Corporate Anatomy Lessons

The book that will lay the groundwork for the corporate law debates of the coming decade is The Anatomy of Corporate Law. Written by seven of the world's leading corporate law scholars - Henry Hansmann, Reinier Kraakman and Ed Rock of the U.S.; Paul Davies of England; Gerard Hertig of Switzerland; Klaus Hopt of Germany; and Hideki Kanda of Japan - The Anatomy of Corporate Law attempts to identify the underlying structure of corporate law, and to provide a framework for understanding the wide range of approaches that different countries take to corporate law regulation. It is hard to overstate the significance - and the success - of this project. Traditional comparative law scholarship tended to explore the differences among jurisdictions in intricate detail. The authors of The Anatomy of Corporate Law insist that these local variations are only that - variations on a single, common theme. Throughout the book, they take a functional approach, an approach that emphasizes the extent to which countries that seem to have very different legal rules nevertheless tend to develop roughly similar solutions to the characteristic problems of corporate law. The central issue for corporate law in every jurisdiction, they argue, is three kinds of agency problem: the potential conflicts between managers and shareholders, between majority and minority shareholders, and between the firm and third parties. To understand how different countries address these conflicts, the authors develop a typology of ten different strategies. The authors divide the strategies into two categories, which they refer to as "regulatory" and "governance" approaches, and then distinguish strategies that operate ex ante from those that come into play ex post. Having developed their typology, the authors then apply it to related party transactions, control transactions, investor protection and a variety of other key corporate law issues. The great virtue of The Anatomy of Corporate Law is that its typology of strategies provides a simple, user-friendly way to compare the corporate law regimes of a wide range of different countries. Almost as remarkable as the typology itself - especially given that the book is the work of seven different scholars - is the clarity and elegance of the analysis. The authors develop and apply their typology in less than two hundred pages, a succinctness that would fill the editors of that other anatomical guide, Gray's Anatomy, with envy. To say so much in so brief a compass, the authors obviously had to exercise ruthless editorial judgment as what to include and what to omit. After describing the authors' typology and exploring several of their applications, I focus on several issues and perspectives that the authors left out. The most important omission is the bankruptcy or insolvency regime. In recent years, it has become increasingly apparent that bankruptcy - or corporate reorganization - is best seen as a component of corporate law; and indeed that it is impossible to understand other corporate law issues without appreciating the role that bankruptcy plays in shaping the incentives of managers and other constituencies even while the corporation is financially healthy. Second, the authors also omit any sustained discussion of corporate groups - that is, the parent-subsidiary arrangements that characterize nearly every large corporation. Although the authors refer to the extensive regulations of corporate groups in Germany and elsewhere, they have little to say about these regulations and do not offer any analysis of the factors that influence a company's decision whether to set up a new business as a division within an existing corporation, or to locate the business in a separate corporation. Finally, the authors do not consider the distinctive challenges of corporate governance in developing countries. Although the authors suggest that the ten-part typology is relevant to any country, their analysis focuses on five notably developed jurisdictions - the U.S., the U.K., Germany, France and Japan. In the developing nations whose corporate law has been a particular concern in recent years, by contrast, it is important to move beyond the typology in order to account for problems such as limited judicial enforcement. My analysis can be seen as a proposing several friendly amendments to the authors' analysis. The additions suggest ways that the anatomy could be made even more complete.