Director Primacy: The Means and Ends of Corporate Governance (February 2002). Available at SSRN: https://ssrn.com/abstract=300860
Any model of corporate governance must answer two basic sets of questions: (1) Who decides? In other words, when push comes to shove, who has ultimate control? (2) Whose interests prevail? When the ultimate decisionmaker is presented with a zero sum game, in which it must prefer the interests of one constituency class over those of all others, whose interests prevail?
On the means question, prior scholarship has almost uniformly favored either shareholder primacy or managerialism. This article argues that control - the power and right to exercise decisionmaking fiat - is vested neither in the shareholders nor the managers, but in the board of directors. According to this "director primacy" model, the corporation is a vehicle by which the board of directors hires various factors of production. The board of directors thus is not a mere agent of the shareholders, but rather is a sui generis body - a sort of Platonic guardian - serving as the nexus of the various contracts making up the corporation. As a positive theory of corporate governance, director primacy thus claims that fiat - centralized decisionmaking - is the essential attribute of efficient corporate governance. As a normative theory of corporate governance, director primacy claims that resolving the resulting tension between authority and accountability is the central problem of corporate law.
On the ends question, prior scholarship has tended to favor either shareholder primacy or various forms of stakeholderism. Again, director primacy rejects both approaches. Although shareholder primacy and the shareholder wealth maximization norm are often conflated, one can have the latter without necessarily endorsing the former. Hence, this article argues that director decisionmaking primacy can be reconciled with a contractual obligation on the board's part to maximize the value of the shareholders' residual claim.
In Defense of the Shareholder Wealth Maximization Norm. Washington & Lee Law Review, Vol. 50, 1993. Available at SSRN: https://ssrn.com/abstract=303780
This essay, "In Defense of the Shareholder Wealth Maximization Norm, appeared in the Symposium on New Directions in Corporate Law published in volume 50 of the Washington & Lee Law Review. This essay was written as a reply to an article in the same symposium by Professor Ronald M. Green - "Shareholders as Stakeholders: Changing Metaphors of Corporate Governance," 50 Wash. & Lee. L. Rev. 1409 (1993) - in which Professor Green criticized the dominant view of corporate governance, according to which directors have a fiduciary duty to maximize shareholder wealth. In sharp contrast, this essay argues that the principle of shareholder wealth maximization is both a valid positive account of corporate law and also a legitimate normative proposition.
The essay is grounded in a contractarian approach to corporate governance. The essay begins by observing that in the nexus of contracts theory the concept of ownership goes out the window, along with its associated economic and ethical baggage. Consequently, the traditional justification for shareholder wealth maximization - i.e., that shareholders own the corporation - is unavailing. There is a considerable difference between showing that the traditional private property model is inadequate, however, and showing that we should adopt a new decisionmaking norm to which corporate officers and directors must conform their behavior.
The essay then identifies and critiques the two principal normative arguments running through Professor Green's article. First, Green treats the limited liability rule as a privilege conferred by society, in return for which society can demand socially responsible corporate behavior. My essay points out that this is little more than a revival of the long-dead concession theory of corporate governance. Second, Green contends that limited liability is a mechanism through which shareholders harm nonshareholders by externalizing certain costs onto them. Although this is a more substantial argument, my essay contends that it is not persuasive. Although limited liability does permit such externalities, Green's proposed solution - i.e., allowing/requiring directors to consider the effects of their decisions on nonshareholder constituencies of the corporation - is highly flawed. Such a multi-constituency fiduciary duty would be unworkable, at best, and would significantly increase the agency costs inherent in the separation of ownership and control.
The Bishops and the Corporate Stakeholder Debate (April 2002). Villanova Journal of Law and Investment Management. Available at SSRN: https://ssrn.com/abstract=308604
Prepared for a conference on faith-based investing practices, this essay critiques Catholic social teaching on corporate social responsibility. Specifically, the essay focuses on one of the policy recommendations made by the U.S. Bishops in their pastoral letter on economic justice, Economic Justice for All: Pastoral Letter on Catholic Social Teaching and the U.S. Economy. In that letter, the Bishops addressed the so-called stakeholder debate; i.e., whether decisionmaking by directors of public corporations should take into account the interests of corporate constituencies other than shareholders. This essay focuses on the Bishops' position as matter of public policy rather than as a matter of theology. The essay evaluates three ways in which the Bishops' position might be translated into public policy: (1) directors could be given nonreviewable discretion to make trade-offs between shareholder and stakeholder interests; (2) directors could be given reviewable discretion to make such trade-offs; or (3) directors could be required to make such trade-offs subject to judicial (or regulatory) oversight. None of these approaches is an improvement on current law; to the contrary, all are worse. The first approach would be toothless, the second would increase agency costs, and the third would either prove unworkable or pose an unwarranted threat to economic liberty (or both).
