I first encountered the work of Texas Tech law professor Christopher Bruner when researching my recent article on good faith in corporate law. He had written a couple of very fine articles on that subject, from which I learned a lot. In a more recent article, The Enduring Ambivalence of Corporate Law, he ambitiously challenges just about everybody in corporate law. Bruner argues that "we have three prevailing theories, each of which has 'dealt deadly blows to the other,' as Hart might put it." These are nexus of contracts (into which he lumps my director primacy theory), Blair & Stout's team production, and shareholder-centric theorists.
Prevailing theories of corporate law tend to rely heavily on strong claims regarding the corporate governance primacy and legitimacy of either the board or the shareholders, as the case may be. In this paper I challenge the descriptive power of these theories as applied to widely held public corporations and advance an alternative, arguing that corporate law is, and will remain, deeply ambivalent - both doctrinally and morally - with respect to three fundamental and related issues: the locus of ultimate corporate governance authority, the intended beneficiaries of corporate production, and the relationship between corporate law and the achievement of the social good.
Let's look at a couple of Bruner's critiques that relate to director primacy in detail.
Bruner writes that "it nevertheless has a difficult time accounting for the law of corporate takeovers, and the absence of any clear mandate to maximize the wealth of shareholders under any but the most limited circumstances." With all due deference, I thought I did a pretty good job of addressing those points in Unocal at 20: Director Primacy in Corporate Takeovers, 31 Delaware Journal of Corporate Law 769 (2006), which argued that:
Unocal is almost universally condemned in the academic corporate law literature. Building on his director primacy model of corporate governance and law, however, Bainbridge offers a defense of Unocal in this article. Bainbridge argues 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 mechanisms to ensure director accountability. The Unocal framework provides courts with a mechanism for filtering out those cases in which directors have abused their authority from those in which directors have not.
Since Bruner didn't address the arguments made therein, I won't further belabor them here.
Bruner at 14 argues that:
The very existence of any shareholder voting power inevitably proves problematic for those who identify the board as the very essence of the corporate enterprise itself. Bainbridge, for example, who depicts the board as a “sui generis body” and “a sort of Platonic guardian,” justifies giving voting power to shareholders by reference to the disciplinary effects of the market for corporate control (made possible by the transferability of their interests), but then proves amenable to “sharply constrain[ing]” the market for control through takeover defenses in favor of the efficiency of board governance – an account that undercuts its own explanation for the existence of even minimal shareholder voting rights.
Here he touches a nerve. In a world of pure director primacy, in which directors could be counted on to be faithful to the shareholder wealth maximization norm, shareholder voting rights likely would not exist.
I struggled with this issue most recently in The Case for Limited Shareholder Voting Rights, 53 UCLA Law Review 601 (2006), in which I argued that "shareholder voting is properly understood not as an integral aspect of the corporate decision-making structure, but rather as an accountability device of last resort to be used sparingly, at best." Why sparingly? Because corporate governance is made at the margins of an unending competition between two competing values; namely, authority and accountability. Both are essential to effective corporate governance, but they are ultimately irreconcilable. Efforts to hold someone to account inevitably limit their discretion. The inconsistency Bruner claims to see in my work arises inherently out of the tension between authority and accountability. Shareholder voting is an accountability mechanism, exercised mainly through the takeover market, but preservation of the board's authority requires that both the franchise and the market for corporate control have limits. (This, by the way, is another theme of Unocal at 20.)
Bruner makes a good case that "pure" theories of corporate governance all have problems. I've believed for a long time that there is no unified field theory that explains all of corporate governance. In Executive Compensation: Who Decides?, 83 Texas Law Review 1615, 1628 (2005), for example, I wrote that:
Physicists have long sought a unified field theory, which would provide a single set of simple laws that explain the four interactions or forces that affect matter--i.e., the strong, electromagnetic, weak, and gravitational forces. To date, they have failed, which provides a strong cautionary tale for anyone seeking a unified field theory of social interactions among fallible humans, whose behavior is far harder to predict than is that of, say, an electron.
But so what? Elegant and parsimonious models are more important for economists than for lawyers. Instead, situation-specific mini-theories often are more useful for making legal decisions than a single unified theory. I thus don't claim that director primacy explains everything about corporate governance. I simply believe that has a larger domain of explanatory and justificatory power than any other theory on the market. Bruner's article didn't change that, which I suspect won't surprise him (or anybody else).
In any case, kudos to Bruner for a very fine article that provoked a blog post that's going to get dropped straight into my forthcoming book on director primacy.
