the main bank and the other banks
that participated in providing loans to the company also held
significant amounts of the company’s equity, again out of a concern
that a hostile takeover might upset the company’s labor and
financing arrangements.
Should the company fall on hard times, the main bank was
expected to bail it out, through the provision of additional funds, but
at the price of displacement of management with bank employees.
The main bank bailout expectation was understood to be “an
institutional arrangement complementary to the system of
permanent employment.” Bailout “helps to preserve the firm-specific
human assets accumulated in the framework of the lifetime
employment system and hence provides incentives for them to be
generated in the first place.”30 In turn, this package of attributes and
the related internal production methods are complementary to
particular kinds of activity. The Japanese governance system, with its
large investment in firm-specific employee human capital, is very
effective when innovation is linear, and depends importantly on team
work, but it is much less effective when innovation is discontinuous
—the Japanese structure does not lend itself to Schumpetarian (or
Christensen-like31) disruption.32 The overall result has been a tightly
integrated system of production that has been difficult to change in
response to changing business conditions and opportunities for
innovation.
In Milgrom and Roberts’ terms, the relationship between these
governance and associated organizational characteristics is
supermodular. By that term they mean that at each decision node
where a new governance or characteristics must be added to the
existing system, the corporation will choose from among the
alternatives that which best “fits” with the already present elements.
That fit, in turn, is a function not just of the efficiency of the new
element standing alone—the increased productivity that results
simply from its addition—but also of the new element’s capacity to
improve the performance of the existing elements—the extent to
which it is supermodular.33
The complementarity among elements of the system, then, is a
barrier to reform of the system because changing one element in the
system results in degrading the performance of all other system
elements to which that element was complementary. Just as adding
a complementary element increased system performance by more
than its own contribution, removing an element, by regulatory
design or voluntarily in response to changed economic conditions,
reduces performance of all elements. Like financial leverage,
supermodularity steepens the performance curve both on the upside
and on the downside: short of changing all elements of the system
at once, reform will result in reduced system performance until
enough of the system changes to recreate complementarities among
the new and remaining elements.
Continuing the Japanese example, the combination of allowing
Japanese companies to access non-Japanese sources of capital
through the Eurodollar market and the enormous success of
Japanese companies such that projects could be financed through
cash flow rather than bank-provided project finance, eroded the role
of the main bank. The contemporaneous drop in the value of the
Nikkei reduced the value of the banks’ cross-holdings in its customer
companies, which necessitated sales of significant amounts of those
holdings to maintain bank compliance with capital requirements.34 At
the same time, conditions in many product markets came to favor
discontinuous innovation rather than linear innovation. Reduced
performance of any part of a governance system built on
complementarities reduced the performance of the entire Japanese
governance system, yet the previously efficient complementarities
create a barrier to reform.
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Title: The bedbug

Its relation to public health, its habits and life history, and
methods of control

Creator: United States. Public Health Service

Release date: November 27, 2023 [eBook #72238]

Language: English

Original publication: Washington: Government Printing Office, 1924

Credits: Charlene Taylor, Donald Cummings, and the Online

Distributed Proofreading Team at https://www.pgdp.net
(This file was produced from images generously made
available by The Internet Archive/American Libraries.)

*** START OF THE PROJECT GUTENBERG EBOOK THE

BEDBUG ***
Transcriber’s Note: New original cover art included with this eBook is
granted to the public domain.
 TREASURY DEPARTMENT
UNITED STATES PUBLIC HEALTH SERVICE
HUGH S. CUMMING, Surgeon General

THE BEDBUG
ITS RELATION TO PUBLIC HEALTH, ITS HABITS
AND LIFE HISTORY, AND METHODS OF
CONTROL

REPRINT No. 626

FROM THE

PUBLIC HEALTH REPORTS

December 10, 1920
(Pages 2964–2970)
[Revised edition, 1924]

WASHINGTON
GOVERNMENT PRINTING OFFICE
1924
 THE BEDBUG.[1]
Its Relation to Public Health, its Habits and Life History, and Methods
of Control.
[1] Reprint from the Public Health Reports, vol. 35, No. 50,
December 10, 1920, pp. 2964–2970.

