I'm pleased to report that The Research Handbook on the Economics of Corporate Law is now available. I contributed a chapter on director primacy to the Handbook.
The Introduction by Claire Hill and Brett McDonnell is available on line from SSRN:
Abstract: This essay is the Introduction to the Research Handbook on the Economics of Corporate Law. After briefly surveying the origins of modern economic analysis of corporate law, it analyzes leading developments in recent decades. Major developments in the law and economics of corporate law have in some cases followed from developments in the law, including changes in fiduciary duty standards, the growth of shareholder activism, the increasing role of independent directors, changes in executive compensation, a new emphasis on various gatekeepers, federalization of corporate governance rules, and globalization. Other developments have followed from trends within economics, including some new ideas in the theory of the firm, greater emphasis on empirical research, a focus on market failures due to incomplete information, the growth of behavioral economics, and some increased emphasis on comparative institutional analysis. The essay speculates that future developments may include a new focus on systemic risk in light of the financial crisis and greater use of empirical research methodologies other than regression analysis. The essay concludes with an overview of the contributions to the volume, which is divided into five Parts: corporate constituencies, insider governance, gatekeepers, jurisdiction, and new theory.
I've read many of the chapters and think this is a very important contribution to the literature. I commend it highly to lawyers, judges, corporate governance professionals, and others interested in both law and policy in this area.
In a recent law review article (35 Seattle U. L. Rev. 1033), Matt Bodie compliments my director primacy theory for having "move[d] the ball significantly when it comes to our conceptions of the modern corporation" and for having "been influential in academic, practitioner, and judicial circles." He notes, however, that:
Bainbridge fails to flesh out his theory sufficiently to justify the near absolute control he provides to the board. He repeatedly relies on Arrow's contrast between consensus and authority to resolve any questions of power allocation in favor of stronger authority. This move--characterized by Brett McDonnell as Bainbridge's “Arrowian moment”--is the crux of his model. But as McDonnell points out, Arrow's description of the tradeoff between authority and accountability does not resolve all policy questions in favor of authority. Ultimately, Arrow's dichotomy--and by extension, the director primacy model--is “not able to tell us whether reform in favor of somewhat more accountability at the expense of some, but far from total, loss in authority is a good idea or not.”
I responded to the "Arrowian moment" critique in a paper entitled, simply enough, Director Primacy, which appears in Research Handbook on the Economics of Corporate Law. In it, I argue that:
Critics of the director primacy model sometimes suggest that it overstates the importance of authority. Brett McDonnell (2009, 143), for example, argues that “Bainbridge moves very, very quickly from recognizing the tension between authority and accountability to arguing that we should presume a legal structure that favors authority over accountability, unless there are strong arguments against that presumption.” Apropos the discussion in the preceding section, however, I contend that the utility of director primacy is confirmed by its ability to explain one of the truly striking things about U.S. corporation law; namely, the extent to which the balance between authority and accountability in fact leans towards the former. As we’ve seen, for example, a host of rules serve to limit the power of shareholders vis-à-vis directors. As we’ve also just seen, the business judgment rule is designed precisely “to protect and promote the full and free exercise of the managerial power granted to Delaware directors.”
In the closely related context of the procedural rules governing shareholder derivative litigation, the New York Court Appeals stated in Marx v. Akers that “By their very nature, shareholder derivative actions infringe upon the managerial discretion of corporate boards.... Consequently, we have historically been reluctant to permit shareholder derivative suits, noting that the power of courts to direct the management of a corporation’s affairs should be ‘exercised with restraint.’” The Marx court further noted the need to strike “a balance between preserving the discretion of directors to manage a corporation without undue interference, through the demand requirement, and permitting shareholders to bring claims on behalf of the corporation when it is evident that directors will wrongfully refuse to bring such claims,” which is precisely the balance between authority and accountability the director primacy model predicts.
We observe similar rules seemingly designed to protect the board’s authority in statutory provisions, such as those governing transactions in which the directors are personally interested, including management buyouts, which involve a significant conflict of interest and therefore tend to get close judicial scrutiny, but which receive judicial deference in appropriate cases. (Bainbridge 1993, 1074-81) The same is true for the similar problem of target board of director resistance to unsolicited takeover bids. (Bainbridge 2008b)
On the other hand, I have never claimed that the board should have unfettered authority. In some cases, accountability concerns become some pronounced as to trump the general need for deference to the board’s authority. Once again, I turn to Arrow (1974, 78):
To maintain the value of authority, it would appear that [accountability] must be intermittent. This could be periodic; it could take the form of “management by exception,” in which authority and its decisions are reviewed only when performance is sufficiently degraded from expectations ....
Given the significant virtues of discretion, however, I continue to believe that one must not lightly interfere with the board’s decision-making authority in the name of accountability.
McDonnell (2008, 143) contends that this argument proves too much when applied to real world problems, however:
The argument that Bainbridge borrows from Arrow only tells us that there is a trade-off between authority and accountability, and that both have real value. It also tells us that it will generally be unwise to choose a structure that eliminates authority completely in favor of accountability, or vice versa. None of the major pro-accountability reform proposals currently in play, however, comes even close to eliminating board authority. In the world in which we live today, Arrow's argument is not able to tell us whether reform in favor of somewhat more accountability at the expense of some, but far from a total, loss in authority is a good idea or not.
... I have never denied that the argument McDonnell (2009, 143) calls my “Arrowian moment” doesn't do much more than establish a general presumption in favor of respecting director authority. Each doctrinal problem must be carefully analyzed to determine where to strike the balance between authority and accountability. The necessary analysis typically requires one to go beyond the “Arrowian moment” to consider other policies. Hence, for example, my analysis of the business judgment rule acknowledged that:
Critics of the [Arrowian moment] likely would concede that judicial review shifts some power to decide to judges, but contend that that observation is normatively insufficient. To be sure, they might posit, centralized decision making is an essential feature of the corporation. Judicial review could serve as a redundant control on board decision making, however, without displacing the board as the primary decision maker. (Bainbridge 2008, 114)
To explain why the presumption in favor of authority prevails in this context, accordingly, I moved on to consider other policies, such as encouraging risk taking, preventing hindsight bias, and so on.
Similarly, I acknowledge that it’s not enough to point out that proposals to change the shareholder voting process would shift the balance towards accountability. One must go on to ask why such a shift is undesirable (or, preferably, to defend the presumption against such a shift). Hence, in Bainbridge (2008, chap. 5), for example, I went on to consider such questions as whether the shareholders would use the powers activists propose to give them, whether certain shareholders are more likely to do so than others, and whether those shareholders are likely to use their new powers to pursue private gains at the expense of other shareholders.
In sum, director primacy sets the stage. It defines the parameters within which the debate over particular issues takes place. It enables one to make broad predictions about the law and foundational critiques of legal rules that depart from those predictions. The fact that specific problems sometimes require additional fine tuning is hardly proof that the basic model is flawed.
