The Entrepreneur and the Theory of the Modern Corporation

I. INTRODUCTION The third quarter of the nineteenth century was the golden age of economic and political liberalism and the entrepreneur.1 The last quarter of the nineteenth century and the first three decades of the twentieth century witnessed the decline of political and economic liberalism, the demise of the entrepreneur in favor of the modern corporation, and the rise of competing systems built on ideologies2 either partially or completely at odds with a pure free market economy.3 The First World War marked the breakdown of nineteenth century western civilization.4 The Great Depression confirmed that economic liberalism and free market capitalism had failed.5 Whether collectivism, fascism, or some form of heavily-government-regulated capitalism would become the world's dominant political and economic philosophy was a question slowly and painfully answered and reanswered thereafter.6 In America, however, the answer seemed clear early on. Classic liberalism7 and the ideology of free markets and the individual entrepreneur gave way to the New Deal8 and a philosophy that strongly preferred government regulation to promote the general welfare over protection of private property rights in the means of production.9 The New Deal ideology reflected widespread fear and distrust of the modern corporation and its economic and political power.10 In corporation law, the governing ideology concerning the corporation crystallized in the Berle-Means Paradigm and its identification of separation of ownership and control as the central problem of the modern corporation.11 For nearly fifty years thereafter, this description of the corporation provided the theoretical framework for mainstream corporation law scholarship12-a paradigm far more powerful than simple fear of the modern corporation and its entrenched, unrestrained managers. Around 1980, the governing-ideology pendulum unexpectedly swung the other way. Advocates of free markets, individualism, and elimination of government regulation recaptured political and intellectual control in America, England, and, within a decade, most of the first-world countries.13 Within corporation law, a similar ideological shift occurred.14 Disciples of the Chicago School of Law and Economics controlled the agenda. Their swift rise to dominance coincided with the ascendancy in corporation law of a new hegemonic paradigm, founded on the view that the corporation is a nexus-of-contracts-a consensual ordering of relations generally to be governed by private ordering and not government regulation.15 This most recent era of free market ideological dominance has seen a rekindling of the cult of the entrepreneur primarily in the form of the modern CEO.16 One example of the exalted status that the modern CEO has enjoyed post-1980 should suffice: The average CEO made $6.7 million more in 2003 than in 1980, when they made $1.4 million, adjusted for inflation. The average full-time production and non-supervisory worker made $31,928 in 2003 and $31,769 in 1980, adjusted for inflation-a gain of $159. CEOs often spend more than that on dinner. CEO pay skyrocketed 480% during 1980-2003, adjusted for inflation, while domestic corporate profits rose 145%, worker productivity rose 61% and worker pay stalled. If CEO and worker pay had increased at the pace of worker productivity, CEOs would have made $2.3 million in 2003 and workers $51,148.17 However, the reign of the CEO, the modern personification of the swashbuckling entrepreneur of the 19th century, has not been reflected in corporation law's version of free market ideology-the nexus-of-contracts model of the corporation. For the last two decades of the twentieth century, nexus-of-contracts scholars overwhelmingly agreed that corporation law can best be understood by reference to shareholder primacy-the predictive (and normative) maxim that the defining purpose of corporation law is shareholder wealth maximization. …