Feedback to SSRN (Beta)
What type of feedback would you like to send?
Abstract: The notion that the primary, or in extreme versions, the only legitimate goals of corporate management and governance should be to maximize the value of the shareholders' interest in the company is based on a series of elegant and facile, but deeply flawed assumptions about the nature of the relationships among corporate participants, about how financial markets work, about how human beings work together in groups, and about what the law requires. Contrary to these assumptions, shareholders are neither the "owners" of corporations, nor the only claimants with investments at risk; stock prices do not always accurately reflect the true underlying value of equity securities; managers will not necessarily do a better job of running corporations if they focus solely on share value, or if they are heavily incentivized with stock options, or if they are constantly vulnerable to being ousted in a hostile takeover; and corporate law does not require shareholder primacy. Instead, this essay suggests that, once basic societal and business institutions are in place, such as rule of law, sophisticated and uncorrupted courts, an independent accounting profession, liquid financial markets and an adequate securities regulation system, the principle element needed to foster wealth creating productive activity may be a powerful set of cultural norms emphasizing personal and group integrity, cooperative behavior among team members, and responsibility in the team's relationships to the larger communities in which it operates.
Abstract: In the heated debate of the last fifteen years over which of the world's many different corporate governance systems were best, the shareholder primacy advocates thought they had won at the turn of the century. Now, in 2002, the helium has come out of the formerly high-flying technology and information infrastructure sectors that were leading the U.S. economic expansion in the 1990s, and the Enron fiasco and accounting scandals at numerous other U.S. corporations have exposed deep flaws in the system that had been held up as the model for all the world to follow. Many possible lessons can be drawn. At least one is that the high-powered incentives provided by stock option compensation may produce perverse behavior that can, in turn, undermine institutional arrangements that support and foster mutual trust and cooperation. The study of corporate governance must focus on more than just how to get management to maximize value for shareholders. It must also be about the human institutions that bind people together in cooperative relationships over long periods of time.
Abstract: Conventional legal and economic analysis assumes that opportunistic behavior is discouraged and cooperation encouraged within firms primarily through the use of legal and market incentives. This presumption is embodied in the modern view that the corporation is best described as a "nexus of contracts," a collection of explicit and implicit agreements voluntarily negotiated among the selfishly rational parties who join in the corporate enterprise. In this article we take a different approach. We start from the observation that, in many circumstances, legal and market sanctions provide at best imperfect means of regulating behavior within the firm. We consider an alternate hypothesis: that corporate participants often cooperate with each other not because of external constraints, but because of internal ones. In particular, we argue that the behavioral phenomena of internalized trust and trustworthiness play important roles in encouraging cooperation within firms. In support of this claim, we survey the extensive experimental evidence that has been produced over the past four decades on human behavior in "social dilemmas." This evidence demonstrates that internalized trust is a common phenomenon; that it is at least in part learned rather than innate; and that different individuals vary in their inclinations toward trust. Most important, the experimental evidence indicates that decisions whether or not to trust others are in large part determined by social context rather than external payoffs. By altering social context - subjects' perceptions of others' beliefs, expectations, likely actions, and relationships to themselves - experimenters can reliably produce everything from nearly universal trust, to an almost complete absence of trust, in subjects in social dilemmas. In other words, most people behave as if they have two personalities or preference functions. One is competitive and self-regarding. The other is cooperative and other-regarding. Social framing is key in triggering when the cooperative personality emerges. These behavioral findings carry important implications for corporate law. For example, in this article we demonstrate first that the phenomenon of trust offers insight into the substantive structure of corporate law and particularly the nature and purpose of that elusive legal concept, fiduciary duty. In the process, it adds weight to the claims of anticontractarian corporate scholars who argue against the notion that corporate officers and directors should be free to contract out of their fiduciary duty of loyalty. Second, the experimental evidence on trust sheds light on how corporate law works, by suggesting how judicial opinions in corporate cases direct corporate officers' and directors' behavior not only by altering their external incentives but also by changing their internalized preferences. This possibility helps explain the notoriously puzzling relationship between the duty of care and the business judgment rule. Third, trust highlights the limited power of law by explaining how cooperative patterns of behavior can sometimes develop within firms even when external incentives, such as legal sanctions, are unavailable or ineffective. In the process, it underscores the dangers of the contractarian approach by suggesting how an excessive emphasis on external sanctions - including formal contract and even the rhetoric of contract - may be not only ineffective but counterproductive, serving to undermine trust and trustworthiness within the firm.