Having made that concession, however, I must immediately recall, by way of analogy, recall Benjamin Cardozo’s famous dictum that the legal duties of a fiduciary should not be undermined by “the ‘disintegrating erosion’ of particular exceptions.” Just so, if one believes that authority has survival value, one should protect the board of directors’ decision-making authority from the “disintegrating erosion” of reform.
This does not mean that one should always reject reforms that shift the balance towards accountability. It does, however, suggest one must pay attention to the cumulative impact of repeated reform proposals, lest one subject the board’s authority to the legal equivalent of death by a thousand cuts. It also suggests that there ought to be at least a presumption in favor of authority. In light of the huge advantages authority offers the corporate form, the burden of rebutting that presumption should be on those who wish to constrain the board’s authority.
 Smith v. Van Gorkom, 488 A.2d 858, 872 (Del. 1985).
 Mark v. Akers, 666 N.E.2d 1034, 1037 (N.Y. 1996) (quoting Gordon v. Elliman, 119 N.E.2d 331, 335 (N.Y. 1954)); see also Pogostin v. Rice, 480 A.2d 619, 624 (Del. 1984) (“[T]he derivative action impinges on the managerial freedom of directors ....”).
 As we have just seen, however, such a presumption has considerable explanatory value when one reviews the many corporate law doctrines that enshrine deference to boards. If one grants my starting hypothesis that corporate law tends towards efficient solutions, those doctrines are persuasive evidence for director primacy.
 Meinhard v. Salmon, 249 N.Y. 458, (N.Y. 1928).
WHY? Radio presents: "Are Corporations People?” with guest Stephen M. Bainbridge.
Sunday, June 10, 5 p.m. central.
Listen live from anywhere in the world at www.whyradioshow.org and in North Dakota at 89.3 (Grand Forks), 91.9 (Fargo), 90.5 (Bismarck), and on Prairie Public radio stations across North Dakota.
RSVP on Facebook at: https://www.facebook.com/events/322982607777391/
Stephen Bainbridge is the William D. Warren Distinguished Professor of Law at the UCLA School of Law in Los Angeles. He is a prolific scholar, whose work covers avariety of subjects, but with a strong emphasis on the law and economics ofpublic corporations. He has written over 75 law review articles and numerous books. He has been a Salvatori Fellow with the Heritage Foundation and in 2008 and 2011, he was named by Directorship magazine to its list of the 100 most influential people in the field of corporate governance.
WHY? Radio presents: "Are Corporations People?” with guest Stephen M. Bainbridge.
Sunday, June 10, 5 p.m. central.
Listen live from anywhere in the world at www.whyradioshow.org and in North Dakota at 89.3 (Grand Forks), 91.9 (Fargo), 90.5 (Bismarck), and on Prairie Public radio stations across North Dakota.
RSVP on Facebook at: https://www.facebook.com/events/322982607777391/In 2010, the U.S. Supreme Court ruled that corporations should be considered persons. They have the same rights as individuals, including the freedom to fund political campaigns. This led to a firestorm of debate with advocates arguing both sides, each pointing to the absolute necessity of their positions. On this episode of WHY?, we will ask what it means for a corporation to be a person, how collective action affects agency, and how these large companies are to be considered legally and morally accountable for their actions.
Stephen Bainbridge is the William D. Warren Distinguished Professor of Law at the UCLA School of Law in Los Angeles. He is a prolific scholar, whose work covers avariety of subjects, but with a strong emphasis on the law and economics ofpublic corporations. He has written over 75 law review articles and numerous books. He has been a Salvatori Fellow with the Heritage Foundation and in 2008, he was named by Directorship magazine to its list of the 100 most influential people in the field of corporate governance.
Stephen's blog can be found at: http://www.professorbainbridge.com/
My friend and colleague Eugene Volokh blogs that:
Kentucky Employees May Not Be Fired for Lawfully Storing Guns in Their Cars
That’s what Kentucky statutes provide, and today the Kentucky Supreme Court applied this rule in Mitchell v. University of Kentucky (Ky. Apr. 26, 2012). There was something of a complication because the defendant was a university, and state law provides universities with generally broad authority to restrict weapons on their property. But the court concluded that the statutory provisions allowing employees to lawfully store guns in their cars is an exception from that broad university power.
As Clayton Cramer explains, the Mitchell case "ruled that an employee and grad student who was fired from his job for having a handgun in his car (for which he had a concealed handgun license) has a valid basis for a wrongful termination suit against the university. It's a complicated discussion, but the core of the argument is that Mitchell was exercising his right to keep and bear arms in conformity with Kentucky law. While the university has some authority to regulate possession of arms on university property, when those regulations are in conflict with public policy, as defined by the state legislature, the university's rules lose the fight."
I'm not a Second Amendment enthusiast, but set that issue aside. What bugs me about cases like this is the implications for the doctrine of at-will employment. Cases like this illustrate that both right and left are willing to throw at-will employment under the bus to advance policy goals. In contrast, I think at-will employment (except, of course, for tenured law professors ) is a crucial social policy that deserves better from those of us on the right who respect free enterprise and free markets.
The economic effects of "public policy"-based exceptions to the at-will employment doctrine are well-established.
There are predictable economic effects associated with the increasing acceptance of the wrongful-termination doctrine. In effect, it creates for workers some degree of property right in their existing jobs. These additional rights tend to increase the costs to employers of hiring labor. For example, the potential threat of legal action resulting in liability awards to aggrieved employees now becomes a part of the cost calculus that employers must make when considering the hiring of new workers. Also, the threat of such actions by employees makes it more difficult for employers to adjust their usage of labor in an efficient manner to fit changing market conditions. To a certain extent, the labor input into the productive process no longer can be treated as a variable input. Rather, it has acquired some of the characteristics of a fixed input.
The presence of additional labor costs associated with the employment relationship requires a response by employers. There are two options open to them. One is through changes in the level of workers' compensation. Added labor costs perceived by those who hire labor may be passed on to employees by downward adjustments in labor compensation. The other possibility is to reduce the number of workers hired. The mix of these two options will depend on the nature of the elasticities of demand for and supply of labor. This is spelled out in the Technical Appendix. Using what we view as a reasonable set of these elasticities, also described in the Technical Appendix, it appears that about 85 percent of any additional labor cost arising out of the emergence of the wrongful-termination doctrine will be passed on to employees in the form of reduced wages and benefits for workers. The remainder represents what can be thought of as "net uncompensated costs" to the employer and will negatively affect the willingness of employers to hire workers. ...
