A Shallow Harbor and a Cold Horizon: the Deceptive Promise of Modern Agency Law for the Theory of the Firm

Publication year2012
CitationVol. 35 No. 04

UNIVERSITY OF PUGET SOUND LAW REVIEWVolume 35, No. 4SUMMER 2012

A Shallow Harbor and a Cold Horizon: The Deceptive Promise of Modern Agency Law for the Theory of the Firm

David A. Westbrook(fn*)

I. Introduction

For at least a hundred years, legal scholars have sought a "theory of the firm," some sort of theoretical account of the corporation.(fn1) Scholars continue to write about the nature of the business corporation, and conferences such as this one continue to be held, so perhaps an adequate theory has proven elusive. Or perhaps professors produce texts because that is what professors do. And maybe periodic reconsideration of core questions is the way an academic discipline renews itself, i.e., legitimates the next generation, without redefining itself altogether. But rather than understand this perennial need for a theory of the firm as intellectual work that needs to be done (because our forebears did not solve the problem), or in terms of the sociology of the profession, I want to explore a dominant account of the firm as a symptom of political anxiety.

Modern agency law-the consensual agreement of one person to work for and under the control of another-has been widely used to provide a general framework for understanding a great deal of business law.(fn2) Agency law concepts can be used to frame pedagogical, scholarly, institutional, and even political discourses. In so doing, modern agency law addresses concerns about the institution of the corporation, generally by reference to contract: institutions are created out of essentially consensual, and hence justifiable, relationships among autonomous individuals.

So modern agency law is more than a "theory" of the firm in the narrow sense of theory; modern agency law provides a liberal myth or ideology for business associations.

As discussed below, the effort to establish the firm on the bedrock of modern agency law is serviceable for many social purposes, notably classroom teaching, but falls short in at least two ways. First, key corporate relations can be translated into agency law only by squinting in dim light. Second, agency law cannot really be understood solely in terms of consent. The problems with status and hierarchy found in the corporation are replicated in agency law, which used to be discussed more candidly in terms of master and servant. So while modern agency law provides a handy language for articulating much of corporate life, it does not allay the anxieties with which we seek a theory of the firm. Our theory is shallow.

A less than gentle reader might ask: But so what? Why should modern agency law, of all things, be taken so seriously? Much of what follows in the remainder of this Essay is familiar, at least to law professors. Doctrinal structures are subjected to logical pressure that they cannot bear; contradictions emerge, and the author declares victory. But this is only a "victory" for thought under the strange assumption that agency law-or corporation law-is or should be highly intellectually consistent. While perhaps convenient for job talks, the idea that law is consistent has not been serious since Aeschylus.(fn3) The structure of law is tragic; the law's commitments are conflicted. Why, then, dwell on these relatively trivial difficulties with modern agency law's apology for the firm? Why engage in extenuated doctrinal logic and close reading of old cases to debunk modern agency law? The vocabulary and grammar of agency law works well enough for teaching, policy discourse, and a rough and ready understanding of corporate law. Why be impolite?

If this less than gentle reader were in a mood not just to attack the text but also to take its author to the mat, it might be said that while the present Essay argues that anxiety is the mother of theory, surely anxiety has more than one child? Does not the sort of impolite critique undertaken here at least suggest the author's anxiety, or anger, or hope for something else-some emotion aroused by the misuse of agency law doctrine?(fn4) Otherwise, why does the author simply not accept the apology made by agency law for the modern business corporation, inadequate as it is? Ad hominem, perhaps, but on the mark nonetheless.

One might begin to respond to this attack by noting that understanding the corporation in the essentially contractual and therefore individualistic terms of modern agency amounts to an intellectual avoidance of the social. Within the firm, modern agency law understands relations in terms of contract (Cardozo's "morals of the marketplace") rather than in terms of obligations imposed by society as an attribute of status, as a fiduciary or otherwise.(fn5) In the world at large, modern agency law paints the firm as essentially private rather than public, as having more liberty interest than social purpose. Under such conceptual conditions, building a more sensible capitalism is hard to imagine.

This Essay argues that a more candid understanding of agency, in which social role and even power are explicitly acknowledged, might enable us to think in more sophisticated terms about the nature of corporate life and what society may hope from corporations. Part II discusses the impulse to define the firm in order to address worries about corporations. Part III examines the centrality of modern agency law for contemporary corporate law discourse. Part IV asserts that modern agency law, based on and legitimated by consent, does a poor job of accounting for corporate, or even simple agency, relations. Agency law therefore cannot serve as the basis for a robust theory, that is, legitimation, of the firm. Finally, this Essay concludes by suggesting how a more candid understanding of agency might help us think about corporate life in terms of business purpose, which might provide purchase for efforts to think seriously about markets, and perhaps even political economy.

II. Why Does the Firm Need a Theory?

It is not immediately obvious why a theory of the firm has been so long and so widely felt to be required. Indeed, it is not clear what sort of account could possibly satisfy the desire for a theory. Surely any imaginable theory of the firm would be founded on similarly vague concepts like "transaction costs" or "capital structure" or even "agency." The papers in this issue of the Seattle University Law Review were occasioned by a very good conference, Berle III. But for all its merit, Berle III did not deliver a theory of the firm that resolves the question and satisfies the desire. The question remains open, and future conferences on the matter will be held.

But as William James pointed out in a somewhat different context, treating social phenomena as propositions and evaluating their validity (the tendency of a certain sort of philosopher) may not be wise.(fn6) Some things merely are, and thus should be understood as opposed to confirmed or denied. James was talking about religious experience, and corporate law scholarship (indeed law and society scholarship generally) could do worse than taking the sort of pragmatic turn that James counseled for the philosophical consideration of religious experience. At the same time, it is interesting-and I think James would have found it inter-esting-that some social phenomena seem to call for articulation in terms of social principles that are somehow felt to be fundamental. The "firm" is one such idea; "human dignity" is another.(fn7) But the turn to ontology is hardly an everyday occurrence in American life, so what are we to make of the varieties of ontological desire, as it were? Why pursue theories of the firm?

One might think that a theory of the firm would be helpful to students who are trying to figure out what a corporation is. As discussed below, agency law is indeed useful for tying together much of the basic course on business associations. Yet, while theory has its uses in the classroom, our students come to the legal academy informally knowing what corporations are, for the simple reason that our students, too, live in a commercial society. And students do not graduate (nor should they graduate) thinking they "know" what the corporation is in any fundamentally different way. The legal academy has few if any new answers. It is true that the professoriate has numerous ways to characterize the corporation, and the professoriate continues to hold conferences where, with luck, new and clever things will be said. But the legal academy's theori-zations of the firm are essentially incomplete, multivalent, overlapping articulations of existing social commitments-and that is the point: to sophisticate what is thought about the firm. Doctrinal theorizations of the firm are (and ought to be) refinements of preexisting social understandings. Legal theory articulates the social; it does not replace the social with something else. After all, in business associations and other classes, what we teach is the law of the society of which almost all of our students are members.

But if we understand legal doctrines to be formalized and often enforceable articulations of the social, and if we perceive that here and in a few other places, doctrine requires the turn to ontology, then maybe the very word "theory," implying the detachment of the theorist, is misleading. This aspect of social life, the firm, is inadequately articulated, and therefore needs a theory; this requires some theoretical account and probably a justification...

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