Abstract: In this article, I briefly review the history of corporate law, and then describe current legal distinctions among organizational forms in order to argue that one of the characteristics that distinguishes corporations from partnership-type forms is the set of default rules that help organizers to lock in capital, without locking in the investors. I argue that such lock-in is probably attractive because it allows business organizers to precommit not to withdraw capital from the venture prematurely or capriciously. I then propose that corporate governance reform proposals be distinguished according to whether their purpose and effect is to strengthen the independence and information available to boards, to enhance shareholder "voice," or to make it easier for shareholders to "exit." If the purpose and effect of a corporate governance reform proposal is to make it easier for shareholders to "exit," by, say, requiring boards to submit takeover offers to a shareholder vote, or permitting shareholders to propose and mandate (by election) distributions, dissolution or asset sales, I argue in this paper that such a proposal is at odds with the "lock-in" function of corporate law. Since business organizers would find it difficult to achieve effective lock-in using other currently available organizational forms, eliminating or weakening the lock-in potential of the corporate law choice by statutorily requiring corporations to give shareholders such powers would take away an important organizational option that business organizers and investors currently have. This option has been eagerly sought out and used by business organizers in the U.S. for more than 150 years, and appears to be associated with substantial economic innovation and growth. Thus, it seems unwise on the face of it to change the law in ways that would eliminate this option. On the other hand, if the purpose and effect of a corporate governance reform proposal is to enhance the monitoring capabilities of corporate boards, or to facilitate shareholder "voice," such a proposal is not obviously at odds with the lock-in function of the corporate form, and may well reduce agency costs without unduly subverting the role that the corporate form serves in addressing the team production problem.
Abstract: Contemporary corporate scholarship generally assumes that the central economic problem addressed by corporation law is getting managers and directors to act as loyal agents for shareholders. We take issue with this approach and argue that the unique legal rules governing publicly-held corporations are instead designed primarily to address a different problem - the "team production" problem - that arises when a number of individuals must invest firm-specific resources to produce a nonseparable output. In such situations team members may find it difficult or impossible to draft explicit contracts distributing the output of their joint efforts, and, as an alternative, might prefer to give up control over their enterprise to an independent third party charged with representing the team's interests and allocating rewards among team members. Thus we argue that the essential economic function of the public corporation is not to address principal-agent problems, but to provide a vehicle through which shareholders, creditors, executives, rank-and-file employees, and other potential corporate "stakeholders" who may invest firm-specific resources can, for their own benefit, jointly relinquish control over those resources to a board of directors. This alternative to the principal-agent approach offers to explain a variety of pivotal doctrines in corporate law that have proven difficult to explain using agency theory, including: the requirement that a public corporation be managed by a board of directors rather than by shareholders directly; the meaning and function of a corporation's "legal personality" and the rules of derivative suit procedure; the substantive structure of directors' fiduciary duties, including the application of the business judgment rule in the takeover context; and the highly-limited nature of shareholders' voting rights. The team production model also carries important normative implications for legal and popular debates over corporate governance, because it suggests that maximizing shareholder wealth should not be the principal goal of corporate law. Rather, directors of public corporations should seek to maximize the joint welfare of all the firm's stakeholders - including shareholders, managers, employees, and possibly other groups such as creditors or the local community - who contribute firm-specific resources to corporate production.
Abstract: Contemporary corporate scholarship generally assumes that the central economic problem addressed by corporation law is getting managers and directors to act as loyal agents for shareholders. We take issue with this approach and argue that the unique legal rules governing publicly-held corporations are instead designed primarily to address a different problem -- the "team production" problem -- that arises when a number of individuals must invest firm-specific resources to produce a nonseparable output. In such situations team members may find it difficult or impossible to draft explicit contracts distributing the output of their joint efforts, and, as an alternative, might prefer to give up control over their enterprise to an independent third party charged with representing the team's interests and allocating rewards among team members. Thus we argue that the essential economic function of the public corporation is not to address principal-agent problems, but to provide a vehicle through which shareholders, creditors, executives, rank-and-file employees, and other potential corporate "stakeholders" who may invest firm-specific resources can, for their own benefit, jointly relinquish control over those resources to a board of directors. This alternative to the principal-agent approach offers to explain a variety of pivotal doctrines in corporate law that have proven difficult to explain using agency theory, including: the requirement that a public corporation be managed by a board of directors rather than by shareholders directly; the meaning and function of a corporation's "legal personality" and the rules of derivative suit procedure; the substantive structure of directors' fiduciary duties, including the application of the business judgment rule in the takeover context; and the highly-limited nature of shareholders' voting rights. The team production model also carries important normative implications for legal and popular debates over corporate governance, because it suggests that maximizing shareholder wealth should not be the principal goal of corporate law. Rather, directors of public corporations should seek to maximize the joint welfare of all the firm's stakeholders -- including shareholders, managers, employees, and possibly other groups such as creditors or the local community -- who contribute firm-specific resources to corporate production.