Lawyers, labor unions, and other groups have successfully sought changes in the legal environment in which business operates to subvert the sanctity of private contracts, particularly the ancient doctrine of employment-at-will. In a sense, these developments are a form of stealth taxation. They have imposed very significant and real burdens on the American people. ... This is stealth taxation because it is a burden that was not imposed in a manner that was clear and open to the taxpayers. Legislatures did not in a single historic vote decide to radically revise our system of contracts and property rights. Moreover, it is highly regressive taxation, falling heavily on the poor and disadvantaged. (Link)
Another paper summarizes the reasons this form of stealth taxation is highly inefficient:
Employment-at-will dominated other potential terms of exchange because it was efficient. If an employee can be dismissed at any time and for any reason, then said employee has every reason to be productive. Productive employees have little to fear from arbitrary dismissal, since profit-seeking employers can only hurt themselves by dismissing them. Even today, employment-at-will is embraced and long-term contracts avoided in most cases outside of union and government employment.
If at-will contracts are not the best arrangement for those involved, the parties are always free to modify their agreement to mutual advantage. Transaction costs between the two parties are extremely low, and advocates of intervention have never been able to document any substantial third-party effects that justify interference on efficiency grounds. The at-will contract allows more-or-less continuous minor adjustments of contract terms in any direction on a mutually agreeable basis. The arrangement is self-enforcing because a mix of formal and informal controls link payments to employee value and effort rendered. The arrangement avoids the problems inherent in explicit contract language and its inevitable unforeseen gaps, as well as the incentive deficiencies and shirking problems accompanying a fixed duration of employment. While average U.S. job tenure is eight years, it is voluntary markets, not unjust dismissal laws, that sustain such relations. (Link)
You might say, "well, this is just a little exception to at will employment and it protects Constitutional rights." If so, you would be wrong. It would take a remarkably extremist understanding of the Second Amendment to believe that one has a Constitutional right to possess firearms on your employer's property.
In any case, it is the steady erosion of carving out one "little exception" to the at will doctrine after another that has essentially eviscerated that doctrine.
The new public policy doctrines prohibit employers from dismissing employees for performing acts protected by public policy or for declining to commit acts prohibited by public policy. While the public policy exceptions may be the least controversial incursions against at-will employment, problems with these exceptions abound. The term "public policy" evades precise and uniform definition. Can an exception be declared by legislative action only? Or can it emanate from judicial and other sources? The open-ended nature of public policy exceptions is typified by the California court that in Peterman v. Local 396 (1959) declared that anything that contravenes "good morals or any established interests of society" constitutes action against public policy. SincePalmattere v. International Harvester (1981), Illinois courts have expansively defined public policy as "that which is right and just and collectively affects the state’s citizenry." And in Nees v. Hocks (1975), an Oregon court declared that an employer can be held responsible for dismissing an employee "for a socially undesirable motive."
From an economic point of view, a public policy prohibition on dismissal might have an efficiency rationale based on third-party effects. Consider a relatively uncontroversial example: no dismissal for employee absence due to jury duty. The rationale behind these laws is that jury service is a public service, public good, or externality-rich action that allegedly serves the general interest. But even if this proposition is accepted, the cost is not spread across the entire community; rather, it is forced on the juror-employee and his firm’s owners. The tax, or "taking," in other words, is suffered by the absent employee and the unlucky business owners who might otherwise have replaced that employee. The cost of jury duty has been arbitrarily externalized by the courts, legislature, and general public. (Link)
In sum, I don't care whether the guy got fired for having a gun in his car or for [insert here a politically incorrect reason that would have some hyper-sensitive, far-left UCLA law student with no sense of humor running off to once again call on the Dean and Chancellor to fire me for daring to exercise my free speech rights ... not that I'm bitter or anything]. Whether it's a policy preference of right or left, only truly fundamental social goals like ending race discimination ought to trump the principle of at-will employment.
I'm dubious that THE Foreign Corrupt Practices Act, as it stands on the books today, is a particularly wise statute. Among the many cogent criticisms that have been lodged against the FCPA are the following:
Having said all that, however, I believe that there is a case to be made for A FCPA. As the OECD has observed in connection with its anti-bribery convention:
Bribes to high-level officials for government contracts, such as for defence contracts, infrastructure projects, and oil and gas concessions, can result in the plundering of national assets, and endemic “confusion” between private and public funds in some developing and transition economies.
Foreign bribery distorts international competitive conditions and denies companies the ideal “level playing field” on which to do business. The OECD is leading global efforts to level this playing field for international business by fighting to eliminate bribery of foreign public officials from the competition for contracts and investment.
Corruption in awarding business contracts exacts social, political, environmental and economic costs that no country can afford. If public officials take bribes when awarding contracts to foreign businesses for public services such as roads, water or electricity, serious consequences result: prices are inflated, allocation of resources is distorted, foreign investment becomes less appealing, and competition is undermined. The effects on investment, growth and development are devastating.
As Elizabeth Spahn has demonstrated, moreover, bribery is not a victimless crime (41 GEOJIL 861):
Modern economic research reveals that while bribery may facilitate an isolated transaction, when examined over a longer timeframe bribery provides market incentives to increase regulations. Bilateral monopolies of insiders (business and government), misnamed crony ‘capitalism,’ use their relationships to restrict market access and harass competitors, reducing actual market-based competition. ‘Friendly’ regulatory environments, reducing regulatory burdens for bribe-paying insiders, erode safety regulations and distract business from tending to safety and quality control, focusing business efforts instead on developing relationships with powerful officials. The longer timeframe reveals an eco-cycle of regulations, bribery and deteriorating safety/quality control.
As a business transaction from the micro-economic viewpoint, bribery is a high-risk business model. [She] provides specific examples of various risk-points in a bribe-transaction, including unreliability of corrupted partners and intermediaries, difficulties establishing fair prices for bribes, and very risky exit strategies. Where entire cultures tolerating bribery arise, modern scholarship reveals opportunistic penetration by transnational organized criminal syndicates.
It strikes me that the solution is a multi-national treaty among the members of the OECD and G-20, in which a workable set of global rules are developed to ensure that all firms compete on a level playing field. In addition to harmonized rules, you'd need some sort of mechanism for sanctioning countries that fail to achieve some agreed level of enforcement efforts.
Stefan Padfield is working on an interesting project, trying to sort out whether there is a theory of the corporation somewhere in the muddle that is the Supreme Court's campaign finance law. This a Herculean task, as it is one the court itself has mostly eschewed. As I noted when FCC v. AT&T came down:
The Citizens United decision last term attracted much criticism--not least from Con Law Professor-in Chief Obama--for holding that a corporation is a person and as such has certain constitutional rights. While I agreed with the holding, I was disturbed that the Chief Justice's majority opinion for the Supreme Court so obviously lacked a coherent theory of the nature of the corporation and, as such, also lacked a coherent theory of what legal rights the corporation possesses.
The utterly specious word games that drive this opinion simply confirm that Chief Justice Roberts has failed to articulate a plausible analytical framework for this important problem.
