The Purposes and Accountability of the Corporation in Contemporary Society: Corporate Governance at a Crossroads

This Article begins by identifying five forces of change that have profound implications for corporate governance in contemporary society. These forces involve changes in the nature of work, capital markets, product markets, organizational forms, and the corporate regulatory environment. It then examines the implications of these changes for corporate governance. It reviews the empirical literature in finance and strategy and concludes that much of this literature is cross-sectional in nature, and therefore is incapable of predicting the consequences of these changes. The Article discusses the prominent paradigms that are found throughout corporate governance scholarship. Stripped of their complexities, most of the literature centers around a debate between two opposing views of the corporation: contractarianism and communitarianism. The Article describes these two views of the public corporation, examines how each addresses the impact of the five forces of change that we have identified, and critiques the limitations of each view. The Article concludes that, in a world of rapid change, the contractarian view provides the better perspective for public policy toward the large-scale, public corporation. While there are important limitations of the contractarian view (for example, third-party effects and problems deriving from ill-defined property rights), on balance, the ability of individuals to engage freely in mutually beneficial contracting is the most efficient way of adapting to these governance challenges. The Article also revisits the debate surrounding the American Law Institute's Corporate Governance Project. While the Project addresses issues that might be interpreted as affirming the communitarian perspective, it clearly asserts the primacy of shareholder wealth-maximization, a fundamental tenet of the contractarian perspective. The Article examines in detail the governance structures in Japan and Germany--structures that are quite communitarian compared to the relatively contractarian U.S. structure--to determine whether these alternative governance systems provide any better blueprints for adapting to change. The Article concludes that the communitarian perspectives adopted by these countries impede the ability to adapt to change. Further, the Article provides evidence that global corporations in these countries are inexorably patterning their governance practices and styles along Anglo-American, or more precisely, U.S. lines. The argument that the world is inexorably evolving along the lines of the contractarian model is an important and unique conclusion of this Article. Most who have written on the subject to date have concluded that there is no "optimal" governance structure and that both the Japanese and German systems are efficient, self-sustaining forms as well. The authors disagree. There is sufficient theory and evidence to support the assertion that public corporations around the world are moving toward a more contractarian, and specifically, more U.S.-styled governance structure. Moreover, this movement is, in large part, a response to the fundamental changes that are identified in the Article. The Article does not conclude in a state of contractarian euphoria, however. Effective cross-border institutions must be developed in order to reduce the two major shortcomings of the contractarian system. First, effective contracts cannot be written when property rights are ill-defined or the terms of contracts cannot be enforced--regulatory "voids" at the intersection of sovereign boundaries, and impediments to a well-functioning international market for corporate control exacerbate this problem. Therefore, the establishment of international standards, institutions, and rules of law that facilitate free contracting across borders is needed. Second, the potential costs and abuses of externalities (third-party effects) are pernicious. Whenever possible, mechanisms must be developed to internalize the costs of such externalities.