Abstract: A substantial academic and popular literature argues that the performance of American corporations might improve if American corporations had long-term outside investors (relational investors) who would hold large stakes, actively monitor management performance, and engage with management in setting corporate policy. Institutional investors can perhaps play this role. We provide the first large-scale test of the hypothesis that relational investing can affect corporate performance. We consider ownership and performance data for more than 1,500 large U.S. companies over a thirteen-year period (1983-95). Our results provide a mixed answer to the question of whether relational investing affects corporate performance. Our data suggest that there was a period in the late 1980s - a period with a high level of hostile takeover activity - when the presence of a relational investor was associated with higher stock market returns. This cohort of relational investors may have been able to induce corporate restructuring, whose principal effect was to reduce growth rates while improving profitability. But this pattern was not found in the early 1980s, or repeated in the early 1990s.
Abstract: One of the most pressing questions facing both corporate scholars and businesspeople today is the question of how corporate directors can be made accountable. Before addressing this issue, however, it seems important to consider two antecedent questions: To whom should directors be accountable? And for what? Contemporary corporate scholarship often starts from a "shareholder primacy" perspective that holds that directors of public corporations ought to be accountable only to the shareholders, and ought to be accountable only for maximizing the value of the shareholders' shares. This perspective rests on the conventional contractarian assumption that the shareholders are the sole residual claimants and risk bearers in a public firm. More recent work in economics suggests, however, that this assumption is false. In particular, options theory and the growing literature on the contracting difficulties associated with firm-specific investment both support the claim that a wide variety of groups are likely to bear significant residual risk and enjoy significant residual claims on firm earnings. These groups include not only shareholders, but also creditors, managers, and employees. Thus economic efficiency may be best served not by requiring corporate directors to focus solely on shareholders' interests, but by requiring them instead to maximize the sum of all the interests held by all the groups that bear residual risks and hold residual claims. In accord with this view, we argue that corporate directors ought to be viewed not as "agents" who serve only the shareholders, but as "mediating hierarchs" who enjoy ultimate control over the firm's assets and outputs and who are charged with the task of balancing the sometimes conflicting claims and interests of the many different groups that bear residual risk and have residual claims on the firm. This mediating model of the board's role offers to explain a variety of important doctrines in U.S. law that preserve director autonomy and insulate the board from the command and control of the shareholders or indeed any other group. At the same time, the mediating model raises the question of why directors who are largely insulated from outside pressures should be expected to do a good job of running the firm. We suggest that answers to this question are available, but only if we are willing to look beyond the homo economicus model of rationally selfish behavior commonly employed in economic analysis and to consider as well the extensive empirical evidence in the social sciences literature on the phenomenon of intrinsically trustworthy, other-regarding behavior. We briefly explore how this literature both supports the claim that directors may behave trustworthily even when they do not have explicit incentive to do so, and suggests some of the circumstances that are likely to promote accountable director behavior.
Abstract: Although there is controversy among economists about whether the U.S. economy is really functioning in a new way in the last decade, there is widespread agreement on one feature of the so-called "New Economy": Physical assets, such as land, natural resources, office space, factories, and machines, are becoming commodities. Today, new wealth and competitive advantage largely come from non-physical assets or "intangibles," including ideas, human capital, corporate competence, and, importantly for this article, intellectual property rights. The authors of this article recently participated in a special Task Force, organized under the auspices of the Brookings Institution, to consider the policy implications of the growing importance of intangibles in the U.S. economy. (Prof. Blair co-chaired the Task Force with Steven M.H. Wallman and drafted the final report, issued recently by Brookings as Unseen Wealth: Report of the Brookings Task Force on Intangibles; Mr. Hoffman served as chair of the intellectual property rights subgroup on the Task Force.) In this chapter, we summarize and discuss the findings of the report, especially as they relate to proposed reforms of the intellectual property rights laws and institutions in the U.S. and in the international community. The Task Force proposals are intended to increase the certainty, though not necessarily the scope of property right protection over intellectual assets such as patents, copyrights, and trademarks.
Abstract: For the past two decades, legal and economic scholarship has tended to assume that the central economic problem addressed by corporation law is getting managers and directors to act as faithful agents for shareholders. There are other important economic problems faced by business firms, however. This article introduces a Symposium that explores one of those alternate economic problems: the problem of "team production". Team production problems can arise whenever three conditions are met: (1) economic production requires the combined inputs of two or more individuals; (2) at least some of these inputs are "team-specific," meaning they have a significantly higher value when used in the team than in their next best use; and (3) the gains resulting from team production are nonseparable, making it difficult to attribute any particular portion to any single team member's contribution. In such situations, it can be difficult or impossible for team members to draft explicit contracts that protect their team-specific investments from other team members' opportunism. Thus the nine articles in the Symposium explore the implications of team production analysis for a wide variety of business organizations, including public corporations, private companies, multinational firms, and venture capital firms.