In his latest post, however, Prof Padfield prodded the bear by discussing the implications of director primacy for his project:
The aspect of my paper that I want to discuss this week is my assertion that the director primacy theory of the corporation is better aligned with real entity theory rather than the aggregate theory of the corporation—at least for the purposes of my paper. For the uninitiated, the aggregate theory of the corporation posits that the corporation is best understood as primarily an association of individuals. This is to be contrasted with artificial entity theory, which views the corporation as much more than simply an association of individuals—and traces that “much more” to advantages flowing from the state. Real entity theory, meanwhile, argues that the corporation should be understood as something independent of both the individuals that make it up and the state that created it. ...
My greatest obstacle in aligning director primacy theory with real entity theory is likely that Stephen Bainbridge, the leading proponent of the theory whom I quote above, disagrees. However, even Bainbridge has arguably acknowledged that there may be some limited role for viewing director primacy as an expression of real entity theory: “[T]o the limited extent to which the corporation is properly understood as a real entity, it is the board of directors that personifies the corporate entity” (quote from here).
To follow the argument below, please go read the whole thing. Now. Don't worry, I'll be here when you get back.
Okay, you're back.
My clearest statement of my own views on the nature of the corporation appeared in The Board of Directors as Nexus of Contracts. (You'll want to download it, but that can wait until we're done here.)
In it, I wrote that:
In one sense, the corporation is a nexus. To be sure, the traditional insistence that the firm is a real entity tends towards mindless formalism. Yet, perhaps some deference should be shown the corporation’s status as a legal person. Corporate constituents contract not with each other, but with the corporation. A bond indenture thus is a contract between the corporation and its creditors, an employment agreement is a contract between the corporation and its workers, and a collective bargaining agreement is a contract between the corporation and the union representing its workers. If the contract is breached on the corporate side, it will be the entity that is sued in most cases, rather than the individuals who decided not to perform. If the entity loses, damages typically will be paid out of its assets and earnings rather than out of those individuals’ pockets. To dismiss all of this as mere reification ignores the axiom that ideas have consequences.
If the connected contracts model is correct, and there is no nexus, employment contracts would cascade—looking rather like a standard hierarchical organization chart—with each employee contracting with his or her superior. (Debt contracts would be even more complex.) Such a cascade would be costly to assemble, if not impossible. Most corporate constituents lack any mechanism for communicating with other constituencies of the firm—let alone contracting with one another. Instead, each constituency contracts with a central nexus. Accordingly, constituencies must be (and are) linked to the nexus and not each other.
Although I perhaps could have been clearer (I am reminded of a quip attributed to Ronald Dworkin: "Once again, my critics have deliberately misunderstood me," but that seems inapt to the present discussion), this passage should not be understood as embracing either the real or artificial entity theory of the corporation.
The passage must be put in context. I am responding here to connected contracts model advanced by my friends Mitu Gulati, Bill Klein, and Eric Zolt:
Gulati, Klein, and Zolt contend that the firm is usefully understood as a set of connected contracts. Their model departs from contractarian orthodoxy, however, by denying the existence (and even the relevance) of the nexus concept. [Hence,] the firm described by Gulati, Klein, and Zolt neither is nor has a nexus. ...
In reply to which, I posed the question of whether "a model lacking the concept of a nexus [can] make useful predictions about the legal rules governing such firms?"
My answer to that question, obviously, is "no." In elaborating on that answer, I was trying to make the point that somewhere within the corporation there must be a nexus of contracts between factors of production. As I explained in the article:
In a more important sense, however, the corporation has a nexus. After all, to say that the firm is a nexus is to imply the existence of a core or kernel capable of contracting. But kernels do not contract—people do. In other words, it does us no good to avoid reifying the firm by reifying the nexus at the center of the firm. Hence, we must search for the person or persons who serve as the nexus of the set of contracts making up the firm….
If the corporation has a nexus, however, where is it located? The Delaware code, like the corporate law of every other state, gives us a clear answer: the corporation’s “business and affairs . . . shall be managed by or under the direction of the board of directors.” Put simply, the board is the nexus.
Accordingly, as I explained in the introduction to that article:
The director primacy model proposed herein is grounded in the prevailing law and economics conception of the firm; namely, the so-called nexus of contracts model.
Of course, I don't have a copyright on director primacy. Prof Padfield is free to reinterpret it as he sees fit. But I do want to take issue with his claim that:
Because director primacy theory at the very least has a lot in common with some versions of real entity theory, it seems better to locate it there than ignore it. For example, real entity theory has been described by Reuven Avi-Yonah as the theory which “represents the most congenial view to corporate management, because it shields management from undue interference from both shareholders and the state” (quote from here). That seems quite consistent with director primacy.
Just because two roads end up in the same place, doesn't mean that they are one and the same.
I argued in The Board of Directors as Nexus of Contracts (don't forget to download it) that the power of fiat within the corporation is an off-the-rack term of the standard form contract provided by corporate law:
... there is no necessary contradiction between a theory of the corporation characterized by command-and-control decision making and the contractarian model. The set of contracts making up the corporation consists in very large measure of implicit agreements, which by definition are both incomplete and unenforceable. Under conditions of uncertainty and complexity, the parties cannot execute a complete contract, so that many decisions must be left for later contractual rewrites imposed by fiat. It is precisely the nonenforceability of implicit corporate contracts that makes it possible for the central decisionmaker to rewrite them more or less freely. The parties to the corporate contract presumably accept this consequence of relying on implicit contracts because the resulting reduction in transaction costs benefits them all. It is thus possible to harmonize the Coasean and contractarian models without having to reject a theory of the firm in which the board of directors has the power to, say, direct the firm’s workers. Instead, the firm’s constituents voluntarily enter into a relationship in which they accept the board’s power of fiat, while reserving the right to disassociate from the firm.
Likewise, I argued that the business judgment rule--which shields most exercises of that power from judicial review--is another off-the-rack term of the corporate standard form contract.
To the extent that director primacy implies legal rules that shield "management from undue interference from both shareholders and the state," it therefore does so because those rules are majoritarian defaults provided by the law to facilitate private ordering. Not because the corporation is an entity.
Finally, I want to close by disclosing a personal foible. I have a very practical mind. Most abstract reasoning strikes me as metaphysical mumbo jumbo. When I look at the corporation, I thus find myself agreeing with Edward, First Baron Thurlow, who put it best: "Did you ever expect a corporation to have a conscience, when it has no soul to be damned, and no body to be kicked?"