The bedbug is one of the numerous insects which have been

suspected of conveying disease to man. Compared with such insect
pests as mosquitoes, lice, and fleas, however, its rôle is decidedly a
minor one. It has been claimed that the bedbug can take up the
microparasites of European relapsing fever, plague, and possibly
leprosy, along with the blood of men or animals suffering from these
diseases. It is also possible that in rare instances the bedbug may
transmit plague or European relapsing fever to man. On the other
hand, there is no convincing evidence that the bedbug is the usual
and ordinary insect transmitter of these or any other diseases at
present known to us.
If the bedbug acts as a transmitter of disease, it apparently does
so by the accidental carriage of disease elements on the mouth
parts; but this occurs only under the most favorable conditions.
These would require, first, the presence of great numbers of
microparasites on the skin or in the blood of a man or animal sick
with some disease transmissible to man by subcutaneous
inoculation; second, it would probably be necessary that there
should be many bugs biting in order that one or more of them should
bite some healthy person within a rather short space of time after
these insects had fed on the infected individual.
In actual practice these conditions would be found only in the most
filthy and insanitary surroundings and would call for drastic
measures to exterminate all vermin. It is, of course, possible that
under unsettled conditions where sick and well are crowded together
with no facilities for cleanliness, bedbugs might act as transmitters of
septicemic diseases. Experience has shown that under such grossly
insanitary conditions such insects as fleas and lice appear to be and
are far more dangerous as carriers of disease. Special measures for
their extermination should be taken. Added precautions for the
examination of bedbugs under these conditions would probably not
be justified by the results.
Notwithstanding the minor rôle which must be assigned the
bedbug as a carrier of disease, its presence is an offense against
sanitary decency. Its bites are quite poisonous to some people and
its odor is most disagreeable; and every effort should be made to
keep all dwellings, hospitals, ships, and other premises free from
these disgusting insects.
Dr. L. O. Howard, Chief of the Bureau of Entomology, United
States Department of Agriculture, and consultant United States
Public Health Service, has permitted the quotation of the following
passages from Farmer’s Bulletin No. 754, by C. L. Marlatt, which
gives an authoritative account of the habits, life history, and the
means of control of these insects.

“General Characteristics.
“The bedbug belongs to the order Hemiptera, which includes the
true bugs or piercing insects, characterized by possessing a piercing
and sucking beak. The bedbug is to man what the chinch bug is to
grains or the squash bug to cucurbs. Like nearly all the insects
parasitic on animals, however, it is degraded structurally, its parasitic
nature and the slight necessity for extensive locomotion having
resulted, after many ages doubtless, in the loss of wings and the
assumption of a comparatively simple structure. Before feeding, the
adult is much flattened, oval, and in color is rust red, with the
abdomen more or less tinged with black. When engorged, the body
becomes much bloated and elongated and brightly colored from the
ingested blood. The wings are represented by the merest rudiments,
barely recognizable pads, and the simple eyes or ocelli of most other
true bugs are lacking. The absence of wings is a most fortunate
circumstance, since otherwise there would be no safety from it even
for the most careful of housekeepers. Some slight variation in length
of wing pads has been observed, but none with wings showing any
considerable development has ever been found.

“Habits and Life History.

