Failure of Corporate Law
The Failure of Corporate Law: Fundamental Flaws and Progressive Possibilities.
By Kent Greenfield, University of Chicago Press, Chicago, Ill., 257 pages, $45
Reviewed by Heidi Boghosian
Important societal influences surface in unexpected places. When baseball stadiums—icons of Americana—are named after corporations instead of former coaches or presidents, the affect of big business in the public sphere is evident. Naming rights are sold to any entity that can bear a name, such as biomedical research centers and school locker rooms. As cities fill budget gaps with millions in revenue from corporate partnerships to pay for public works, it almost seems that corporations exist to serve the common good.
The complex relationship between corporate behavior and the public interest renders that a naïve assumption. Excessive government regulation can stifle creativity and growth, but unfettered corporate power will leave us impoverished as income disparities widen, the tax burden is shifted increasingly to the individual, and public institutions are increasingly beholden to corporate sponsors.
Attempts at corporate reform arise regularly, and just as often fall. Campaign finance reform, regulatory bodies such as the Food and Drug Administration, and corporate social responsibility campaigns are undermined by the increase in power held by corporations, industry associations and lobbyists. In the end, as seen in scores of recent scandals, even the legal system lacks real teeth to address corporate fraud. Courts have actually changed restrictive laws in response to pressure from business.
For example, a 1999 proposed merger of Travelers Group and Citibank violated the Glass-Steagall Act, a 50-year-old law prohibiting commercial banks from collaborating with full-service brokerage firms or participating in investment banking activities. Yet both multinationals forged ahead, believing—correctly—that President Clinton would accede to pressure, sign the Financial Services Modernization Act, and repeal Glass-Steagall.
In “The Failure of Corporate Law,” Kent Greenfield succeeds where idealogues and regulators have failed in proposing ways that corporations may actually serve society. He questions long held legal doctrines and suggests new ones to remedy entrenched socioeconomic problems. At a time when the gap between the wealthy and poor continues to widen, Professor Greenfield’s re-imagination of corporate law is both a much-needed redefinition of the obligations of corporations as well as a compelling alternative to corporate social responsibility campaigns.
Greenfield’s central thesis is that corporate governance law should be a regulatory tool to address policies harmful to society that have gone unchallenged for decades. Private contract law on which corporate law is based, he explains, is a metaphor to insulate corporate law from the public. “The contractual model sees the corporate form not as a juridical legal person created by the legislature but a legal form created through a multitude of private contractual relationships,” he writes. This model repeats the Supreme Court’s error in Lochner v. New York, 198 U.S. 45 (1905), in which the marketplace was seen as extrapolitical and extralegal. Greenfield writes that the “private entitlements [of contract and property rights] should spring not from some theory of extralegal natural rights but from a theory of the social good, formed by political judgments about how best to achieve that good.”
A law professor at Boston College, Greenfield’s ideas are straightforward and his supporting analyses urbane. Drawing from philosophers and writers such as John Rawls, Charles Dickens, and leaders in corporate law, he critiques basic legal doctrines from a refreshingly commonsensical perspective.
For example, he writes that parallels exist between corporate law and Charles Dickens’s appraisal of utilitarianism as irrational. “Perhaps the closest living relative of the utilitarianism that Dickens critiqued in ‘Hard Times’ is the corporate law of the United States….In the mainstream view, managers are to be constrained to a single overarching goal, namely, the maximization of shareholder wealth,” writes Greenfield.
The shareholder primacy model has contributed to unabated corporate wrongdoings (from financial fraud, to obstruction, deceptive advertising and deception lending practices, to name a few). Workers are better positioned than shareholders, writes Greenfield, to ensure that their companies succeed because their own interests are better served if corporations perform well. He critiques the assertion that the shareholder primacy doctrine, because of limited liability and highly diversified portfolios, is good for corporations that are mostly indifferent to company direction. His preferred model “gives due regard to the goal of realizing the preferences of shareholders but also does not deify those preferences at the expense of other stakeholders, the firm as a whole, or society in general.”
Another practice that enables corporations to wreak damage on the social good, according to Greenfield, is that Delaware is the dominant state of incorporation of over half the country’s public companies. He challenges the internal affairs doctrine—providing that the state of incorporation controls governance of the issues among shareholders and directors—as “inconsistent with democratic legitimacy.” He calls for an end to the dominance of Delaware over the terms of corporate governance. Unlike any other area of the law, “Corporations located outside of Delaware can adopt Delaware’s laws for their internal affairs, leaving other non-shareholding stakeholders affected by those laws but with no democratic mechanism to influence those laws.”
Greenfield questions the mainstream views that advancing shareholder wealth serves societal wealth, that widening manager responsibility to include other stakeholders releases them from responsibility, and that it is more efficient to regulate corporations externally rather than internally. He says that although these traditional beliefs have not been questioned, they should be rejected. We ought to treat corporations warily “because of their inability (absent regulation) to take into account values far more important than wealth." He argues instead for a dependence on fairness, nonfinancial factors, and focus on process, rather than the supreme stakeholder model. Examples of fairness factors include allowing workers and other non-shareholders to partake in decision making, and calling for the creation of antifraud laws for workers, as well as requiring that directors owe a fiduciary duty to workers.
Greenfield’s premise is straightforward: The shareholder primacy theory of corporate law is deeply flawed and should be fixed. Even skeptical readers of “The Failure of Corporate Law” will surely realize the benefits of this assertion. Fixing unjust laws far outweighs rewarding the powerful few who dominate the well being of society’s powerless many.