Apropos of which, in working on this post, I came across a truly wonderful old article: Felix S. Cohen, Transcendental Nonsense and the Functional Approach, 35 Colum. L. Rev. 809 (1935). As John Hasnas summarized the key part of the article (19 J.L. & Pol'y 55):
Felix Cohen began Transcendental Nonsense and the Functional Approach, perhaps the most entertaining law review article ever written, by describing a heaven of legal concepts in which could be found “all the logical instruments needed to manipulate and transform . . . legal concepts and thus to create and to solve the most beautiful of legal problems.” This heaven, which contained
a dialectic-hydraulic-interpretation press, which could press an indefinite number of meanings out of any text or statute, an apparatus for constructing fictions, and a hair-splitting machine that could divide a single hair into 999,999 equal parts and, when operated by the most expert jurists, could split each of these parts again into 999,999 equal parts . . . [was] open to all properly qualified jurists, provided only they drank the Lethean draught which induced forgetfulness of terrestrial human affairs.
This was the realm of transcendental nonsense in which legal questions were resolved by examining the relationships among abstract concepts divorced from any consideration of the practical consequences or ethical quality of the decision.
As his first illustration of transcendental nonsense, Cohen selected the law's treatment of corporations. He pointed out that in deciding whether a corporation incorporated in one state could be sued in the courts of another, one might expect courts to make “some factual inquiry into the practice of modern corporations in choosing their sovereigns and into the actual significance of the relationship between a corporation and the state of its incorporation,” to consider “the difficulties that injured plaintiffs may encounter if they have to bring suit against corporate defendants in the state of incorporation . . . [and] the possible hardship to corporations of having to defend actions in many states, considering the legal facilities available to corporate defendants,” and to decide the case “[o]n the basis of facts revealed by such an inquiry, and on the basis of certain political or ethical value judgments as to the propriety of putting financial burdens upon corporations . . . .” Yet, when the New York Court of Appeals was called upon to rule on this matter, “[i]nstead of addressing itself to such economic, sociological, political, or ethical questions . . ., the court addressed itself to the question, ‘Where is a corporation?’ Was this corporation really in Pennsylvania or in New York, or could it be in two places at once?”
But how is such a question to be answered? As Cohen pointed out,
Clearly the question of where a corporation is, when it incorporates in one state and has agents transacting corporate business in another state, is not a question that can be answered by empirical observation. Nor is it a question that demands for its solution any analysis of political considerations or social ideals. It is, in fact, a question identical in metaphysical status with the question which scholastic theologians are supposed to have argued at great length, “How many angels can stand on the point of a needle?”
Nevertheless, the court ruled that the corporation could be sued in New York because by maintaining an office there, the corporation had come into the state. The problem with this ruling is that
[n]obody has ever seen a corporation. What right have we to believe in corporations if we don't believe in angels? To be sure, some of us have seen corporate funds, corporate transactions, etc. . . . But this does not give us the right to hypostatize, to “thingify,” the corporation, and to assume that it travels about from State to State as mortal men travel. Surely we are qualifying as inmates of . . . [the] heaven of legal concepts when we approach a legal problem in these essentially supernatural terms.
Deciding cases by reifying the abstract concept of the corporation is a classic example of transcendental nonsense.
Put simply, I just can't wrap my head around the metaphysical abstractions required to think of the corporation as an entity--real or otherwise--rather than as an aggregate. Being unable to perform the mental gymnastics necessary to "thingify" the corporation, I am happy to find such a distinguished precedent for dismissing the effort so blithely. After all, as James Boyle wrote (62 U. Colo. L. Rev. 489):
The realist attack was particularly effective in corporation law, where the “constructed” nature of the subject was more apparent. In Transcendental Nonsense and the Functionalist Approach, Felix Cohen suggests that the question “where is a corporation” is the kind of nonsense you can expect from scholastics drunk on their own wordy theories. In fact, talking about whether the corporation is “in the jurisdiction”--or even exists at all--is simply a way of expressing our conclusions about the “policy question” of whether we wish to hold the corporation liable, or grant its directors immunity from suit, or whatever. In other words, to talk of the legal subject is merely to restate a conclusion reached on other grounds. Legal subjects pop in and out of being as a (mysteriously arrived at) set of policy conclusions changes and shifts.
Speaking as a "Reagan realist," i.e., someone who "recognizes the contingent nature of law but insists that such contingency is limited by moral, political, and cultural values that are essentially conservative" (47 Hous. L. Rev. 297), that strikes me as basically right.
Anyway, be sure to go read Prof Padfield's article. It's provocative, thoughtful, and engaging.
I'm off to Northern California to give a speech on Director Primacy in Nonprofit Corporations, which looks at the theory and practice of current issues in not for profit corporate governance. Here's the PowerPoint show for my presentation:
The Economist claims that South Korea's allegedly weak corporate governance rules are responsible for South Korea's allegedly underperforming equitiy market:
So what is the source of the “Korea discount”, which means that the KOSPI has a forward price-to-earnings ratio of under ten, below most other Asian stockmarkets (see chart)? There are a few possibilities. The national economic model is still built on exports, often in highly cyclical industries such as shipbuilding. The capital structure of South Korean firms has historically been debt-heavy.
But the prime cause of the discount is more likely to be poor corporate governance at the family-run chaebol conglomerates that dominate the economy. Nefarious schemes to pass on control to sons, avoid taxes and exploit company assets for the benefit of family members are widely discussed in private.
What I know about South korean corporate governance would not take very long to recite, but even so I read the Economist article with some skepticism.
While superior corporate governance logically ought to lead to superior stock performance, the evidence of such an effect is weak. Indeed, event studies (at least in the US) generally don't show much of a link between the two:
Virtually all of the important mechanisms of corporate governance have been subjected to event study analysis. These include boards of directors, shareholder proposals, derivative lawsuits, and executive compensation. Although all of these devices have been posited to perform a critical function of reducing the agency costs of the separation of ownership and control in the U.S. public corporation, empirical studies do not provide strong support for this viewpoint. Neither shareholder proposals nor lawsuits have a significant positive price effect. A positive stock price effect is associated with appointment of an independent director to the board, but board composition has not been found to impact positively on performance.
Sanjai Bhagat & Roberta Romano, Event Studiesand the Law: Empirical Studies of Corporate Law, 4 Am. L. & Econ. Rev. 380, 401 (2002).
There are, I suppose, two possible explanations for that finding. First, superior corporate governance rules either do not affect stock prices or have such a minor effect that they are swamped by other factors. Second, conventional wisdom about what constitutes superior corporate governance is wrong. Both explanations suggest that The Economist's recommendation that South Korea adopt such rules may not corret the alleged problem. As Bhagat and Romano observed of their findings: "These findings suggest that widely shared beliefs concerning what are essential components for effective corporate governance may be mistaken and that affirmative policies to foster such devices ought to be reconsidered."
Another reason I'm skeptical of The Economist's account is my understanding that chaebol “can be thought of as the brainchild of the government.” Sung-Hee Jwa, The Evolution of Large Corporations in Korea: A New Institutional Perspective on the Chaebol 19 (2002). “Basically, the formation and growth of the chaebol was a result of the interaction between the government's industrial policies and the chaebol's responses to them.” Id. at 27. According to Gilson and Milhaupt, "important bilateral monopoly qualities of the government-chaebol relationship remain to this day." 59 AMJCL 227, 249 (2011).