“The bedbug is normally nocturnal in habits and displays a certain
degree of wariness, caution, and intelligence in its efforts at
concealment during the day. Under the stress of hunger, however, it
will emerge from its place of concealment in a well-lighted room at
night, so that under such circumstances keeping the gas or electric
light burning is not a complete protection. It has been known under
similar conditions to attack human beings voraciously in broad
daylight. It usually leaves its victim as soon as it has become
engorged with blood and retires to its normal place of concealment,
either in cracks in the bedstead, especially if the latter be one of the
wooden variety, or behind wainscoting, or under loose wall paper;
and in these and similar places it manifests its gregarious habit by
collecting in masses. It thrives particularly in filthy apartments and in
old houses which are full of cracks and crevices, in which it can
conceal itself beyond easy reach. As just noted, the old-fashioned,
heavy, wooden-slatted bedsteads afford especially favorable
situations for the concealment and multiplication of this insect, and
the general use in later years of iron and brass bedsteads has very
greatly facilitated its eradication. Such beds, however, do not insure
safety, as the insects are able to find places of concealment even
about such beds, or get to them readily from their other hiding
places.
“The bedbug takes from 5 to 10 minutes to become bloated with
blood, and then retires to its place of concealment for 6 to 10 days
for the quiet digestion of its enormous meal, and for subsequent
molting, or reproduction if in the adult stage.”
“The eggs hatch in a week or 10 days in the hot weather of
midsummer, but cold may lengthen or even double this incubation
period or check development altogether. The young escape by
pushing up the lid-like top with its projecting rim. When first emerged,
they are yellowish white and nearly transparent, the brown color of
the more mature insect increasing with the later molts.”
“Unfavorable conditions of temperature and food will necessarily
result in great variation in the number of generations annually and in
the rate of multiplication, but allowing for reasonable checks on
development, there may be at least four successive broods in a year
in houses kept well heated in winter.”

“Food and Longevity.

“Under normal conditions the food of the common bedbug is
obtained from human beings only, and no other unforced feeding
habit has been reported. It is easily possible, however, to force the
bedbug to feed on mice, rats, birds, etc., and probably it may do so
occasionally in nature in the absence of its normal host. The
abundance of this insect in houses which have long been
untenanted may occasionally be accounted for by such other
sources of food, but probably normally such infestation can be
explained by the natural longevity of the insect and its ability to
survive for practically a year, and perhaps more, without food.”

“Influence of Temperature.
“As a messmate of human beings in dwelling houses, the bedbug
is normally protected from extreme cold and is known to be an
abundant and serious pest far north. In fact, it is often more
troublesome in north temperate latitudes than farther south. This
may be accounted for partly by the fact that the bedbug is very
sensitive to high temperatures, and a temperature of 96° to 100° F.
or more, accompanied with a fairly high degree of humidity, results in
the death of large numbers of the bugs. The mature or partly mature
bedbugs can stand comparatively low temperatures, even below
freezing, for a considerable period. The eggs and newly hatched
larvæ, however, succumb to a temperature below freezing, if this
condition is prolonged for from 15 days to a month. The feeding and
developing activity of the insect practically ceases at 60° F., the
insect remaining quiescent and in semihibernation at temperatures
below this point. The most favorable temperatures for activity are
between 60° and 98° F. The activity of the insect is controlled entirely
by temperature and food supply, and, therefore, in heated houses
the insect may remain active throughout the winter. There is some
protection in winter, therefore, in sleeping in cold bedrooms.”

“The Bite of the Bedbug.

“The bite of the bedbug is decidedly poisonous to some
individuals, resulting in a slight swelling and disagreeable
inflammation. To such persons the presence of bedbugs is sufficient
to cause the greatest uneasiness, if not to put sleep and rest entirely
out of the question. With others, however, who are less sensitive, the
presence of the bugs may not be recognized at all, and, except for
the occasional staining of the linen by a crushed individual, their
presence might be entirely overlooked. The inflammation
experienced by sensitive persons seems to result chiefly from the
puncture of the skin by the sharp piercing setæ which constitute the
puncturing element of the mouth parts, as there seems to be no
secretion of poison other than the natural fluids of the mouth.
“The biting organ of the bedbug is similar to that of other insects of
its order. It consists of a rather heavy, fleshy under lip (the only part
ordinarily seen in examining the insect), within which lie four thread-
like hard filaments or setæ which glide over one another with an
alternating motion and pierce the flesh. The blood is drawn up
through the beak, which is closely applied to the point of puncture,
and the alternating motion of the setæ in the flesh causes the blood
to flow more freely.
“To allay the irritation set up by the bite of the bedbug, peroxide of
hydrogen or dioxygen may be used with good results.
“Tincture of iodine either at ordinary or double strength is also a
good counterirritant for use in cases of flea, mosquito, bedbug, and
other insect bites, but should be used with caution on the tender skin
of small children and on those who are affected with or disposed to
eczemic disorders.”

