In recent years, a number of commentators have criticized corporate law's traditional commitment to shareholder primacy because of the costs it imposes on nonshareholder corporate constituencies. The phrase "shareholder primacy" refers to management's legal duty to pursue shareholder wealth maximization without regard for competing considerations. Despite the jarring social effects of the hostile takeover craze of the 1980s, shareholder primacy has weathered those storms and has managed to retain its status as corporate law's foundational principle.(1) Adherence to this norm can result in decisions that are harmful to various corporate constituencies, including workers, lenders, suppliers, and others involved with the corporation. For example, seeking to maintain or enhance corporate profits for shareholders may prompt management to lay off workers or close production facilities. Such decisions can cause disastrous consequences for those who lose their jobs, as well as further harmful ripple effects within the local community and beyond.(2) Similarly, management may engage in activities beneficial to shareholders that increase the default risk faced by the corporation's creditors.(3) In these and other ways, nonshareholder corporate constituencies are vulnerable to actions taken by corporate managers for the benefit of shareholders.
Scholars who have expressed concern about the social costs of shareholder primacy have been labeled "communitarians." Applied to corporate law scholarship, the term seems to have originated as a pejorative designation deployed by defenders of the shareholder primacy status quo. In fact, among the critics of shareholder primacy, it is hard to find a core set of premises that are distinctively communitarian. Little effort has been made to forge links to the rich and extensive philosophical literature on communitarianism.(5) Corporate law communitarians seem to be united primarily by their critical posture.
The common thread in this diverse body of work has been the effort to replace traditional shareholder primacy with a new legal regime--one that is more responsive to the problem of nonshareholder vulnerability to the social costs generated by corporate law's traditional commitment to shareholder wealth maximization.(6) Some writers have characterized the corporation as a community of interrelated, interdependent constituencies, and then drawn various normative conclusions from this descriptive claim.(7) Others have relied on rhetoric and analytical tools of neoclassical economics as the basis for concrete law reform proposals.(8) What brands the latter writers "communitarian" is their attention to issues that traditionally have been excluded from corporate law discourse. Their wider conception of the appropriate scope for corporate law reflects a view of the corporation as a community of interests embracing more than just shareholders and managers. Although the movement as a whole might be better termed "progressive"(9) than "communitarian," the latter term has gained currency and, if nothing else, is sufficiently broad and amorphous to warrant continued usage.
The communitarian perspective stands in contrast to the contractual or contractarian model of the corporation. According to the contractarian position,(10) the corporation is nothing more than a nexus of contracts among the various suppliers of inputs (capital, labor, credit, materials, and the like) to the production process. The parties to these various contracts define their respective rights and duties either through ad hoc bargaining that is more or less transaction-specific, or through acceptance of standard-form provisions that are typically taken "off the rack." Examples of the former include collective bargaining agreements and bond indentures, while the terms provided by state corporate law--the body of statutory and judge-made doctrine that defines the rights of shareholders--exemplify the latter. Seen in this light, it makes no sense to speak of shareholders as enjoying a legally mandated privilege in relation to other corporate constituencies. If the rights and duties of the various corporate constituencies are thought of as creations of contract, any benefits or advantages that shareholders enjoy are products of consent by the various affected parties, as are any costs or disadvantages that other constituencies must bear.
According to this view, if relationships among shareholders and nonshareholders are defined by contract, nonshareholders can protect themselves ex ante from the social costs of shareholder wealth maximization by bargaining and paying for provisions that provide the desired safeguards. For example, workers can bargain for job security, or bondholders can bargain for specific protective covenants or more general fiduciary protections.(11) If they have not done so, it is because they do not believe that such contract terms are worth the price.(12) Legal reforms aimed at improving the welfare of nonshare holders would amount to interference with private ordering and, in the contractarian view, would be illegitimate for that reason.(13) The contractarian vision of the corporation thus differs from the communitarian stance, both in its descriptive and in its normative aspects.
In this Article, I seek to further the communitarian project by proposing a new law reform strategy. I draw on recent economic research to advance two claims. In Part II, I discuss the relevance of the endowment effect and status quo bias to the distribution of gains from trade in employment contracting. Part III then draws on path-dependency theory to argue that the current prevalence of at-will employment does not necessarily indicate its superiority to job security and, therefore, does not provide a basis for rejecting the change in the law proposed here. Before turning to those matters, however, I consider, in Part I, existing law reform proposals in a communitarian vein. Although these proposals have taken quite different directions and are subject to important shortcomings, I believe they share a valuable foundational commitment. They exemplify an unwillingness to accept the sufficiency of private ordering as a mechanism for nonshareholder protection from the costs of shareholder wealth maximization. In my view, limited wealth imposes significant constraints on the ability of certain nonshareholder constituencies to obtain legitimate safeguards through the bargaining process. I therefore suggest in Part II that altering existing contractual default rules may improve the bargaining capability of nonshareholders. I should stress that this Article is modest in ambition. Even leaving aside the important and controversial political question of whether the law ought to be used for redistributive purposes, there remains the prior question of whether the strategy considered here might actually create any benefits. The question proves to be far more complicated than typically has been assumed. The exploration offered here is therefore tentative and preliminary.(14)
COMMUNITARIAN LAW REFORM PROPOSALS
Communitarian corporate law scholars, sympathetic to nonshareholder claims for protection from the costs of shareholder wealth maximization, have developed two general strategies. This Part briefly examines these strategies, concluding that they are subject to important shortcomings. I then suggest a new strategy that respects communitarian misgivings about the adequacy of private ordering while addressing my concerns about existing proposals. My alternative relies more heavily on bargaining than existing proposals have, but within a framework of altered contractual default rules. This approach seeks to redress the problem of "bargaining capability," a concept discussed in Part I.D.1 below. Whether this proposal might actually improve bargaining outcomes is considered in Part II.
The Multifiduciary Model
One law reform strategy, which has been variously termed the "stakeholder,"(15) "multifiduciary,"(16) "constituency,"(17) or "directors' duty"(18) model, would redefine the duties of the corporation's board of directors to include regard for nonshareholder as well as shareholder interests.(19) Some have drawn inspiration from the new directors' duty statutes.(20) These statutes, which in various forms have been adopted by nearly thirty states,(21) permit (or, in one case, require (22)) the board to consider workers, creditors, suppliers, consumers, and local communities in making decisions about corporate policy and strategy. Other advocates of a multifiduciary approach take a similar position without grounding their analyses on these statutes.(23) These scholars would reconceptualize the board of directors as mediator among the various interests of nonshareholders and shareholders, in place of the standard conception of the board as agent for the shareholders.
By encouraging the board to consider nonshareholder interests when those interests conflict with the interests of shareholders, the multifiduciary model obviously would impose burdens on shareholders that do not exist under the current shareholder primacy regime. The conceptual basis for this change is the idea of the corporation as a community. The point is to propose an alternative to the contractarian notion of the corporation as, in effect, a marketplace that serves as a venue for atomistic individuals seeking to further their own interests through bargaining and exchange. The normative payoff of the corporation-as-community model is the suggestion that the web of ongoing relationships constituting productive activities involves significant elements of interdependence and cooperation that cannot be captured fully by reference solely to a set of bilateral contracts. The content of these relationships gives rise to obligations existing independently of bargaining.(24)
The second law reform strategy pursued by...