Kent Greenfield, Proposition: Saving the World With Corporate Law

• Citation: Vol. 57 No. 4
• Publication year: 2008

DEBATE: SAVING THE WORLD WITH CORPORATE LAW?

Kent Greenfield

D. Gordon Smith

ABSTRACT

The current debate within corporate law is as fundamental as at any time since the New Deal, when the great exchange between Merrick Dodd and A.A. Berle defined the issues for a generation of scholars. Today, the community of corporate law scholars in the United States is split between two groups. The first, heavily influenced by economic analysis of corporations, argues the merits of increasing shareholder power vis-à-vis directors. The second, animated by concern for economic justice and regulatory efficiency, challenges the traditional, shareholder-centric view of corporate law and argues instead for a model of "stakeholder governance." The following Essays present a debate between two prominent scholars, one from each of the two major groups, on the audacious question, "Can corporate law save the world?" Professor Greenfield, a leading proponent of "progressive corporate law" and the author of The Failure of Corporate Law: Fundamental Flaws and Progressive Possibilities, uses this Essay to offer a provocative critique of the status quo using organizational and regulatory theory. In his Essay, Professor Smith, one of the nation's leading advocates of increased shareholder power, contends that changes in corporate law cannot eradicate poverty, clean our air or our water, or solve "the labor question." Indeed, he argues, the only changes in corporate law that will have a substantial effect on such issues are changes that will make matters worse, not better.

PROPOSITION: SAVING THE WORLD WITH CORPORATE LAW

Kent Greenfield^*

Corporate law can change the world.

This is an overstatement, to be sure, but more correct than false. Large, multinational corporations are immensely powerful-affecting investors, workers, governments, communities, and ecosystems the world over-and the law that governs them creates, channels, and cabins that power. Corporations are also immensely successful at creating financial wealth. They represent the world's most successful business form for facilitating a cooperative process of investment by numerous stakeholders, who unite through the corporate entity to organize their various resources to produce goods or services for profitable exchange.

Despite the corporation's collective nature and collectivizing function, corporate law in the United States is constructed as if the firm consists of only shareholders and executives.¹Even though corporate law once served as a mechanism for injecting some aspects of public interest into the corporation's structure and goals,²in recent decades the focus of corporate law has narrowed to a fixation on shareholder rights and executive prerogatives.³This narrow focus has become entrenched in mainstream scholarship and doctrine.⁴What's more, as globalization intensifies, the narrow shareholder-executive focus of United States corporate law is increasingly exported, displacing the more expansive, public-oriented view of corporations in other nations.⁵

This Essay argues that this trend is unfortunate and that corporate law in the United States should be modernized and expanded. Changes in corporate law could make it possible to take advantage of the distinctive abilities of the corporation to create wealth, while making it less likely that corporations will do so through breaches of the public trust or the imposition of costly externalities on stakeholders or communities. Corporate law could also channel the power of corporations to make them a progressive force in society, using them not only to create wealth but also to spread it more equitably- addressing public policy problems, such as stagnant wages for American workers, which have been remarkably impervious to other public policy tools.⁶

Indeed, this Essay's central claim is that most of us in the United States, as well as many people throughout the world, would be better off if corporate law were different.

This Essay and its companion, by Professor Gordon Smith, embody a debate going on broadly across the field of corporate law, which is currently experiencing significant intellectual ferment. While the mainstream, neoclassical view of corporations and corporate law continues to hold sway in most court opinions and in the legal academy, a growing number of scholars contest some of that dominant school's basic tenets.⁷Disagreements go to the

Power, 118 HARV. L. REV. 833 (2005) (re-evaluating the allocation of power between boards and shareholders in public companies with dispersed ownership). heart of the discipline: what corporations are; who owns them; whether they are public or private institutions; whether managers should be charged solely with maximizing profits or with looking after other social goals as well.⁸

These disagreements are as central today as they have been since the great Berle-Dodd debates of the 1930s.⁹Moreover, there is now more disagreement at the core of corporate law than perhaps in any other area of law.

