Ownership and Control: Rethinking Corporate Governance for the Twenty-First Century.

• Author: Chandrasekhar, Jai K.

By Margaret M. Blair. Washington, D. C.: The Brookings Institution, 1995. Pp. vii, 371. $34.95 (hbk.), $14.95 (pbk.).

I

Scholarly interest in corporate law has fluctuated during this century. In 1932, Adolf Berle and Gardiner Means defined the field for subsequent generations with their treatise on "the separation of ownership and control."(1) Indeed, so influential was Berle and Means's work that corporate law became intellectually moribund in the postwar era,(2) only to be revived when the law-and-economics movement turned its attention to the dilemma posed by the Berle-Means thesis.(3) For most scholars, the agency problems between management and stockholders remain the critical issue,(4) but Margaret M. Blair imaginatively applies law and economics to promote the cause of a different constituency: workers. Thus, Blair brings the debate over corporate law back to its normative roots in the legal realism of Berle and Means, who (as is often forgotten(5)) argued that the separation of ownership and control, by unbundling the traditional attributes of ownership, deprived stockholders of their sole claim to corporate profits and entitled the people to demand that corporations be managed in the interests of workers and "all society."(6)

Ownership is the right to an asset's residual returns and to control over the asset (p. 27).(7) Blair argues that stockholders are not a corporation's sole residual claimants and therefore should not be deemed its sole owners and granted exclusive control. Because many employees embody firm-specific human capital, they too are rewarded with a share of the firm's residual returns (pp. 15-16, 230-32).(8) Blair's argument that workers should be given a share of control and perhaps of equity ultimately falters on the impossibility of measuring firm-specific human capital, the difficulty of devising effective means of governance to maximize returns to diverse constituencies, and the existence of alternative ways of compensating workers for their firm-specific human capital. Nevertheless, Blair's provocative use of efficiency arguments to redefine employees as part-owners of their firms should stimulate further research and practical experimentation.

II

Blair emphasizes that, despite continuing debates in corporate law such as that over hostile takeovers,(9) there is a nearly universal consensus among scholars that a corporation's primary goal is to maximize the value of the stockholders, shares (pp. 12, 95-115, 122).(10) This is deemed a corporation's proper purpose because shareholders bear the residual risk and receive the residual returns from the firm's business (pp. 15, 228-29). Others who deal with a company, including employees, protect their interests by contract (p. 210).(11) Stockholders, exposure to the hazards of the firm's business gives them the greatest incentive to monitor the firm to ensure that it maximizes profits.(12) Thus, enhancing stock value should be corporations, goal.

Blair criticizes this consensus on efficiency grounds, drawing on the work of economists who have recognized the existence of firm-specific human capital for thirty years.(13) She turns the economists, insight into a new basis for greater worker involvement in firms, governance, which some critics of corporate law have previously advocated on political grounds.(14) Since some workers have firm-specific skills, she argues that, like stockholders, they share in the firm's residual returns (pp. 230-32).(15) Accordingly, managing a firm so as to maximize only the residual gains to stockholders risks inefficiency in the event that the firm's revenues suffice to provide returns to firm-specific human capital but not to equity. Existing doctrine then encourages management to fire workers or even discontinue operations, squandering human capital that should remain productively employed (pp. 256-57).(16)

Blair therefore urges directors to recognize a duty to maximize returns to firm-specific human capital as well as equity (pp. 239-40, 324-26). Although she refers to changing...