“Natural Enemies of the Bedbug.

“Living always in houses as it does and being well concealed, the
bedbug is not normally subject to much if any control by natural
enemies. Certain other household insects, however, do occasionally
prey upon the bedbug, as, for example, the house centipede and the
common little red house ant. Such enemies, however, are of very
small importance and yield little, if any, effective control except under
very exceptional circumstances.”

“Remedies.
“Undoubtedly the most efficient remedy for the bedbug is to
fumigate the infested house or rooms with hydrocyanic-acid gas.
This gas will penetrate into every crevice in the house or room where
the bedbugs conceal themselves and has an immediate
effectiveness which gives it an important recommendation,
especially when the infestation is considerable or of long standing.
This method of fumigation should be intelligently employed, as the
gas is deadly poisonous.” Five ounces of potassium cyanide per
1,000 cubic feet of space should be employed; exposure, one hour.[2]
Ten ounces per 1,000 cubic feet would be better.
[2] Creel, R. H., and Faget, F. M., Cyanide Gas for the Destruction
of Insects, with Special Reference to Mosquitoes, Fleas, Body
Lice, and Bedbugs: Public Health Reports, June 9, 1916, pp.
1464–1475; Reprint No. 343.
“The fumes of burning sulphur are also a very efficient means of
control where the conditions are such that this method can be used,
readily destroying the insect in all stages, including the egg. The
treatment is inexpensive compared with the use of hydrocyanic-acid
gas and offers much less risk of danger to human beings. There is,
however, a considerable risk of injury to household fabrics,
furnishings, and wall papers from the strong bleaching quality of
sulphur fumes. This danger will be somewhat diminished if the
fumigation can be done at a time when the room or house is
thoroughly dried out, as in winter by a furnace or other heating
system. Further precautions should be taken by removing all metallic
surfaces from the room or building, or by protecting them with a
coating of vaseline.”
Four pounds of sulphur are recommended for each 1,000 cubic
feet of space, and the building should be closed for the treatment for
at least five or six hours. “Sulphur candles may be used where
available, or the sulphurous gas or fumes can be generated by
burning the sulphur in a dish placed in the center of the room, and
for protection set within a larger vessel. Thoroughgoing precautions
must be taken to prevent accidental overflowing or the starting of a
fire, and after the fumigation the house should be given a thorough
airing.
“Other gases have been experimented with, such as formalin and
the vapors of benzine, naphthalene, and camphor, but these gases
are of little value. Similarly, insect powders are of little value, largely
from the difficulty of getting them into the crevices and other places
of concealment of the insects.
“The old-fashioned household remedies referred to below are
effective enough, though at a greater cost of time and personal
effort. They will, however, be often of much service in the case of
slight or recent infestations, or where the employment of more
poisonous and troublesome gases is objected to or is impracticable.
Of these simple methods of control perhaps the most efficient is in
very liberal applications of benzine or kerosene, or any other of the
lighter petroleum oils, introduced with small brushes or feathers, or
by injecting with syringes into all crevices of beds, furniture, or walls
where the insects may have concealed themselves. Corrosive
sublimate is also of value, and oil of turpentine may be used in the
same way. The liberal use of hot water, wherever it may be
employed without danger to furniture, etc., is also an effectual
method of destroying both eggs and active bugs.[3] A 5 per cent
solution of compound solution of cresol (liquor cresolis compositus)
in kerosene forcibly applied with a large plant sprayer is effective if
frequently applied.
[3] “A remedy for the bedbug has been devised by Mr. R. H. Pettit
(‘Notes on two insecticidal agents,’ 10th Rpt. Mich. Acad. Sci., p.
159–160, 1908) as a substitute for hydrocyanic-acid gas and
sulphur, and is reported to have proved very successful. The
preparation of this insecticide and its application are described as
follows:
“Alcohol is drawn through pyrethrum in a funnel until the powder
is well washed and a large part of the resinous principle extracted.
To do this, the powder is placed in a large funnel with filter-plate
and a layer of cotton wool at the bottom. An aspirator is attached
and the alcohol is at first slowly and later rapidly sucked through
six or eight times, during which operation it becomes highly
colored. To this liquid as a basis, are added several oils to give
permanence to the application. Both alcohol and pyrethrum
evaporate so quickly that it was thought best to carry in some
heavier volatile oils whose effects would last several days or even
weeks. The formula when completed stands as follows:
“To the extract made by washing 400 grams of pyrethrum with
2,000 c. c. of strong alcohol, are added—

