In their new article, Litigation Discovery and Corporate Governance: The Missing Story About the ‘Genius of American Corporate Law,’ Érica Gorga and Michael Halberstam argue that the U.S.’s unique, liberal discovery standards in private civil litigation have had an important role in shaping the content of corporate law.

They make a number of interesting claims in the paper, including that civil discovery provides detailed data for courts and regulators to use when creating legal standards, and that the omnipresent threat of civil discovery forces corporate managers to run their companies with more care: they must engage in extensive internal monitoring and recordkeeping in order to protect themselves should a dispute arise.  Additionally, the internal process of having attorneys and other experts review documents in anticipation of litigation – even if the documents are never turned over to the plaintiffs – generates information that assists managers, in their monitoring roles, and assists gatekeepers – attorneys, experts, etc – in understanding both the specific firm targeted and the industry in general.  Gorga and Halberstam also argue that the standards for adequacy of corporate internal investigations – which themselves play a growing role in corporate governance – are informed by the standards set by civil discovery in litigation.  Finally, the authors argue US Style corporate governance and securities laws cannot be easily exported to legal systems that do not have civil discovery, because civil discovery is a necessary part of the US’s ex post enforcement mechanism.

I found the paper very interesting, and I agree that discovery is critical to a regime that depends on private ex post litigation to enforce legal rules.  That said, I think the authors do not give sufficient weight to the argument that corporate managers – aware of civil discovery – are incentivized to keep records to the bare minimum necessary to establish that they met their obligations.  Board meeting minutes, for example, are often extremely sparse, describing the basic agenda and topics covered, but giving no sense of the color and tenor of the discussion.  High level corporate officers have been known to refuse to use email at all for fear of generating incriminating electronic trails.  There are limits to managers’ ability to protect themselves this way – modern business often requires electronic communication, and god knows every litigator has, at one point or another, dug up the incriminating email trail that finishes with someone saying “DELETE THIS.”  But the point remains that the possibility of discovery can be just as much of an incentive for managers to create misleadingly exculpatory paper trails as to engage in careful monitoring.