Abstract: For the past two decades, legal and economic scholarship has tended to assume that the central economic problem addressed by corporation law is getting managers and directors to act as faithful agents for shareholders. There are other important economic problems faced by business firms, however. This article introduces a Symposium that explores one of those alternate economic problems: the problem of "team production". Team production problems can arise whenever three conditions are met: (1) economic production requires the combined inputs of two or more individuals; (2) at least some of these inputs are "team-specific," meaning they have a significantly higher value when used in the team than in their next best use; and (3) the gains resulting from team production are nonseparable, making it difficult to attribute any particular portion to any single team member?s contribution. In such situations, it can be difficult or impossible for team members to draft explicit contracts that protect their team-specific investments from other team members? opportunism. Thus the nine articles in the Symposium explore the implications of team production analysis for a wide variety of business organizations, including public corporations, private companies, multinational firms, and venture capital firms.
Abstract: This paper focuses on contracting problems in firms caused by asset specificity and investment incentives, particularly the problems that arise when employees make investments in "firm specific human capital." In such cases, employee investments will also be seriously at risk in the enterprise. Under the nexus of contracts theory of corporations, corporation law is viewed as providing a standardized solution to a central contracting problem, namely the agency problem between shareholders (who are assumed to be the "owners" of the firm) and their hired managers. All other relationships are seen as governed by ordinary, negotiated contracts. But where employees make important specific investments, it is no longer appropriate to assume that shareholders are, and should be, the hiring party, or the "owners." A broader view of what a firm is, and what corporation law accomplishes, is needed, one that permits exploration of why one set of participants in the firm might end up with certain control rights rather than some other set. For a firm in which such firm-specific employee investments are important, one would expect, for example, to find institutional arrangements that are central to the nature of the firm and that encourage continuity in the relationships between employees and the firm, as well as give employees the means to protect their stakes. Such institutions might include unions, severance pay, and social norms of lifetime employment, together with internal job ladders, career paths, seniority rules, and direct and formal control rights. The paper then reviews several new theories that view the firm alternately as a system of incentives, or as a nexus of specific investments. In other words, they conceptualize the firm as a mechanism for governing the relationships among all the participants (those who contribute labor as well as those who contribute capital), not just the relationship between shareholders and managers.
Abstract: This essay observes that, in the face of corporate scandals of the last few years, a number of prominent advocates for shareholder primacy have retreated to the position that directors and officers should attempt to maximize long run share value performance, rather than short term value. But the mantra of share value maximization has no distinctive meaning and policy implications if it is not interpreted to mean maximization of short term value. This is because the actions required to maximize share value in the long run are indistinguishable in practice from actions taken in pursuit of other more broadly-stated goals such as the maximization of wealth for all corporate stakeholders. Moreover, once its advocates accept the goal of long run share value maximization, then they should consider discarding the language of shareholder primacy, and the associated emphasis on high-powered, equity-based incentive systems. Such language is unnecessarily divisive and provocative. It draws attention to conflicting interests in corporate enterprises and announces that, when faced with conflicts, directors should choose actions that benefit shareholders even if those actions harm other stakeholders. In so doing, it tends to reduce cooperation, send signals that other participants and other values are of secondary importance, and undermine the ethical climate inside corporations. This essay proposes that, by contrast, the language of "team production" supports cooperative behavior, sharing of burdens and rewards, and win-win solutions.
Abstract: This essay has two goals: to praise Professor Robert Clark as a remarkable corporate scholar, and to explore how his work has helped to advance our understanding of corporations and corporate law. Clark wrote his classic treatise at a time when corporate scholarship was dominated by a principal-agent paradigm that viewed shareholders as the principals or sole residual claimants in public corporations and treated directors as shareholders' agents. This view naturally led contemporary scholars to assume the chief economic problem of interest in corporate law was the "agency cost" problem of getting corporate directors to do what shareholders wanted them to do (presumably, to maximize share value). Clark's treatise in some ways adopted this perspective. It also, however, carefully noted important but anomalous aspects of corporate law that the principal-agent model could not explain, including directors' extensive and sui generis legal powers; the fact that directors control dividends; the device of legal personality; and the open-ended rules of corporate purpose. Today, economic and legal scholars have begun to move beyond agency costs and to focus attention on a second economic problem that arises in public corporations: protecting specific investment. When corporate production requires more than one individual or group to make specific investments, problems of intrafirm opportunism arise as shareholders try to exploit each other and try as well to exploit creditors, employees, customers, and other groups that make specific investments. Board authority, while worsening agency costs, may provide a second-best solution to such intrafirm rent-seeking. This perspective can explain the important corporate law anomalies Clark described. Because Clark wrote his treatise at a time when the principal-agent paradigm was ascendant, he could not himself easily explain the anomalies he carefully noted. His treatise nevertheless showed both remarkable insight and remarkable honesty in discussing them. As result Clark played an important role in drawing scholars' attention to the limitations of the principal-agent model and in spurring them to explore alternatives. His treatise remains one of the best available starting points for the reader who wants an accurate portrait of the structure of corporate law.