50 grams gum camphor.

150 c. c. cedar wood oil.
25 grams oil citronella.
25 grams oil lavender.

“The application is best made with a large-sized atomizer, one

holding a pint or more and working with a piston instead of a
rubber bulb. * * * To obtain the best results, repeat the treatment
after about two weeks. We have tried this mixture repeatedly and
with uniformly gratifying results. Usually one application, if
thoroughly made, put a period to the complaints, about eight to
ten ounces being required in an average sleeping room. The odor
remains some little time in a room, but is not disagreeable to the
average person.
“This remedy can be readily prepared by a pharmacist in any
drug store.”
“Various bedbug remedies and mixtures are for sale, most of them
containing one or another of the ingredients mentioned, and these
are frequently of value. The great desideratum, however, in a case of
this kind, is a daily inspection of beds and bedding, particularly the
seams and tufting of mattresses, and of all crevices and locations
about the premises where these vermin may have gone for
concealment. A vigorous campaign should, in the course of a week
or so at the outside, result in the extermination of this very obnoxious
and embarrassing pest.”
“Temperature control.—The possibility of temperature control is
indicated in the discussion elsewhere of the effect of temperature on
this insect. A temperature maintained below freezing for 10 or 15
days destroys the eggs, and this temperature continued for 15 days
to a month will destroy the newly hatched young. It may be,
therefore, that if infested houses in cold climates should be opened
up and allowed to remain at a temperature well below freezing for a
considerable period, all eggs and the young, and possibly most if not
all of the adults, would be exterminated. This method of control might
perhaps be practicable at least in the case of summer houses in the
North which are left untenanted in the winter.
“The maintaining of high temperatures may be an even more
efficient method of control. The activity of the bedbug is at its
greatest between 60° and 70° to 75°. As indicated elsewhere, in a
temperature of 96° to 100° F., accompanied with a high degree of
humidity, newly hatched bedbugs perish within a few days, and, if
this temperature is raised to 113° F., in a few minutes.[4] A
temperature of 113° will also destroy the eggs, and with these higher
temperatures the item of humidity is not apparently important.”
[4] Editorial note.—An account of successful use of live steam
to eradicate bedbugs in bunkhouses, as practiced by a lumber
company in Oregon, was published in Public Health Reports, Nov.
28, 1919, pp. 2713–2714. In that instance steam pipes were
tapped, after closing all doors and windows, and a temperature of
160° F. was held for approximately 3 hours. The officials of the
company stated that 2 months after the steaming no signs of
bedbugs had been found.
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Transcriber’s Notes:
Archaic and variable spelling has been preserved.
Variations in hyphenation and compound words have been
preserved.
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