Few research topics over the last two decades have proven as alluring and elusive as corporate governance. Its allure is self-evident: Since the turn of the 21st century, a growing number of pundits, commentators, and scholars have argued that high quality corporate governance matters in creating and preserving firm value. And accordingly, various courts, legislatures, regulators, and boards of directors have introduced a host of governance reforms in response. Yet the topic is also elusive, largely because corporate governance operates through a wide variety of means, including the financial structure of a company, economic incentives, monitoring, formal authority, real authority, and legal rights and obligations, resulting in a conceptual patchwork that defies concise ontology. Economists and legal scholars often exacerbate this piecemeal structure by concentrating narrowly on their respective disciplinary fields. However, pragmatic and effective research on corporate governance requires an appreciation of both the economic and legal institutions surrounding corporations.
In a newly released study, we offer an overview of law and corporate governance directed at economic researchers who work in the field but do not have considerable legal training. The study—which will comprise a chapter in the forthcoming Handbook of the Economics of Corporate Governance (Hermalin & Weisbach, eds 2017)—organizes and synthesizes key legal concepts pertaining to the field, including statutes, regulations, and jurisprudential doctrines that “govern governance” in private and public companies, with concentration on the for-profit corporation. We review the literature concerning the nature and purpose of the corporation, the objects of fiduciary obligations, the means for decision making within the firm, as well as the overlay of state and federal law pertaining to how that decision-making authority is exercised within publicly traded companies.
A core feature of our analysis is that, while the basic structures of corporate law and governance are familiar and in some ways predictable, they are also in a constant state of flux, shaping and being shaped by firms, regulators, and courts. For example, we document how a rising number of “horizontal” governance disputes among different groups of shareholders are playing an increasingly important role in large U.S. corporations, including publicly traded ones. Dual-class stock structures and shareholder activism have focused renewed attention on the challenge of shareholders holding potentially conflicting views about how best to deploy firm resources. This contrasts with the more traditional “vertical” disputes between shareholders as a group and boards and officers who may have incentives to shirk their obligations to investors or to extract personal benefits from the company.
Horizontal governance disputes have traditionally been limited to privately-held U.S. companies, where they also seem to be on the rise, in part because recent changes to securities laws have encouraged economically significant firms to stay private longer. In this way, the legal dynamics affecting both private and public firms have shifted the primary governance challenge facing large U.S. corporations away from the vertical conflict between managers and shareholders towards horizontal conflicts among shareholders themselves.
This post comes to us from Robert Bartlett, Professor of Law at the University of California, Berkeley School of Law, and Eric Talley, Isidor & Seville Sulzbacher Professor of Law at Columbia Law School. It is based on their recent paper, “Law and Corporate Governance,” available here.