corporate law, principal-agent, agency costs, boards of directors, legal personality, specific investment, law and economics, scientific revolutions, nexus of contracts, shareholder wealth maximization, residual claimants, theory of the firm, capital lock-in, shareholder primacy, team production
Abstract: This essay draws on the experience of business people in the early 19th century U.S. to provide insights into the problems of creating effective institutions of capitalism in emerging market and transition economy countries. The essay argues that the unique contribution of the corporate legal form in the 19th century was that it allowed business people to create separate legal entities with potentially unlimited life to own the assets used in production, which, among other things, separated asset ownership from control over those assets. These features together enabled business organizers to commit capital almost irrevocably to an enterprise, and helped to make the enterprises more financially stable. Using the corporate form, rather than partnership or so-called "joint stock companies" (which were a type of partnership), business organizers could more easily accumulate organizational and other intangible capital, along with the specialized physical capital necessary to carry out complex business activities over an extended period of time. Scholars who have studied the problems of creating effective corporate law and governance institutions in developing and transition countries have emphasized the importance of protections for minority shareholders. But the need for legal and organizational mechanisms for locking capital into the enterprise, for preventing investors from stripping assets or otherwise pulling out prematurely, is even more basic, yet largely neglected in the literature so far. An appreciation of our own history of how business people tried to find organizational forms that would enable them to build substantial and lasting business enterprises in the absence of strong legal, cultural and institutional supports sheds light on the important role played in this country of entity status and separation of control from financial contribution.
Abstract: Corporations can be understood as solutions to team production problems, rather than as property. Incorporation involves creation of a new legal entity in which control rights are separated from residual claim rights. The corporation itself, not the shareholders nor any other corporate participants, becomes the owner of assets used in production, and of output. Decision-making authority is vested in an organizational hierarchy, headed by a board of directors that is legally independent of shareholders. Understanding corporations in this way helps explain a number of features of corporate law and provides new insights into the theory of the firm.
Abstract: This Article argues that corporate status became popular in the nineteenth century as a way to organize production because of the unique manner in which incorporation permitted organizers to lock in financial capital. Unlike participants in a partnership, shareholders in an incorporated enterprise could not extract capital from the firm without explicit approval of a board of directors charged with representing the interests of the incorporated entity, even when that interest might sometimes conflict with the interests of individual shareholders. While this ability to lock in capital has occasionally led to abuses, the ability to commit capital generally helped promote and protect the interests of shareholders as a group by making it possible for the entity to invest in long-term, highly specific investments. It also helped protect a wide range of enterprise participants who made specialized investments in reliance on the continued existence and financial viability of the corporation. The ability to lock in capital grew out of the fact that a corporate charter created a separate legal entity, whose existence and governance were separate from any of its participants. Although the idea that the law creates a separate legal person when a corporation is formed has been played down in the legal scholarship of the last two decades in favor of the view that a corporation is simply a nexus through which natural persons interact, recent legal scholarship has begun to reconsider the importance of entity status. Entity status under the law, and the associated separation of governance from contribution of financial capital through the formation of a corporation, allowed corporate participants to do something more than engage in a series of business transactions, or relationships, or even projects. It made it possible to build lasting institutions. Investments could be made in long-lived and specialized physical assets, in information and control systems, in specialized knowledge and routines, and in reputation and relationships, all of which could be sustained even as individual participants in the enterprise came and went. And these business institutions, in turn, could accomplish more toward the improvement of the wealth and standard of living of their participants in the long run than the same individuals could by holding separate property claims on business assets and engaging in a series of separate contracts with each other.