One therefore wonders whether state meddling is more to blame than poor governance.
Brett McDonnell has an interesting post on the inherent ambiguity of "prosocial" behavior. His points are important, but I would like to rephrase and broaden one of them. Brett argues that "the question is prosocial behavior in whose favor? What if there are conflicting possible groups towards whom one might be loyal?"
As I understand the point he's making, it is a version of the broader problem that whether something is prosocial depends on your definition of the good society. On many issues, I suspect Brett and I would have very different definitions of the good society. He might think the good society promotes reproductive choice, while I might think the good society respects all lives whether they have been born yet or not. From this perspective, when you or I call something "prosocial" all we're really doing is using a 50-cent word that really means "pro how I think the world should be run."
To my mind, that pretty much evisverates any utility one might claim for the concept of "prosociality."
David Zarig comments on the UK government's decision to strip former Royal Bank of Scotland CEO Frederick Goodwin of his knighthood:
... perhaps Britain is showing the way with regard to imposing sanctions, but not resorting to the criminal code.
It reminds me of the debate a few years ago about shaming as an alternative sanction. There's a very interesting paper by Dan Kahan on the subject, which stands as one of the few cases I know of in which a prominent legal scholar so publicly changed his mind on such a significant issue. I also highly recommend David Skeel's paper on shaming as a corporate law sanction.
Update: The Economist's Schumpeter blog makes a good point:
Galling as it is to imagine Mr Goodwin insisting on being called Sir Fred at his local corner shop, or offering his hand to be kissed at the bus stop, no power flowed from his title. Shame is an important sanction when very well-paid people screw up, but Mr Goodwin’s reputation was already in the gutter, following the bank’s failure and a nasty, public row over his pension entitlement. Knighthood or not, he was not about to walk back into public life.
It is why commenter KG16's observation below about jail time has traction.
In an article entitled Unocal at 20, I built upon my "director primacy model of corporate governance and law" to argue that "Unocal strikes an appropriate balance between two competing but equally legitimate goals of corporate law: on the one hand, because the power to review differs only in degree and not in kind from the power to decide, the discretionary authority of the board of directors must be insulated from shareholder and judicial oversight in order to promote efficient corporate decision making; on the other hand, because directors are obligated to maximize shareholder wealth, there must be mechanisms to ensure director accountability. The Unocal framework provides courts with a mechanism for filtering out cases in which directors have abused their authority from those in which directors have not."
As I read today's WSJ, however, I was prompted to wonder whether my analysis left enough room for the market for corporate control to do its part in the process of creative destruction that makes capitalism work.
In a 1999 University of Cincinnati Law review article, my friend Bill Carney explained how my friend Henry Manne made the breakthrough argument about the critical role the market for corporate control plays in a capitalist economy:
[Manne’s article] Mergers and the Market for Corporate Control [73 J. Pol. Econ. 110 (1965)] was the natural culmination of Manne's writing and thinking on the role markets played in constraining managers. … Manne noted that shareholders were primarily interested in having managers maximize profits, and that stock prices reflected the success of their efforts.
In 1962 Manne’s article] The Higher Criticism introduced the notion that weak management that caused profits to decline would also cause share prices to decline, which would in turn attract outsiders as buyers because of the votes attached to the shares. These buyers would in turn use the votes they had purchased with their shares to seek better management and the rewards of higher earnings and stock appreciation. In this first article, Manne had made the critical linkage between share voting and share transferability, which he would develop more fully in 1964 and 1965.
In 1964 [Manne’s article] Some Theoretical Aspects of Share Voting first developed the notion that there were positive returns to acquiring voting control of firms, and that these returns come from improved management. Manne described shares as consisting of a bundle of rights--one being the investment and the other being the right to vote. He noted that the value of the share vote rose as the value of the share itself declined from poor management, and that the difference represented the control premium that outside management teams would be willing to pay for control. … It was this 1964 article that first introduced the phrase, “the market for corporate control.”
But it was Mergers and the Market for Corporate Control that gained the most attention in this remarkable series. … The returns from acquiring control, Manne argued, were from improving management. Improving management would, in turn, increase cash flows that would be capitalized by the market. …
In the context of mergers, Manne recognized the value of the veto power held by managers over this form of takeover, and the likelihood that this veto would encourage side payments to management to persuade it to allow shareholders to accept a premium for their shares. This observation has obvious implications, of which we all became acutely aware later on. First, if managers can extract a part of the economic rents available to shareholders in a target corporation, returns to target shareholders in mergers should be smaller than in tender offers. Later evidence has borne this out. Second, if changes of control are efficient and are furthered by management acquiescence, how much power should target-management possess in order to extract part of the gains? The struggles of the Delaware courts in attempting to delineate how much corruption is too much in this setting have occupied corporate lawyers for the past fifteen years. But the outline of the problem has been present for the last 34 years.
The … most important contribution of this article was its description of the market for corporate control as a serious constraint on management misbehavior. As Manne wrote:
Only the take-over scheme provides some assurance of competitive efficiency among corporate managers and thereby affords strong protection to the interests of vast numbers of small, non-controlling shareholders. Compared to this mechanism, the efforts of the SEC and the courts to protect shareholders through the development of a fiduciary duty concept . . . seem small indeed.
What prompted me to ruminate on all this was the Journal's coverage of Kodak's rumored bankruptcy filing. Kodak long was a great success story. But all things--including corporations--have a life cycle. Kodak got old. It became a mature cash cow. Managers of mature cash cows all too often succumb to a mid-life crisis. The firm must be revitalized. It needs the corporate equivalent of botox. Just as Hollywood types with too much money to spend on plastic surgery all too often end up with duck lips and chipmunk cheeks, corporate managers with too much free cash flow often end up with bloated, dysfunctional conglomerates.
Kodak's sad story is a classic example of the phenomenon:
The company ... invented the digital camera—in 1975—but never managed to capitalize on the new technology.
Casting about for alternatives to its lucrative but shrinking film business, Kodak toyed with chemicals, bathroom cleaners and medical-testing devices in the 1980s and 1990s, before deciding to focus on consumer and commercial printers in the past half-decade under Chief Executive Antonio Perez.
None of the new pursuits generated the cash needed to fund the change in course and cover the company's big obligations to its retirees. A Chapter 11 filing could help Kodak shed some of those obligations, but the viability of the company's printer strategy has yet to be demonstrated, raising questions about the fate of the company's 19,000 employees.
