Norms & corporate law.

• Jurisdiction: United States
• Date: 01 June 2001
• Author: Rock, Edward B.

INTRODUCTION

Norms are an essential element of human conduct. We have always known that they guide behavior and that they are important in this role. They represent those behavioral rules and standards that are primarily, if not exclusively, enforced by the parties themselves. But until recently, writing about legal rules and standards was of much greater interest to the legal academy.

In recent years, the legal academy's interest in norms has reawakened. Since the seminal conference at Penn in February 1996,(1) substantial additional work has been done in the area.(2) Much of this literature deals with societal norms, the norms of atomistic actors interacting with other individual actors, or with the nonlegal behavioral norms of parties who are contracting with each other.

The interest in norms is now being felt in corporate law.(3) Changing the context to a corporate setting changes the role that norms play. Corporate norms operate inside an organization. Thus, corporate norms share the greatest affinity with workplace norms, which are also inside an organization. Corporate norms are distinctive because they do not deal with third parties colliding with each other in a societal context or second parties interacting with each other in a contracting context.

Thinking about the role of norms in a corporate setting is critical for several reasons. Inside the corporation second-party relationships reign, but the relationships are importantly, indeed primarily, noncontractual. For example, behavioral rules and standards for corporate actors are provided by corporate culture and are essentially norm-based. Much of what goes on in the corporate boardroom varies among companies and follows corporate-specific practice.

Clearly, legal rules matter too, not only in establishing the corporation's charter and bylaws, but also in setting standards of behavior for directors and executive officers. At the same time, corporate law is more a set of default and enabling terms rather than mandatory terms. With great latitude, corporations can still follow their own norms and still do it "right."

An attention to norms in the corporate setting thus highlights the interaction between law and norms and between legal enforcement and private enforcement in a more intensive fashion than in other areas. Investigating the role played by norms may thus help explain a number of the major issues and puzzles of corporate law. Norms may help explain the manner in which the law, in the absence of bright line rules, influences corporate governance. Norms may also explain why standards rather than rules work well in a corporate setting. Indeed, norms may justify the prevalence of aspirational judicial standards that are far from the actual standards that the courts enforce.

Norms may also help to explain a fact that we often tell our students: namely, that corporate lawyers are rarely litigators but instead are frequently dealmakers and counselors to the board of directors. Norms may explain why there are so few cases. Norms may also provide a way of understanding the "dark matter" of corporate law, namely, the cases that are not brought.

For those primarily interested in norms as a research agenda, it is an opportunity to understand how norms play out in an institutional context by considering the specific and reasonably well understood case of the corporation. For those primarily interested in the theory of the firm or of corporations, it may help explain the role of self-enforcing contracts.

Attention to norms in a corporate setting should also highlight another research agenda: the growing attention by corporate finance specialists to the roles of corporate culture and of trust in the theory of the firm, work that fits into an already established economics literature on self-enforcing agreements. The parallels between this economics-based literature and the legal literature on norms run very deep, but have often gone unappreciated. An objective in organizing the conference was to bring these literatures closer together.

For the two of us, attention to norms in a corporate setting was a logical extension of our earlier joint paper on The Enforceability of Norms and the Employment Relationship(4) and of our separate work on the role of norms in corporate law and of self-enforcing rules in the theory of the firm.(5)

Consequently, for a variety of reasons, the time was ripe for a conference that focused on the topic of norms in a corporate setting. This issue is the result of that conference. The conference and the Symposium issue have three major sections.

The first part of the issue concerns the general relationship between corporate law and "norms." In our article, we try to provide a general account of the role that corporate law plays in facilitating self-governance by nonlegally enforced rules and standards.(6) In Oliver Hart's article, he examines the difficulties of incorporating norms into theories of the firm and the extent to which norm analysis has enriched those theories.(7) Robert Cooter and Melvin Eisenberg provide a general taxonomy of the way social norms operate in organizations and the ways in which the state conscripts organizations to promote adherence to general social norms.(8) Margaret Blair and Lynn Stout focus on the role of trust and trustworthiness in corporate law, arguing that, to the extent that people internalize norms of trustworthiness, the law can back off.(9) Finally, David Skeel focuses on the role that shame and shaming play in corporate law.(10) The section closes with Marcel Kahan's probing critique of the potential of a norms approach to elucidating problems of corporate law.(11)

The second part of the issue examines the use of norms to explain specific aspects of corporate law. Saul Levmore examines the puzzle of why firms do not issue indexed stock options even though their incentive...