New Directions In Corporate Law Communitarians, Contractarians, And The Crisis In Corporate Law

I. CRISISAt a recent corporate law conference, I found myself seated beside a young professor from one of the leading east coast law schools.(1) Referring to the brochure advertising our symposium on "New Directions in Corporate Law," which he had received in the mail, he recalled his surprise--and incredulity--at the asserted existence of a "crisis in corporate law." He related that he had puzzled over this for a while and finally turned to a faculty colleague for enlightenment. That person could not identify any crisis either. So, one may ask, is there really a crisis in corporate law, or, instead, is the title of this essay just a misleading marketing ploy?We are in the midst of a crisis. It is a crisis of uncertainty over corporate law's normative foundations. For much of this century, at least since the publication of Berle and Means' classic in 1932,(2) the orthodox assumption has been that corporate law's objective is to develop legal structures that will maximize shareholder wealth. This shareholder primacy vision of corporate law therefore disregards claims of various nonshareholder constituencies (including employees, creditors, customers, suppliers, and communities in which firms operate) whose interests may be adversely affected by managerial pursuit of shareholder welfare. Managerial accountability to shareholders is corporate law's central problem. Nonshareholder interests, if entitled to any legal protection at all, are for other, noncorporate law legal regimes.To say that shareholder primacy has been corporate law's governing norm is not to say that corporate law has succeeded to everyone's satisfaction in achieving its shareholder welfare objective. To the contrary, the ongoing theme in corporate law discourse has been the need to increase the accountability of management to the corporation's shareholders. Berle and Means articulated this concern in their book, identifying the separation between ownership and control as the source of the accountability problem. A complete solution has proved elusive. For one thing, as economic theorists have pointed out, the costs of delegation of managerial authority--so-called agency costs--can never be eliminated entirely because at some point the marginal costs of remedial measures exceed the marginal benefits.(3) More importantly, legal doctrine has displayed a certain degree of ambivalence on the accountability question. As with any difficult public policy problem, there are countervailing considerations. Deference to managerial discretion has been thought to have a value of its own, if for no other reason than the recognition that courts, staffed by lawyers rather than professional managers and sitting in an ex post posture, lack the expertise to make sound judgments about business policy.(4) In addition, corporate law has always understood--though usually only dimly--that truly relentless pursuit of shareholder wealth maximization is inconsistent with actual business practice and socially unacceptable in any event.(5) Even as these considerations have mitigated against a wholehog commitment to shareholder wealth maximization, it is still clear that shareholder primacy has served as corporate law's governing norm for much of this century. It is otherwise impossible to understand corporate law's basic doctrinal structures (for example, shareholder voting rights and directors' fiduciary duties to shareholders) as well as its academic discourse.(6)The hostile takeover explosion of the 1980s initially held out the promise of a final resolution of the accountability problem. An active market for corporate control would create a mechanism for managerial discipline far more formidable than the lax constraints of the voting rights and fiduciary duty systems. The beauty of the hostile tender offer, of course, was that it allowed the bidder to do an end run around target company management, appealing directly to the shareholders with the enticement of a hefty premium over current stock market price. …