A viable market for corporate control might well have prevented Kodak from spending the last few decades flailing from one failed strategy to another. Back in the 1980s, before Martin Lipton invented the poison pill, bankers like Michael Milken and buyout boutiques like KKR put Manne's theories to the test by taking on the economic dinosaurs of that day--i.e., conglomerates. Managers of that era thought good managers could manage anything. They also thought intrafirm diversification was superior to diversification at the shareholder level. Looser antitrust rules on horizontal acquisitions than on vertical acquisitions further encouraged the building of huge conglomerate empires by imperially-minded CEOs. The result was bloated businesses that did everything from -- as the Kodak case exemplifies -- film to "chemicals, bathroom cleaners and medical-testing devices" to "consumer and commercial printers." Those managers were wrong. Just as Kodak's managers have been wrong in more recent times.
The conglomerates suffered from a form of reverse synergy. They worth more broken up into pieces with the various lines of business sold off as individual firms. And that's precisely what happened because the market for corporate control worked.
Sometimes the process of breaking up conglomerates included the sad but necessary task of killing off lines of business that had outlived their expiration date. If it were not for the creative destruction process, after all, buggy whip companies would still be in business because we'd all still be driving buggies.
Kodak has outlived its expiration date. The cash cow of film has died. The cupboard is empty. If we had a functioning market for corporate control, somebody would buy the shell, sell off whatever assets remain of value, and kill the rest.
I feel badly for the people who work at Kodak. Ideally, public policy would provide mechanisms for retraining and transitioning of employees adversely affected by corporate takeovers. After all, if corporate takeovers really are Kaldor-Hicks efficient, there should be some money available for the state to redistribute to those who suffer from the externalities of that market. But Kodak still should die.
All of which leaves me with a coupe of basic questions to ponder: Did Unocal at 20 properly strike the balance between protecting director primacy and preserving an functional market for corporate control? And does current delaware law do likewise?
Ponder. Not blog. Not yet.
Bob Monks is one of the long-time warriors in the battle for corporate governance reform. Ever since creating ISS a long time ago, Bob has been on the front lines to get corporate governance even considered when the need for some type of market reform seemed necessary. That's why I find his recent piece where he asks " What does it mean to be a shareholder or owner in 2011?" so interesting. Under that umbrella question, he also asks these four questions:1. What do owner and shareholder mean in regards to corporations and governance?
2. Can we lump all stock owners together or do we need multiple classes of stock to accommodate owners with different levels of interest and participation?
3. To whom does management owe fiduciary duty when considering the interest of owners? Does having one class of ownership work in management's favor because it keeps shareholders from ever truly working together to enact change?
4. How can you have "shareholder responsibility" when there is no possibility of shareholders having a common interest and working together. Because there are today so many different classes and categories of shareholders - arbs, derivatives, borrowed stock, etc - that common purpose is impossible.
The middle two questions are very thought provoking and deserve extended analysis at some point in the future. As for numbers 1 and 4, however, they are old bugbears here at PB.com.
How Many Times Must I Say It? Shareholder Do Not Own the Corporation!
Ownership implies a thing capable of being owned. To be sure, we often talk about the corporation as though it were such a thing, but when we do so we engage in reification. While it may be necessary to reify the corporation for semantic convenience, it can mislead. Conceptually, the corporation is not a thing, but rather simply a set of contracts between various stakeholders pursuant to which services are provided and rights with respect to a set of assets are allocated.
Because shareholders are simply one of the inputs bound together by this web of voluntary agreements, ownership is not a meaningful concept in nexus of contracts theory. Someone owns each input, but no one owns the totality. Instead, the corporation is an aggregation of people bound together by a complex web of contractual relationships.
As I explain in detail in my article The Board of Directors as Nexus of Contracts, the shareholders' contract with the firm has some ownership-like features, including the right to vote and the fiduciary obligations of directors and officers.
Even so, however, shareholders lack most of the incidents of ownership, which we might define as the rights to possess, use, and manage corporate assets, and the rights to corporate income and assets. For example, shareholders have no right to use or possess corporate property. Cf. W. Clay Jackson Enterprises, Inc. v. Greyhound Leasing and Financial Corp., 463 F. Supp. 666, 670 (D. P.R. 1979) (stating that “even a sole shareholder has no independent right which is violated by trespass upon or conversion of the corporation’s property”). Management rights, of course, are assigned by statute solely to the board of directors and those officers to whom the board properly delegates such authority. Indeed, to the extent that possessory and control rights are the indicia of a property right, the board is a better candidate for identification as the corporation’s owner than are the shareholders. As an early New York opinion put it, “the directors in the performance of their duty possess [the corporation’s property], and act in every way as if they owned it.” Manson v. Curtis, 119 N.E. 559, 562 (N.Y. 1918).
This remains true even if a single shareholder (or cohesive group) owns a majority of the corporation's voting stock. To be sure, ownership of such a control block gives shareholders substantial de facto control by virtue of their ability to elect and remove directors, yet this still does not confer either possessory or management rights on such shareholders. Indeed, an effort by such a shareholder to exercise such rights might well constitute a breach of fiduciary duty by the controlling shareholder. In appropriate instances of such misconduct by a controlling shareholder, the board may well have a fiduciary duty to the minority to take steps to dilute the majority shareholder's control (as by issuing more stock). See, e.g., Delaware Chancellor Allen's opinion in Mendell v. Carroll, 651 A.2d 297, 306 (Del. Ch. 1994), in which he suggested that the board of directors could "deploy corporate power against the majority stockholders" to prevent "a threatened serious breach of fiduciary duty by the controlling stock." Granted, as I haveobserved elsewhere on this blog, "corporate law is far more tolerant of hegemony than constitutional law," but Allen's dicta would make no sense if majority voting control equalled ownership.
Let me offer another illustration. As I discuss in my article Unocal at 20, if shareholders own the corporation, the board of directors of a target corporation would have no proper role in reponding to a tender offer. The shareholders' decision to tender their shares to the bidder would no more concern the institutional responsibilities or prerogatives of the board than would the shareholders' decision to sell their shares on the open market or, for that matter, to sell their homes. Both stock and a home would be treated as species of private property freely alienable by their owners. Yet, as we all know, corporate law confers an effective gatekeeping function on the target's board of directors by allowing them to deploy potent takeover defenses.
In discussing corporations, it is easy to lose sight of the overriding fact—that firms are nothing more than groups of people. We often find ourselves using jargon like owners, monitors, team members, agent, principal, partner, manager, employee, and shareholder. We also often find ourselves engaged in a form of reification—treating firms as though they were things having an existence separate from the people who comprise them—when we say things like “General Motors did so and so.” General Motors is a firm; it is pure fiction to say General Motors did anything. Reification is often useful, or even necessary, because it permits us to utilize a form of shorthand—it is easier to say General Motors did so and so than to attempt in conversation to describe the complex process which actually may have taken place. Indeed, it is very difficult to think about large firms without reifying them. Reification, however, can be dangerous. It becomes easy to lose sight of the fact that firms aren't things, they are simply a group of people for whom the law has provided an off-the-rack relationship we call the corporation. There simply is nothing there that can be owned.
