Redefining the Fiduciary Duties of Corporate Directors in Accordance With the Team Production Model of Corporate Governance

• Publication year: 2001

36 Creighton L. Rev. 623. REDEFINING THE FIDUCIARY DUTIES OF CORPORATE DIRECTORS IN ACCORDANCE WITH THE TEAM PRODUCTION MODEL OF CORPORATE GOVERNANCE

Creighton Law Review

Vol. 36

GREGORY SCOTT CRESPI(fn*)

I. INTRODUCTION

In several recent and important co-authored articles, Margaret Blair and Lynn Stout have set forth and elaborated upon an intriguing "team production model" (henceforth "TPM") of corporate governance.(fn1) These articles advance two bold claims. First, the authors make the descriptive claim that the courts now embrace the TPM as the paradigmatic governance framework for public corporations more than they do the competing agency model and its associated norm of shareholder primacy.(fn2) Second, the authors applaud this development, contending that the TPM better reflects the reality of modern public corporate governance arrangements than does the conventional agency model, and thus provides a superior normative paradigm for guiding corporate law.(fn3)

Their original 1999 TPM article has subsequently received considerable scholarly attention,(fn4) some of it laudatory,(fn5) some of a moremixed character,(fn6) and some critical of both its descriptive and normative claims.(fn7) I am not aware of any judicial opinions that have yet drawn upon this growing TPM literature to change or clarify the legal standards applicable to corporate governance disputes. However, the TPM concept is unusual in that it to some extent bridges the wide chasm between the mainstream "contractarian" and the competing "communitarian"(fn8) views of corporation law(fn9) that has now persisted for decades.(fn10) Adherents of these two competing analytical frameworks usually start from radically different normative premises(fn11) and advance sharply conflicting policy recommendations, particularly with regard to the roles that non-shareholder corporate stakeholders such as employees and members of the "local communities"(fn12) in which the corporations are situated should play in corporate governance. The possibility that those two groups of corporate law scholars who rarely agree with one another may each find some merit in the TPM concept, both as a descriptive schema and as a normative standard, suggests that Blair and Stout may have developed a flexible yet useful new framework that will eventually influence thinking beyond the academy and impact judicial decisions in a positive way.(fn13)

While the TPM concept has some shortcomings and is not yet fully articulated, in my opinion it nevertheless has substantial merit as an alternative description of public corporation governance and as a yardstick for the assessment of corporation law as applied to those entities. It definitely provides an interesting contrast to the more conventional agency model of corporate governance and its associated shareholder primacy norm, as well as to the communitarian perspective on corporate governance. It therefore would be a worthwhile exercise on the part of corporate law scholars to add to the recent work done by John Coates,(fn14) Viet Dinh,(fn15) Henry Hansmann,(fn16) Reiner Kraakman,(fn17) Peter Kostant,(fn18) Alan Meese,(fn19) David Millon(fn20) and others, and more fully elaborate the theoretical and practical implications of the TPM and subject them to discussion and criticism. In this article, I will attempt to make a modest contribution to that effort by examining the implications of the TPM for the locus and definition of the fiduciary duties that should be imposed upon the boards of directors of public corporations and by considering how effective a fiduciary duty regime that is tailored to fit TPM-style governance of public corporations is likely to be in achieving desirable social objectives.

As noted above, the TPM contrasts sharply with the conventional agency model of corporate governance and with the corollary principle that the fiduciary duties of corporate directors and officers should run solely to the corporation's residual claimant common shareholders.(fn21) The growing body of TPM literature, however, has so far failed tomake entirely clear whether under the TPM framework these traditional agency model-based fiduciary duties in favor of shareholders should be 1) preserved as a means of limiting director discretion, but augmented by the imposition of additional fiduciary duties to other stakeholders; 2) retained as the sole fiduciary duties, but respecified to run in favor of a larger class of stakeholders; or 3) discarded altogether, with other legal and/or non-legal means instead relied upon to constrain director discretion.

To briefly summarize my conclusions, if fiduciary duty law as applied to the directors of public corporations is to be redesigned to better facilitate TPM-style corporate governance arrangements, as I discuss below I would favor the respecification of those duties along the lines of the second alternative above. The proliferation of potentially conflicting fiduciary duties called for by the first alternative above would create a severe "too many masters" problem(fn22) that would not arise under the second or third alternatives. However, the second alternative above - preserving the concept of exclusive fiduciary duties and simply respecifying their locus as being the corporate entity as a whole, very broadly defined to include all de jure and de facto stakeholders - is more in accord with the basic TPM concept than is the more radical third alternative.(fn23) In addition, as a practical matter the courts tend to favor incremental over more radical changes and are far more likely to seriously consider embracing the new TPM paradigm if it is presented to them as a rationale for reorienting the application of traditional fiduciary duty principles than if it requires them to completely discard those principles.

In this article, I will in Part II present a very brief overview of the major TPM concepts.(fn24) In Part III, I will initially discuss how the locus of fiduciary duties should be respecified to be consistent with the TPM framework of corporate governance, should that paradigm be determined to be a descriptively more accurate model of public corporations than is the conventional agency model. I will then review the relatively complex calculations that would have to be carried out to determine how the performance of a TPM-style corporate board of directors measures up against these respecified fiduciary duties. Finally, I will discuss what practical significance of embracing the TPM by the courts as well as their subsequent respecification of the fiduciary duty standards to be consistent with this model, would have for corporate governance. Part IV will present a brief conclusion.

This article will address only the fiduciary duty law implications that should follow from judicial acceptance of the TPM as the dominant governance paradigm for public corporations. There are of course several other substantial and interesting questions presented by the TPM that also merit extended consideration. For example, Blair and Stout's strong descriptive claim that corporate governance law already is more in accord with the TPM than with the agency model of corporate governance is open to serious question.(fn25)

As another example, their claim that the TPM governance structure generally solves the public corporation stakeholder contracting problems that they identify more efficiently than would a governance structure that charged the board of directors to act as agents of the common shareholder principals leaves considerable room for debate, as does the claim that a contractarian hypothetical bargain analysis therefore calls for the TPM to be utilized as the normative baseline for assessing the facilitative properties of corporate governance law.(fn26) Finally, it is unclear whether legal rules designed to facilitate TPM-style corporate governance arrangements will actually work to further traditional communitarian objectives such as enhanced rights for workers and local communities more than does the the agency model-based shareholder primacy norm.(fn27) These interesting questions, however, are beyond the scope of this article.

II. THE TEAM PRODUCTION MODEL OF CORPORATE GOVERNANCE

Blair and Stout base the TPM on a rejection of the conventional contractarian agency model of corporate governance under which corporate directors and officers are regarded as agents of their share-holder principals.(fn28) They contend that the agency model does not fit most public corporations very well because their shareholders retain too little effective control over corporate officials to be meaningfully regarded as their principals.(fn29) They argue that the true objective of corporate governance arrangements is not the minimization of agency costs, as is widely thought, but is instead an efficient solution of the team production problem.(fn30)

This problem arises because the different stakeholders in a public corporation each must invest "firm-specific"(fn31) resources in the enterprise as part of the effort to jointly produce firm output, and are consequently vulnerable after making these relatively illiquid investments to opportunistic behavior on the part of the other stakeholders. The central contracting problem they face is how to efficiently allocate the gains from the production and sale of that output among themselves when the output is by its nature...