These disagreements are important, and not just to scholars of corporate law. Corporate law determines the rules governing the organization, purposes, and limitations of some of the largest and most powerful institutions in the world. By establishing the obligations and priorities of companies and their management, corporate law affects everything from the return on shareholder equity, to employees' wage rates (whether in Silicon Valley or Bangladesh), to whether companies will try to skirt environmental laws, to whether they will tend to look the other way when doing business with governments that violate human rights. Corporate law is a big deal.

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This Essay proceeds in several steps. Part I catalogues the power and success of the corporation. That Part also examines the basis for the corporation's success, drawing on evidence that suggests that a basis for the corporation's success over time is its ability to collectivize the inputs of a variety of stakeholders, all of whom expect the firm to provide more of a return on the input than the stakeholders could receive on their own. Also, organizational theory is brought to bear, suggesting that one of the ways through which the corporation is particularly able to achieve this collectivization process is its managerial structure. In this view, the corporation is not distinctive because of its method of financing, but because of

Contract, Property and the Role of Metaphor in Corporations Law, 35 U.C. DAVIS L. REV. 779 (2002); David Millon, Communitarians, Contractarians, and the Crisis in Corporate Law, 50 WASH. & LEE L. REV. 1373 (1993); MITCHELL, supra note 5; Marleen A. O'Connor, Restructuring the Corporation's Nexus of Contracts: Recognizing a Fiduciary Duty to Protect Displaced Workers, 69 N.C. L. REV. 1189 (1991); Kellye Y. Testy, Linking Progressive Corporate Law with Progressive Social Movements to Corporate Governance, 76 TUL. L. REV. 1227 (2002); and Cynthia A. Williams, The Securities Exchange Commission and Corporate Social Transparency, 112 HARV. L. REV. 1197 (1999). its structure-namely a vertical hierarchy of managers coordinating information and resources, overseen by a board of directors occupying a horizontal position at the very top of the hierarchy.¹⁰The differential success of the corporate form can be traced to the ability of the hierarchy to sort out which issues and decisions should flow up the chain and the capacity of the board to offer the benefits of group decisionmaking for the most momentous choices.¹¹

Part II focuses on the failures of the corporation. Given their nature, governance, and objectives, corporations fail in predictable ways. They produce costly externalities; they are amoral; they fail to sustain implicit or explicit commitments to communities; they privilege some stakeholders

(shareholders) at the expense of others (for example, employees).¹²They manipulate regulatory oversight and exert disproportionate political power; they compete with other firms to their collective detriment by over-utilizing resources or fouling the environment; they provide cover for managerial self-dealing of various kinds. They privilege the short-term at the expense of the long-term.

Corporations thus have long been the focus of various regulatory efforts to prevent these failures and to mitigate their effects, while seeking to preserve the firm's ability to create wealth.¹³These regulatory efforts take various forms, some affecting the internal structure and processes of the firm, and some external to it.¹⁴In the United States, the "internal" regulation of corporate law-for example, the legal imposition of fiduciary duties of care and loyalty on managers and directors-is used almost exclusively to protect shareholders or the firm itself.¹⁵Other stakeholders of the firm-for example employees, communities, or customers-are left to depend primarily on "external" regulations, such as minimum-wage laws, environmental regulations, and consumer safety rules.¹⁶

Drawing on regulatory theory, this Essay then argues that the divide between internal regulation to protect shareholders and external regulation to protect all others is misguided. Instead, the interests of non-shareholder stakeholders would be better protected if internal regulations were made available to protect them, as well. The overall goal of the regulation of the corporate form is to maximize its benefits to society while minimizing its costs.¹⁷This Essay argues that this balance is more likely to be struck if the full panoply of regulatory options-internal and external-is available to protect all the stakeholders.

Finally, this Essay argues that broadening the concerns of corporate law will have benefits that extend beyond merely defending stakeholders from harm. Corporate law also has the potential to work affirmatively, increasing the ability of the corporation to provide significant public benefits. As mentioned above, corporations are immensely...