Abstract: At the close of the twentieth century, U.S. corporate scholarship was dominated by a principal-agent paradigm that assumed that shareholders were the principals or sole residual claimants in public corporations, and also assumed that corporate directors were the shareholders' agents. This approach led many corporate scholars to assume that the proper purpose of the corporation was to maximize shareholder wealth and that the chief economic problem of interest in corporate law was the agency cost problem of getting corporate directors to focus on this goal. There are basic aspects of U.S. corporate law, however, that the principal-agent model cannot explain. These include directors' extensive and sui generis legal powers; the fact that directors control dividends; the device of legal personality; and the open-ended rules of corporate purpose. These corporate law anomalies have prompted contemporary economic and legal scholars to begin to move beyond a focus on agency costs and to pay attention to a second economic problem that arises in public corporations: the problem of protecting specific investment. When corporate production requires more than one individual or group to make specific investments, problems of intrafirm opportunism arise if shareholders try to exploit each other's specific investments or try to exploit the specific investments of creditors, employees, customers, and other groups. Board governance, while worsening agency costs, may provide a second-best solution to such intrafirm rent-seeking. This perspective explains many important corporate law anomalies that cannot be explained by the principal agent model. It also suggests a pressing need to revisit conventional notions of corporate purpose. Focusing on the problem of specific investment suggests that the proper purpose of the public corporation is not maximizing shareholder wealth, but promoting long-term, value-creating economic production under conditions of complexity and uncertainty, in a fashion that provides surplus benefits not only to shareholders but to other groups that make specific investments in corporations as well. This corporate objective is difficult to measure, much less maximize. Nevertheless, it may provide a better gauge of good corporate governance than the simplistic rubric of shareholder wealth.
Abstract: So-called stakeholder theories of the firm have faced intellectual challenges since they first emerged in business schools in the 1980s. The two challenges that have been the most difficult to over come are that the various versions of the theory did not have rigorous theoretical underpinnings, and thus seemed very ad hoc in practice, and that the result was an overly broad notion of who the stakeholders are, and how firms needed to take them into account. Nonetheless, management theorists, as well as business people who manage firms have found the simplifying assumptions required for popular economic models of the firm, such as principal-agent theory, to be too unrealistic, and not versatile enough to reflect the actual day-to-day balancing act that corporation managers engage in. In recent years, several new economic theories, including team production theory, capital lock-in theory, and the economic theory of property rights, have emerged that show promise of being able to bridge this gap. This article comments on work by Asher, Mahoney and Mahoney on a property rights foundation for a stakeholder theory of the firm.
Abstract: This essay reconsiders the role played by entity status and the separation of asset ownership from control in the corporate form, drawing on the experience of business people in the early 19th century U.S. for insights into the problems facing entrepreneurs and investors today in emerging market and transition economy countries. The essay argues that the unique contribution of the corporate legal form in the 19th century was that it allowed business people to create separate legal entities with potentially unlimited life to own the assets used in production. Since the legal entity owns the productive assets once the corporate form is used, ownership is necessarily separated from control. But this feature enabled business organizers to commit capital almost irrevocably to an enterprise, and helped to make the enterprises more financially stable. Using the corporate form, rather than partnership or so-called joint-stock companies (which were a type of partnership), business organizers could more easily accumulate organizational and other intangible capital, along with the specialized physical capital necessary to carry out complex business activities over an extended period of time. Scholars who have studied the problems of creating effective corporate law and governance institutions in developing and transition countries have emphasized the importance of protections for minority shareholders. But the need for legal and organizational mechanisms for locking capital into the enterprise, for preventing investors from stripping assets or otherwise pulling them out prematurely, is even more basic, yet it has largely been neglected in the literature so far. An appreciation for our own history of how businesspeople tried to find organizational forms that would enable them to build substantial and lasting business enterprises in the absence of strong legal, cultural and institutional supports sheds light on the important role played in this country of entity status and separation of control from financial contribution.
Abstract: Is it a viable, efficient, and stable organizational form for the equity of an enterprise to be all or substantially owned by employees? The question is part of a long debate about the nature of capitalism and the way in which capitalism distributes the economic gains from production. In this paper, we take on a seemingly very simple set of empirical questions that we hope will shed light on whether employee ownership of firms "works" in some sense. We do this by examining the actual track record of the 27 publicly-traded firms that we were able to identify for which approximately 20 percent or more of their stock was held by or for employees in 1983, and compared the experience of these firms over time (through the end of 1997) to that of a control sample of 45 firms that were similar in size and in similar industries as of 1983. Our results suggest that, far from being an unstable form, or a form used primarily for transitions, the ownership of a substantial block of shares by employees appears to be a relatively stable arrangement. Indeed, it may be an arrangement that "stabilizes" the firm itself, by making it less likely that the firm will be acquired, taken private, or thrust into bankruptcy. The form may also be associated with more stable employment levels. And it appears to achieve this without cost in terms of productivity or financial performance, and may, in fact, enhance performance.
