Charles O'Kelley has posted a new paper, The Theory of the Firm: The Corporation as Sole-Proprietor Surrogate, in which he claims that:
If we depict a sole proprietorship as a circle encompassing its constituents, that firm would have a center, the sole proprietor, who owns the firm’s property, serves as the node for all contracts, and determines and directs the firm’s policies. In contrast, all corporation law scholars apparently view the corporation as a firm with no center, or, as having at its center an artificial and empty contracting node provided by corporation law.
That was news to me. To quote from my article, The Board as Nexus of Contracts:
In one sense, the corporation is a nexus [of contracts]. ...
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. Our search will be facilitated if we first identify the central characteristic of “firmishness.” In this part, I argue that the defining characteristic of a firm is the existence of a central decisionmaker vested with the power of fiat. Identifying that central decisionmaker is the task of Part III below. …
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.
O'Kelley's paper is interesting and worth considering, but I came away think director primacy--a.k.a. board centric governance--still makes better sense than either the shareholder centric (and team production) models he critiques and the sole proprietor analogy he offers. But more on that later.