The Shared Interests of Managers and Labor in Corporate Governance: A Comment on Strine (May 10, 2007). Available at SSRN: https://ssrn.com/abstract=985683
In his essay, Toward Common Sense and Common Ground?, Delaware Vice Chancellor Leo Strine seeks to identify common concerns of corporate management, labor, and shareholders. In so doing, Strine endorses a vision of the corporation as "a social institution that, albeit having the ultimate goal of producing profits for stockholders, also durably serves and exemplifies other societal values." Accordingly, he directs our attention to the prospects of creating "a corporate governance structure that better fosters [the corporation's stakeholders'] mutual interest in sustainable economic growth."
There is much that is admirable in Strine's analysis of what ails corporate governance and his proposals for reform, as well as much that is debatable. In this brief comment, I identify three aspects of Strine's analysis that strike me as underdeveloped. First, what do we mean when we call the corporation "a social institution"? Second, do managers and laborers really have common interests threatened by shareholders? Finally, even if Strine's search for common ground is a worthwhile project, is corporate law and governance the appropriate arena in which to find it? Taken together, these issues raise serious questions about the viability of Strine's project.
Corporate Social Responsibility in the Night Watchman State: A Comment on Strine & Walker (September 9, 2014). Available at SSRN: https://ssrn.com/abstract=2494003
Delaware Supreme Court Chief Justice Leo Strine and Nicholas Walter have recently published an article arguing that the U.S. Supreme Court’s decision in Citizens United v. FEC undermines a school of thought they call “conservative corporate law theory.” They argue that conservative corporate law theory justifies shareholder primacy on grounds that government regulation is a superior constraint on the externalities caused by corporate conduct than social responsibility norms. Because Citizens United purportedly has unleashed a torrent of corporate political campaign contributions intended to undermine regulations, they argue that the decision undermines the viability of conservative corporate law theory. As a result, they contend, Citizens United “logically supports the proposition that a corporation’s governing board must be free to think like any other citizen and put a value on things like the quality of the environment, the elimination of poverty, the alleviation of suffering among the ill, and other values that animate actual human beings.”
This essay argues that Strine and Walker’s analysis is flawed in three major respects. First, “conservative corporate law theory” is a misnomer. They apply the term to such a wide range of thinkers as to make it virtually meaningless. More important, scholars who range across the political spectrum embrace shareholder primacy. Second, Strine and Walker likely overstate the extent to which Citizens United will result in significant erosion of the regulatory environment that constrains corporate conduct. Finally, the role of government regulation in controlling corporate conduct is just one of many arguments in favor of shareholder primacy. Many of those arguments would be valid even in a night watchman state in which corporate conduct is subject only to the constraints of property rights, contracts, and tort law. As such, even if Strine and Walker were right about the effect of Citizens United on the regulatory state, conservative corporate law theory would continue to favor shareholder primacy over corporate social responsibility.
Corporate Purpose in a Populist Era. Available at SSRN: https://ssrn.com/abstract=3237107
In the wake of the 2016 US Presidential election and similar developments parts of Europe, commentators widely acknowledged the rise of populist movements on both the right and left of the political spectrum that both were deeply suspicious of big business. This development potentially has important implications for the law and practice of corporate purpose.
Left of center corporate social responsibility campaigners have long advocated the use of “boycotts, shareholder activism, negative publicity, and so on” to pressure corporate managers to act in ways those campaigners deem socially responsible. Right of center populists could use the same tactics to induce corporate directors to make decisions they favor. The question thus is whether they are likely to do so based on their historical track record.
Assuming for the sake of argument that right-of-center populists begin focusing on corporate purpose, the question arises whether modifying the shareholder wealth maximization norms so as to give managers more discretion to take the social effects of their decisions into account would lead to outcomes populists would view as desirable. Populists historically have viewed corporate directors and managers as elites opposed to the best interests of the people. Today, right of center populists find themselves increasingly at odds with an emergent class of social justice warrior CEOs, whose views on a variety of critical issues are increasingly closer to those of blue state elites than those of red state populists.
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