I have been reading with interest Lyman Johnson's new paper, Law and the History of Corporate Responsibility: Corporate Governance (2014). 10 University of St. Thomas Law Journal 974 (2014); U of St. Thomas (Minnesota) Legal Studies Research Paper No. 14-21; Washington & Lee Legal Studies Paper. Available at SSRN: http://ssrn.com/abstract=2469979:
Abstract: This article is one part of a multi-article project on the role of law in the history of corporate responsibility in the United States. Key background material for the project is set forth in the introduction to an earlier article addressing corporate personhood. This paper deals with corporate governance while other articles address corporate purpose and corporate regulation.
Corporate responsibility concerns associated with corporate personhood, corporate purpose, and corporate regulation all ultimately relate to a far more basic issue: corporate governance. As the commercial demands of nineteenth century industrialization led to substantial displacement of the partnership form of business enterprise by large corporations with dispersed shareholders, control of these corporations - i.e., their governance - centered in the hands of senior managers, not investors themselves. This phenomenon of “separation of ownership from control” is quite different than in the typical partnership and was seminally described by Adolf Berle and Gardiner Means in their 1932 book, The Modern Corporation and Private Property. It has continued to occupy center stage in corporate law for the past eighty years.
From a legal history vantage point on corporate responsibility, the stupendous rise in commercial significance of the corporation in the nineteenth century corresponded to the precipitous decline of a regulatory approach to corporations under state corporate law, and instead, the twentieth century “outsourcing” of such regulation to an array of other legal regimes ostensibly designed to protect both investor and noninvestor groups. This meant that corporate law itself developed in such a way as to loosen, not tighten, most constraints on those who govern public corporations. The thesis of this article, developed in Parts I and II, is that corporate governance, both as a body of law and as a field of academic study, has historically had little to say on the important subject of corporate responsibility. Instead, the quest for greater responsibility in the United States largely has come from “external” legal regulation and from ongoing shifts in business and social norms. Recently, corporate law’s long and unsustainable neglect of corporate responsibility concerns has led to the emergence of a new type of business corporation, the “benefit corporation.” Benefit corporations expressly permit the directors to advance both investor and noninvestor interests, in aid of pursuing a larger public benefit. The implications of this development for governance of the regular business corporations are unknown. One potential adverse outcome is the “ghettoization” of corporate responsibility within benefit corporations, leading to even less serious attention to such concerns in the traditional business corporation.
I agree with Lyman that "corporate governance, both as a body of law and as a field of academic study, has historically had little to say on the important subject of corporate responsibility. Instead, the quest for greater responsibility in the United States largely has come from “external” legal regulation and from ongoing shifts in business and social norms."
But I disagree with Lyman's argument that this supposed neglect is unsustainable. Instead, I agree with Gordon Smith's eloquent exposition of the The Dystopian Potential of Corporate Law, available at SSRN: http://ssrn.com/abstract=976742, which argues that:
The community of corporate law scholars in the United States is fragmented. One group, heavily influenced by economic analysis of corporations, is exploring the merits of increasing shareholder power vis-a-vis directors. Another group, animated by concern for social justice, is challenging the traditional, shareholder-centric view of corporate law, arguing instead for a model of stakeholder governance. The current disagreement within corporate law is as fundamental as in any area of law, and the debate is more heated than at any time since the New Deal.
This paper is part of a debate on the audacious question, Can Corporate Law Save the World? In the first part of the debate, Professor Kent Greenfield builds on his book, THE FAILURE OF CORPORATE LAW: FUNDAMENTAL FLAWS AND PROGRESSIVE POSSIBILITIES, offering a provocative critique of the status quo and arguing that corporate law matters to issues like the environment, human rights, and the labor question.
In response, Professor Smith contends that corporate law does not matter in the way Professor Greenfield claims. Corporate law is the set of rules that defines the decision making structure of corporations, and reformers like Professor Greenfield have only two options for changing corporate decision making: changing the decision maker or changing the decision rule. More specifically, he focuses on board composition and shareholder primacy. Professor Smith argues that changes in corporate law cannot eradicate poverty or materially change existing distributions of wealth, except by impairing the creation of wealth. Changes in corporate law will not clean the environment. And changes in corporate law will not solve the labor question. Indeed, the only changes in corporate law that will have a substantial effect on such issues are changes that make the world worse, not better.
