Corporate Law and its Efficiency: A Review of History

Abstract

Economic theory of corporations, which has been influential in the recent decades, offers efficiency as the explanation for the open structure of present corporate law. Commending the statutes for their “enabling” character, it has been argued that the law of corporations was shaped by the consideration of efficiency.

This article reviews the origin and development of business corporations in the United States since the American Revolution. It explains the restrictive attitude of public policy towards corporations in the early period and the social and political concerns that animated the discourse.

The far-reaching changes made to corporate law since mid-nineteenth century arose from myriad factors and influences. There was, on the one hand, the egalitarian idea that incorporation ought to be available to all as a matter of right. On the other, business and financial interests wielded significant influence on legislative policy and were able to procure amendments that suited their needs. The review of history indicates that efficiency was not the starting point of the changes that occurred in corporate law beginning from the 1880s.

Considering the history of development, the article argues that corporate statutes lack substantial legitimacy, judged by current standards. In modern democratic societies the laws enacted by elected legislatures must, as a normative ideal, represent the considered statements of public policy on a given subject.

Recent events, beginning from Enron at the turn of the century to the latest governance failures in the financial sector, point to significant deficiencies in the present model of corporate law. It is, therefore, timely to make a review of history for assessing the suitability of the framework of corporate law for the present times and in defining the path for the future.

The present situation is quite different from 1880-1930, when significant changes occurred in American corporate law. It was the age of American ascent. Growth of industry and business and the general rise in prosperity muffled, if not subordinated, other important considerations – social and political. Indeed, economic progress has been offered as a vindication of the current state of corporate law.

A hundred years later, the world is a different place. The current recession, general industrial decline in America and other developed countries and stagnant incomes for large sections of the society for the last few decades are some factors that warrant a review of the business corporation, which is, arguably, a significant economic institution.

Historically the debate on corporations in the United States has been remarkably rich, animated by vibrant political and social ideas. It was not confined to the narrow economic sphere. Another goal of this article is to recall some of the older ideas that stressed the multifaceted character of business corporations – economic, political and social. The review of history will, hopefully, contribute to enriching the debate on corporations and in exploring how the corporate device can be better attuned to the needs of the present.

Keywords: Corporate law, history of corporations, economic efficiency, legal reform, special interests, public policy, democratic process

JEL Classification: B10, B11, B12, B15, G18, G38, G39, K22