Quasipublic executives.

• Author: Camara, K.A.D.
• Position: Symposium on Executive Power

ESSAY CONTENTS INTRODUCTION I. CONTROLLING EXECUTIVES A. Incentives and Insulation B. Constitutional Law and Corporate Law II. CONTROLLING QUASIPUBLIC EXECUTIVES A. The Status Quo B. Control Mechanisms for Quasipublic Executives 1. Nominally Public Executives 2. Nominally Private Executives CONCLUSION INTRODUCTION

This is an Essay about how to design control mechanisms for executives who have private characteristics such as insulation from electoral control, but who are charged with public functions such as corrections, education, and national defense. We call these figures "quasipublic executives." Quasipublic executives are created both when public executives assume private characteristics, becoming what we call "nominally public executives," and when private executives assume or are assigned public functions, becoming what we call "nominally private executives." The regulation of quasipublic executives is important and interesting for two reasons. First, quasipublic executives have become increasingly common in the United States and abroad. (1) and the demographic and technological changes behind this trend are unlikely to reverse themselves. Second, our effort in this Essay to design effective control mechanisms for quasipublic executives reveals a connection between constitutional law and corporate law that has growing consequences for both fields. Unfortunately, this connection has been overlooked for the most part by academics and practitioners alike. This inattention is symptomatic of a broader distortion in the law and legal education caused by the assignment of social problems to doctrinal areas on the basis of formal legal concepts rather than functional considerations. We shall discuss such distortions later in the Essay.

Part I begins by arguing that constitutional law and corporate law address a common problem of controlling executives but that they use very different control mechanisms to do so. It continues by suggesting that this difference can be described using the incentives-and-insulation framework that one of us has developed elsewhere. (2) In particular, we observe that constitutional law relies principally on political and social control mechanisms, while corporate law relies principally on market control mechanisms. Part I then argues that any justification for this difference in reliance must rest on differences between the functions with which we charge the executives governed by constitutional law and corporate law or on differences between the institutional structures in which these executives operate. But no such justification can support the systematic differences between the control mechanisms applied to nominally public executives and those applied to nominally private executives because both of these types of executives are charged with public functions and operate in institutions with substantial private characteristics. In the absence of a justification for the divergence between corporate law's and constitutional law's control mechanisms, it is natural to look to corporate law to shore up the control mechanisms governing nominally public executives and to constitutional law to shore up the control mechanisms governing nominally private executives. (3)

Part II sketches the application of this theory to the reform of control mechanisms for quasipublic executives, using school executives as a running example. In light of space constraints, however, we leave for future work rigorous application of our theory to particular institutions. We conclude by returning to the Essay's second motivation--namely, the light that our analysis sheds on the convergence of constitutional law and corporate law and, more generally, on the ways in which doctrinal divisions in the legal academy distort the law's approach to social problems.

1. CONTROLLING EXECUTIVES

   1. Incentives and Insulation

      The problem of controlling executives is a special case of the problem of controlling people--a problem central to the law, seen as a system of social engineering. The law controls people by controlling their exposure to and insulation from three types of incentive forces: political, market, and social. (4) Political incentive forces change behavior by conditioning a person's getting what he wants on his having the consent of others. Market incentive forces are a special case of political incentive forces in which, in the paradigm case, the reward is financial and the consenters are market participants operating under the baseline rules of private law. (5) Social incentive forces change behavior by changing what people want. (6) It is helpful to think of social incentive forces as internal, that is, as the contribution of an agent's own preferences to what he does, and to think of political and market forces as external, that is, as the contribution of obstacles to the satisfaction of an agent's preferences to what he does. But this rule of thumb must be taken with the caveat that social incentive forces can be shaped and so have external origins, even though, once in place, they function internally.

      With the term "insulation," we capture the idea that people differ in their susceptibility to incentive forces. Someone who is perfectly insulated from an incentive force does not change his behavior in response to it. Authority, in the sense of a social practice of obedience to the one with authority, insulates the one possessing authority from political incentive forces because, if the consenter habitually obeys, the authority need not take his preferences into account. Wealth, or not wanting what can be bought, insulates a person from market incentive forces. Perfect competitive pressure and old-fashioned physical force both insulate a person from social incentive forces, for when someone has no choice, what he wants does not matter. (7)

      A set of incentive forces, together with degrees of insulation from them, describes a system of control mechanisms. (8) Because control mechanisms are often developed on an ad hoc basis or shaped from a legal-doctrinal perspective heavily influenced by history, these systems often contain patterns and holes with no immediately apparent functional justification. Thinking about the law's means of social control in the abstract way we advocate is helpful because it makes these patterns and holes more apparent. Moreover, once we see them, we can decide whether they are desirable by consulting general arguments about the situations in which different types of incentive forces and insulation are useful. And if they are not desirable, we can determine how to fax them.

   2. Constitutional Law and Corporate Law

      Constitutional law and corporate law share the problem of controlling executives. By "executives," we mean high-level decision-makers who are substantially independent of the internal hierarchies of their institution. Thus, the President of the United States, the Mayor of Boston, and the Principal of Mountain View High School are executives, as are the chief executive officers of the large corporations that dominate the American economy. By using the term "executive," we do not mean to restrict ourselves to those at the top of an institutional hierarchy or to those who constitute its public face. What is essential is the independence that we emphasize in our definition, for it follows from this independence that the law must provide, or permit others to provide, (9) whatever control mechanisms will apply. It is also evident from our definition of "executive" that by "constitutional law" we mean not only constitutional law as traditionally understood, but the whole of the law governing public executives, including much of administrative law. And by "corporate law" we mean the law governing the executives of large, publicly traded firms, which both excludes the law of close corporations and includes parts of, for example, antitrust and labor law.

      Constitutional law and corporate law control executives in very different ways: constitutional law, principally through political and social control mechanisms; and corporate law, principally through market control mechanisms. Constitutional law relies on electoral mechanisms (elections, appointments, recalls, and impeachments); on separation of powers (both horizontally among government branches and vertically among international, federal, state, and local governments and between governments and individuals); on norms of public service; and on institutional structures such as sunshine laws, notice-and-comment periods, freedom of speech, and public education that make the other control mechanisms more effective. Corporate law relies on a variety of control mechanisms, but principally on competitive products markets and performance-based executive compensation, including, as an extreme form, the market for corporate control. There are certainly exceptions to this characterization in the literature and in practice--for example, some scholars describe market control mechanisms in constitutional law (10) and others identify political and social control mechanisms in corporate law (11)--but the exceptions are few enough not to undermine the characterization in general.

      Our central claim is that the systematic difference between the control mechanisms that constitutional law employs and those that corporate law employs leads to suboptimal control of quasipublic executives. Any justification for the difference must rest on supposed systematic differences between the situations in which each type of control mechanism is most effective. For example, one traditional justification for corporate law's focus on market control mechanisms is that profit-maximizing executives operating in markets with suitable price interventions do what is socially best. This justification, however, does not apply to the class of quasipublic executives whom we have called "nominally private executives" because they are charged with public functions--and it...