Agency and the Unincorporated Firm: Reflections on Design on the Same Plane of Interest

Regardless of their legal form, all firms confront questions of governance, that is, the recurrence of situations that may not be resolved satisfactorily if their resolution is left solely to the discretion of individual actors. Two principal reasons explain the inevitability of governance questions within firms. First, the interests of persons involved with the firm may diverge. In particular, the interests of owners and managers, and of owners and creditors, do not always coincide. Even among themselves, owners' interests may well diverge. Second, the firm benefits over time through the existence of a structure that defines the ability of individual actors to take action that binds the firm and its owners, as well as some mechanism, whether direct or indirect, to control the conduct of people whose actions bear consequences for the firm and its owners. The law of agency provides a set of doctrines that underlie the mechanisms of firm governance. My purpose in this Article is to illustrate recurrent aspects of unincorporated firms that generate governance problems, problems formally addressed by agency-law norms, but troublesome in practical respects nonetheless. Many unincorporated firms have internal governance structures that are insufficiently differentiated in function to resolve predictable difficulties with the clarity achieved by governance structures that differentiate more extensively among the functions of persons associated with the firm. Agency-law norms resolve these difficulties by providing formal answers to them, but the theoretical and practical challenges are often greater than in firms in which functions are more differentiated. In many unincorporated firms, the same people occupy multiple roles -- equity ownership, management, employment -- rather than distinctive roles. Lack of differentiation in function often leads to instability in small firms. The legal consequences of incorporation themselves specify various differentiations in function,1 some of which could be, but often are not, replicated in unincorporated firms. Lack of differentiation helps explain some of the distinctiveness in legal norms applicable to unincorporated firms. In a more speculative mode, I suggest that the persistence of such governance challenges in unincorporated firms may limit firm growth, particularly growth funded through external sources of equity investment. My inquiry begins with a visual metaphor intended to reflect a baseline assumption about many unincorporated firms, which is that from the standpoint of issues relevant to agency, the design of many such firms places all actors on the same plane of interest. This feature is a defining visual quality in many works of art, in particular, work that preceded the Italian Renaissance or later work that does not evidence its influence. My specific illustration comes from Antonio Pisano, known as Pisanello, who worked in the first half of the fifteenth century. Consider the organization of visual experience in Pisanello's masterpiece, The Vision of Saint Eustace.2 To be sure, the center of the painting depicts the Saint and his vision of Christ on the Cross. But there is so much else as well - a large stag with handsome antlers, a smaller stag with an even more impressive set of antlers, finely detailed equipment on the Saint's horse, elegant clothing on the Saint himself, a dog chasing a hare, other dogs awaiting their chance, what appears to be a bear, various birds, and much, much more. Each might capture the viewer's attention as readily as any other. Of this painting in particular, and of Pisanello's style more generally, the influential art historian, Bernard Berenson, wrote: The art of Pisanello, like that of the early Flemings, was too naive. In their delight in nature they were like children who, on making the first spring excursion into the neighbouring meadow and wood, pluck all the wild flowers, trap all the birds, hug all the trees, and make friends with all the gay-coloured creeping things in the grass. …