Deconstructing Corporate Governance: Director Primacy Without Principle?

Here is my secret. It 's quite simple: One sees clearly only with the heart. Anything essential is invisible to the eyes. - Antoine de Saint-Exupery I. OPENING SKETCHES: ABSOLUTE DIRECTOR PRIMACY For almost eighty years now, corporate law scholarship has centered around two elementary analytical findings made in what has once been described as the "last major work of original scholarship"1 within the field. Since Adolf Berle and Gardiner Means' The Modern Corporation and Private Property,1 corporate theory has first regarded the separation of ownership and control i.e., the defining notion characterizing the large, publicly held corporation with widely dispersed shareownership)3 as the "master problem for research."4 As a second analytical inquiry, it has designated the resultant problem of affecting control over independent corporate managers through both legal and market forces as the fundamental agency (cost) problem of corporate law.5 The latter problem of efficient corporate control, in particular i.e., that magical - if, perhaps, elusive - balance between managerial discretion and managerial accountability),6 must be regarded, at least analytically, as ''unfinished business." Solvitur ambulando,1 we have certainly made good progress "stumbl[ing] forwards in our empirical fashion"8 and have been successful at developing a good number of insightful and valuable microtheoretical models of the firm but, as I have analyzed in more detail elsewhere," we are still a significant distance away from fully explaining "the wisdom" that Berle and Means so thoroughly and masterfully "blundered into."12 Measured by the predictive ability and accuracy of such models13 i.e., their respective ability to predetermine both investor and manager behavior subject to an ambient mix of motives, incentives, aspirational legal mandates14 and market forces15), we have been stuck at a crossroads for some time now. Descriptively, we have been able to design coherent models of the firm that explain current corporate reality (but for some "second- or third-order quibbling"16 that remains). Normatively, however, our models operate in a large conceptual vacuum (or "black box"). We are regularly presupposing an unacknowledged "something" that is currently largely unexplained and unaccounted for - something that, for lack of a better general term, I call "protolegal variables"17 - in order to control for both managerial behavior and the microtheoretical models of the firm that attempt to describe and predict such behavior. In a related article,18 1 have developed an absolute director primacy model of the firm that has led me - at least, tentatively and for the time being - to two conclusions and one dilemma. First, I concluded that the board of directors of a Berle-Means corporation is the private-sector equivalent of a modern Leviathan}9 The board itself, not shareholders on aggregate nor the corporation, is the corporate sovereign - both de facto and de jure. Its decisionmaking is by fiat20 and its decisionmaking authority to run the corporation's business and affairs as it sees fit is absolute,21 original,22 infinite23 and, thus, sui generis2* (hence the moniker "absolute director primacy")·25 Comparable to the Hobbesian perpetual bellum omnium contra omnes within the sovereign state,26 1 have argued that the corporate entity is inescapably and insolubly characterized by perpetual conflicts among self-interested corporate constituents.27 To manage those conflicts - which present a perennial, systemic risk to the internal cohesion, adaptability and, thus, prosperity and ultimate survival of the firm - corporate law is necessarily called upon to allocate infinite and absolute decisionmaking authority within one core group of corporate constituents.28 American corporate law is unmistakably clear as to the identity of such single core group of corporate constituents - namely, the corporation's board of directors.29 As a result, I have argued that the well-advised, disinterested corporate board of a Berle-Means corporation is uncontrollable in absolute terms. …