The Anatomy of Corporate Law: A Comparative and Functional Approach.

• Author: Skeel, Jr., David A.
• Position: Book Review

The Anatomy of Corporate Law: A Comparative and Functional Approach. By Reinier Kraakman * et al. New York: Oxford University Press, 2004. Pp. 260. $85.00.

INTRODUCTION

Every ten years or so, a book is published that sets the terms of discussion in corporate law scholarship for the years that follow. In 1976, Melvin Eisenberg published The Structure of the Corporation, (1) a work that redefined how scholars and policymakers thought about the role of the board of directors. Eisenberg's model of the "monitoring board"--a board that oversees the managers of a company instead of attempting to run the business directly--continues to define our expectations of a properly functioning board. Next came The Economic Structure of Corporate Law by Frank Easterbrook and Daniel Fischel, which reworked a series of their classic articles from the 1980s. (2) Writing from a law-and-economics perspective, Easterbrook and Fischel contended that the principal task of corporate law is to limit the conflict of interest--or "agency costs"--between managers and shareholders, and that American corporate law facilitates this goal by providing a menu of default rules the parties can alter by contract if they so choose. The most recent addition to this pantheon was Mark Roe's 1994 book, Strong Managers, Weak Owners, which challenged the traditional assumption that the emergence of America's widely held corporations was dictated entirely by economics. (3) In Strong Managers, Weak Owners, Roe noted that, unlike American corporations, where shareholders are scattered and rarely play a prominent role, German and Japanese firms are often monitored by large shareholders such as banks and insurance companies. He attributed the difference as much to politics--the traditional American hostility to concentrated financial power--as to economics.

The book that will lay the groundwork for the corporate law debates of the coming decade is The Anatomy of Corporate Law. (4) Written by seven of the world's leading corporate law scholars--Henry Hansmann, Reinier Kraakman, and Ed Rock of the United States; Paul Davies of England; Gerard Hertig of Switzerland; Klaus Hopt of Germany; and Hideki Kanda of Japan--The Anatomy of Corporate Law attempts to identify the underlying structure of corporate law and to provide a framework for understanding the wide range of approaches that different countries take to corporate regulation. "What is the common structure of the law of business corporations ... across different national jurisdictions?" the authors ask at the outset. (5)

It is hard to overstate the significance--and, as we shall see, the success--of this project. Traditional comparative corporate law scholarship has tended to explore the differences among jurisdictions in intricate detail. The authors of The Anatomy of Corporate Law insist that these local variations are only that--variations on a single, common theme. Throughout the book, they take a functional approach, emphasizing the extent to which countries that seem to have very different legal rules nevertheless tend to develop roughly similar solutions to the characteristic problems of corporate law.

The central issue for corporate law in every jurisdiction, they argue, is how to mediate three kinds of agency conflicts: between managers and shareholders, between majority and minority shareholders, and between the firm and third parties. To understand how different countries address these competing claims, the authors develop a typology of ten different strategies. The authors divide these strategies across two vectors: first by operational criteria, categorizing each strategy broadly as either a "regulatory" or a "governance" approach; then by temporal criteria, separating strategies that operate ex ante from others that come into play ex post. (6) Having developed their schema, the authors then apply it to related party transactions, control transactions, investor protection, and a variety of other key corporate law issues.

The great virtue of The Anatomy of Corporate Law is that its typology of strategies provides a simple, user-friendly way to compare the corporate law regimes of a wide range of different countries. Although scholars will surely debate both the authors' typology and their claim that several basic agency cost problems lie at the heart of every corporate law system, the essential framework is likely to withstand even the most relentless scrutiny. (7) Almost as remarkable as the typology itself is the clarity and elegance of the analysis--especially given that the book is the work of seven different scholars. The authors develop and apply their typology in well under three hundred pages, a succinctness that would fill the editors of that other anatomical guide, Gray's Anatomy, (8) with envy.

To say so much in so brief a compass, the authors obviously had to exercise ruthless editorial judgment on what to include and what to omit. After describing their typology and exploring several of their applications, I spend much of this Review focusing on issues and perspectives that the authors left out. At a general level, the book's most important limitation is that it does not take its functionalist approach far enough. Functional analysis, as the legal realists understood that term, encompasses not only legal rules, but also norms, history, and social context. Although the authors are careful not to limit themselves to the "law on the books," The Anatomy of Corporate Law focuses heavily on legal regulation, and tends to give short shrift to these other factors. This gives the book a somewhat ahistorical quality, and makes it seem less "functional" than one might expect. To borrow an analogy from the world of art, it is as if the typology is drawn from casts of ancient sculptures, rather than drawn from life. (9)

The Review also argues that the book leaves out several crucial facets of corporate law. The most important omission is the bankruptcy or insolvency regime. In recent years, it has become increasingly apparent that bankruptcy--or corporate reorganization--is best seen as a component of corporate law. Indeed, I argue that it is impossible to understand other corporate law issues without appreciating the role that bankruptcy plays in shaping the incentives of managers and other constituencies even while the corporation is financially healthy.

The authors also omit any sustained discussion of corporate groups--that is, the parent-subsidiary arrangements that characterize nearly every large corporation. Although the authors refer to the extensive regulations of corporate groups in Germany and elsewhere, they have little to say about these regulations and do not offer any analysis of the factors that influence a company's decision whether to set up a new business as a division within an existing corporation or to locate the business in a separate corporation.

Finally, the authors do not fully consider the distinctive challenges of corporate governance in emerging countries. Although they suggest that the book's ten-part typology is relevant to any country, the authors' analysis focuses on five notably developed jurisdictions--the United States, the United Kingdom, Germany, France, and Japan. In the developing and transition nations whose corporate law has been a particular concern in recent years, by contrast, it is important to move beyond the typology in order to account for problems such as limited judicial enforcement.

Part I of the Review describes the authors' typology and explores some of the insights that emerge when they apply it to issues such as self-interested transactions and the market for corporate control. Part II considers the limits of the authors' functionalist approach and argues that The Anatomy of Corporate Law should be seen as a prequel to, rather than an extension of, important recent debates over the political determinants of different corporate law regimes and the likelihood that corporate law is converging around the world. Parts III-V then discuss bankruptcy, corporate groups, and the special issues raised by corporate governance in emerging nations. I offer the last three Parts as a kind of friendly amendment (though an amendment that articulates my own--perhaps at times conflicting--vision of corporate law) to the book. These Parts can be seen as a plea that the authors add chapters on bankruptcy and corporate groups to their book in the future, and that they highlight the distinctive concerns of developing nations in its epilogue. These additions are all it would take to make the anatomy complete.

1. THE BASIC ANATOMY OF CORPORATE LAW

   The audacious goal of The Anatomy of Corporate Law is, in the authors' words, "to offer a common language and a general analytic framework with which to understand the purposes that can potentially be served by corporate law, and with which to compare and evaluate the efficacy of different legal regimes in serving those purposes." (10) This objective does not distill to a claim that the business corporations of every country are, once we scratch beneath the surface a bit, identical. Nor do the authors claim that the laws governing corporations are heading in this direction, converging toward a single framework (although several of the authors have made essentially this claim elsewhere, and the book presents evidence of convergence in the five jurisdictions on which it focuses). (11) The point, instead, is that "corporations have a fundamentally similar set of legal characteristics--and face a fundamentally similar set of legal problems--in all jurisdictions." (12) The underlying template and the problems are the same; the way they are addressed may be quite different.

   After describing the basic attributes of the corporation in the first chapter, the authors develop their typology--their common language and general analytic framework--in chapter 2; they then spend the remainder of the book applying it to a...