Abstract: This essay argues that the popularity of corporate status as a way to organize production grew out of the unique ability of this legal form in the 19th century to promote and protect the interests not only of shareholders and other investors, but of a wide range of enterprise participants who made specialized investments in reliance on the continued existence and financial viability of the corporation. This ability grew out of the fact that a corporate charter created a separate legal entity, whose existence and governance were separate from any of its participants. Entity status and separate governance made it possible to do something more than engage in a series of business transactions, or relationships, or even projects. It made it possible to build lasting institutions. Investments could be made in long-lived and specialized physical assets, in information and control systems, in specialized knowledge and routines, and in reputation and relationships, all of which could be sustained even as individual participants in the enterprise came and went. And these business institutions, in turn, could accomplish more toward the improvement of the wealth and standard of living of their participants in the long run than the same individuals could by holding separate property claims on business assets and engaging in a series of separate contracts with each other.
Abstract: Although for most of the twentieth century, mainstream neoclassical economists treated "labor" inputs into production as if they consisted of small, identical units that could be added to or subtracted from the production process to achieve efficiency, some "institutionalists" continued to study the messy historical and case-specific facts of how workers are hired, managed, and compensated. For decades, such economists have been marginalized within the discipline. But in the last few decades, a few ideas have come out of the stylized logic of neoclassical reasoning that seem destined to lead to a renewed interest among mainstream economists in the work of institutionalists. This essay briefly summarizes and reviews those ideas.
Institutionalism, team production, marginal value, labor, human capital, industrial relations, theory of the firm, contractarianism, agency theory, asset specificity, captial lock-in, boards of directors
Abstract: This Article considers the economic and policy merits of the Air Transportation Safety and System Stabilization Act, passed by Congress and signed into law in the immediate aftermath of the Sept. 11, 2001 terrorist attacks. The Act provided immediate cash relief to airlines to compensate them for losses resulting from the federal ground stop order during the first four days after the attack, as well as established the Air Transportation Stabilization Board to consider further federal financial assistance such as loan guarantees to airlines hurt by the actual terrorist events and the threat of future such events. During the year after the terrorist attacks, however, it became increasingly clear that the continuing lack of profitability of the industry (which lost about $7.5 billion in 2001, and, as of early November, was on track to lose an equivalent amount in 2002) was due to structural problems in the industry as well as fear of further terrorist events and overall weakness in the economy. Thus the loan guarantee part of the program inevitably put the ATSB into the business of choosing winners and losers in a troubled industry that needs to restructure. The promise of financial support to the industry, which may have been important symbolically in the days after Sept. 11, has had the effect of thrusting the federal government into a questionable role of setting industrial policy at a micro-level, via detailed examination of corporate strategies of individual airline.
Abstract: These are the edited proceedings of a conference convened in November 2003 by the Sloan Project on Business Institutions at the Georgetown University Law Center to discuss the post-Enron crisis of confidence in the corporate governance system. The participants discuss a number of topics, including changes in the role of the board of directors, accounting system reform, recent amendments of the federal securities laws, executive compensation, and the governance functions of market intermediaries, institutional investors, and corporate counsel. Academic participants include Dean Joel Seligman and Professors John C. Coffee, James Cox, Lynne Dallas, Charles Elson, Stuart Gillan, Robert Haft, Steven Kaplan, Neal Katyal, Lynn Stout, and Shyam Sunder. Participants from the accounting profession include G. Michael Crooch, George Diacont, and Dennis Nally. Participants from the business world include John Bogle, Ed Kwalwasser, Claudine B. Malone, Roger Raber, Robert Rosenberg, Charles Rossotti, and Thomas Selman. Participants from the legal profession and the judiciary include Charles Davidow, Eric Dinallo, Damon Silvers, Paul Saunders, Vice-Chancellor Leo Strine, John Villa, and Peter J. Wallison.
Abstract: In this article we examine the rapid emergence and expansion of a private-sector compliance and enforcement infrastructure that we believe may increasingly be providing a substitute for public and legal regulatory infrastructure in global commerce, especially in developing countries where rule of law is weak and court systems are absent or inadequate. This infrastructure is provided by a proliferation of performance codes and standards, and a rapidly-growing global army of privately-trained and authorized inspectors and certifiers that we call the "third-party assurance industry." The growth in the third party assurance business has been phenomenal in the last decade. The business first developed to facilitate making and carrying out private contracts, but in recent years, assurance services are being deployed for purposes that are more appropriately seen as regulatory in nature. Third-party assurance may thus be providing a new institutional structure through which private commercial exchange is being harnessed and regulated for essentially public purposes.