Shareholder Activism and Heterogeneity
It's good to see long time shareholder activist Bob Monks has realized that shareholders are heterogenous. But does he realize the extent to which that observation undercuts the case for shareholder activism?
As my colleague Iman Anabtawi observed: “On close analysis, shareholder interests look highly fragmented.” Iman Anabtawi, Some Skepticism About Increasing Shareholder Power 4 (unpublished manuscript on file with author). She documents divergences among investors along multiple fault lines: short-term versus long-term, diversified versus undiversified, inside versus outside, social versus economic, and hedged versus unhedged. Shareholder investment time horizons are likely to vary from short-term speculation to long-term buy-and-hold strategies, for example, which in turn is likely to result in disagreements about corporate strategy. Even more prosaically, shareholders in different tax brackets are likely to disagree about such matters as dividend policy, as are shareholders who disagree about the merits of allowing management to invest the firm’s free cash flow in new projects.
Consequently, as I explain in The Case for Limited Shareholder Voting Rights, it is hardly surprising that the modern public corporation’s decision-making structure precisely fits Kenneth Arrow’s model of an authority-based decision-making system. Overcoming the collective action problems that prevent meaningful shareholder involvement would be difficult and costly, of course. Even if one could do so, moreover, shareholders lack both the information and the incentives necessary to make sound decisions on either operational or policy questions. Under these conditions, it is “cheaper and more efficient to transmit all the pieces of information to a central place” and to have the central office “make the collective choice and transmit it rather than retransmit all the information on which the decision is based.” Accordingly, shareholders will prefer to irrevocably delegate decision-making authority to some smaller group.
What is that group? The Delaware code, like the corporate law of virtually every other state, gives us a clear answer: the corporation’s “business and affairs ... shall be managed by or under the direction of the board of directors.” Hence, as an early New York decision put it, the board’s powers are “original and undelegated.” Manson v. Curtis, 119 N.E. 559, 562 (N.Y. 1918).
The central argument against shareholder activism thus becomes apparent. Active investor involvement in corporate decision making seems likely to disrupt the very mechanism that makes the public corporation practicable; namely, the centralization of essentially non-reviewable decision-making authority in the board of directors. The chief economic virtue of the public corporation is not that it permits the aggregation of large capital pools, as some have suggested, but rather that it provides a hierarchical decision-making structure well-suited to the problem of operating a large business enterprise with numerous employees, managers, shareholders, creditors, and other inputs. In such a firm, someone must be in charge: “Under conditions of widely dispersed information and the need for speed in decisions, authoritative control at the tactical level is essential for success.” While some argue that shareholder activism “differs, at least in form, from completely shifting authority from managers to” investors, it is in fact a difference in form only. Shareholder activism necessarily contemplates that institutions will review management decisions, step in when management performance falters, and exercise voting control to effect a change in policy or personnel. For the reasons identified above, giving investors this power of review differs little from giving them the power to make management decisions in the first place. Even though investors probably would not micromanage portfolio corporations, vesting them with the power to review board decisions inevitably shifts some portion of the board’s authority to them. This remains true even if only major decisions of A are reviewed by B. The board directors of General Motors, after all, no more micromanages GM than would a coalition of activist institutional investors, but it is still in charge.
Professor Ulen received a bachelor’s degree from Dartmouth College, a master’s from St. Catherine’s College, Oxford, and a Ph.D. in economics from Stanford University. He holds a Swanlund Chair, one of the highest endowed titles on the Urbana-Champaign campus, and is director of the College’s Program in Law and Economics. In addition, he is a research affiliate of the Environmental Council, a member of the Campus Honors faculty, and holds positions in the Department of Economics and the Institute for Government and Public Affairs.
Recently, Professor Ulen served as a visiting professor at the University of Bielefeld, and as the foreign chair in international and comparative law at the University of Ghent, Belgium. He has previously been a visiting professor in Belgium, Germany, Slovenia, and a Ford Foundation Professor in Shanghai, China.
As a scholar, Professor Ulen examines a variety of issues related to economics, legal scholarship, and legal education. He has recently completed work on two new books,Cognition, Rationality, and the Law (with Russell Korobkin; University of Chicago Press) and Foundations of Environmental Policy (with John B. Braden, Edward Elgar Publishers, Ltd.). His book, Law and Economics (with Robert Cooter), now in its fourth edition, has been translated into Chinese, Japanese, Spanish, Korean, French, and Russian.
A prolific writer and researcher, Professor Ulen has contributed four entries—on regulation generally, quantity regulation, price regulation, and quality regulation—for the Oxford Economic History of the United States and a chapter entitled, “The Limits of Law for Imperfectly Rational Actors” for Law and Irrational Behavior (Francesco Parisi, ed., University of Chicago Press, 2003). In addition, he is editing a book of legal humor, and expanding his Illinois Law Review article, “A Nobel Prize in Legal Science,” into a book.
Professor Ulen was a member of the founding board of directors of the American Law and Economics Association and has served as a member of the editorial board of several professional journals. He is also a co-organizer, with Professor Tom Ginsburg and Professor Richard McAdams, of the Midwest Law and Economics Association Annual Meeting at the College of Law.
As John Colombo observed of Tom in his introduction to the symposium:
When one uses the phrase law and economics, it almost automatically invokes the name of Richard Posner, and there is no denying Pos- ner’s importance to the field. But Tom has been equally instrumental, perhaps even more instrumental, in making law and economics the wide- spread and widely studied discipline that it is. The Cooter and Ulen text on law and economics, now in its fifth edition and translated into a dozen different languages (including Chinese—which if nothing else goes to show how well Tom understands market economics), made law and eco- nomics a teachable discipline. The text has spawned two generations of students who “grew up” learning the discipline and has provided a framework for future thought in the field. And it is not just this text; Tom has written dozens of articles in the field pushing the boundaries of Law and Economics forward while recognizing its limitations. He has been a tireless advocate for the discipline, seeding it at universities throughout the world, and he is a constant ambassador for it everywhere he goes.
There are several papers that will beof interest to regular readers of this blog, including:
The Future of Law and Finance After the Financial Crisis: New Perspectives on Regulation and Corporate Governance for Banks
Dirk Heremans & Katrien Bosquet | 2011 U. Ill. L. Rev. 1551
Download PDF | Abstract
Bail-Ins: Cyclical Effects of a Common Response to Financial Crises
Amitai Aviram | 2011 U. Ill. L. Rev. 1633
Download PDF | Abstract
All in all, a well-deserved tribute to a wonderful scholar and great person. I'm glad I'm not at Illinois anymore for a lot of reasons (weather being prominent among them) but Tom is one of the things I miss about the place a lot.