Business norms, certification, contracts, contract enforcement, corporate social responsibility, global governance, globalization, incomplete contracts, ISO, ISO 9000, law and development, norms transmission, outsourcing, rule of law, supply chains, theory of the firm, third-party assurance
Abstract: In this article we examine the rapid emergence and expansion of standardized product and process frameworks and a private-sector compliance and enforcement infrastructure that we believe may increasingly be providing a substitute for public and legal regulatory infrastructure in global commerce. This infrastructure is provided by a proliferation of performance codes and standards, many of which define acceptable social and environmental behavior, and a rapidly-growing number of privately-trained and authorized inspectors and certifiers that we call the third-party assurance industry. We offer reasons for this development, evidence of its scope and scale, and then describe the phenomenon in more detail by examining supply chain arrangements in two industries, food products and apparel, where the use of third-party standards and assurance services has expanded especially rapidly. We conclude with a discussion of the implications for the "make or buy" decision at the core of the theory of the firm. We argue that as quasi-regulatory standards are developed within various industries, and as performance to these standards can be systematically evaluated using third-party inspectors and certifiers, the costs of moving production outside of vertical firm hierarchies drop. We believe this may be an important factor in accelerating the shift to outsourcing that has been observed over the last two decades.
Assurance services, certification, corporate governance, International Organization for Standardization, ISO, make-or-buy decision, standardization, supply chain management, theory of the firm, transnational supply chains, types of supplier relationships
standardization, compliance, enforcement infrastructure, assurance, quasi-regulatory standards, global commerce, third-party inspectors
Abstract: This article proposes several simple financial market reforms that can help regulators both identify systemically risky institutions and mitigate the systemic risk associated with derivative trading, especially trading in credit derivatives such as credit default swaps. The Federal Reserve (or other systemic risk regulator) should require that financial institutions publicly disclose detailed information on all credit derivatives in their portfolio - including counterparties and notional value - on a frequent basis. The notional value of credit derivatives provides a gauge of the maximum amount the derivative seller must pay the buyer if the underlying credit instrument defaults. Although the notional value is not a good indicator of a derivative’s market value (it is unlikely that each contract in the portfolio would have to be settled for the full notional amount), the notional value of all credit derivatives in an institution’s portfolio is a powerful indicator of the systemic risk posed by that institution’s investments because it is the maximum amount the institution could owe to (or be owed by) other institutions in an extreme event such as the 2008 credit freeze. The government should use this disclosure to identify which financial institutions are “systemically significant.” Any institution whose credit derivative portfolio has a notional value exceeding a certain threshold for a several days would be regulated for several years as a “Tier 1 Financial Holding Company” per the Administration’s proposal. Exchange-traded derivatives should not count in the notional value threshold for systemic significance, creating an incentive to move OTC contracts to exchanges.
OTC derivatives, credit derivatives, credit default swaps, systemic risk, financial regulation
Abstract: In recent years the practice of 'outsourcing' and 'offshoring' of production and services by firms in a wide range of industries has become quite common. This represents a change in the organization of production in many firms, from vertical integration to what has been called 'vertical specialization.' As such, it challenges theorists in management, economics, and the law to rethink some of the accepted explanations that theorists have offered about why individual firms exist at all. Why is it that some productive activity is organized through arms-length exchanges in markets, while some is governed by formal contracts, and other activities tend to be carried out within the boundaries of individual firms?
Abstract: No abstract available.
Abstract: Corporate governance problems arise because corporations are fictional entities, with a legal status that is separate from any of the individuals involved in them. They are not, themselves, actual persons, yet numerous different groups of individuals --- investors, employees, managers, suppliers, customers --- may have interests at stake in them. Often, they are managed by hired executives. Hence, decision-making authority in corporations is generally separated from personal responsibility and liability. Neither managers (the active decision makers), nor other employees, nor investors (who enjoy the protection of "limited liability") necessarily bear the direct costs of corporate actions. This article, written as the entry on "corporate governance" for the forthcoming International Encyclopedia of Social and Behavioral Sciences, provides a brief discussion of the central governance problems and common mechanisms used to address these problems in the U.S. and in other countries.
Abstract: Statutory and case law make it clear that corporate officers and directors have very wide discretion to direct reasonable amounts of corporate resources toward artistic, educational, and humanitarian causes, even if those causes have only a remote connection (or no obvious connection at all) to the business goals and profitability of the firm. This stance of the law has been defended primarily by reference to an "entity" theory of the firm. By contrast, contractarian legal scholars, who view the corporation in terms of a principal-agent model, with shareholders as principles, and officers and directors as their agents, have argued that corporate giving, if it is permitted at all, should be strictly limited to those situations in which the benefit to the firm in the form of higher expected profits is clear and compelling. This paper provides an alternative defense of managerial discretion with respect to corporate philanthropy that embraces contractarian reasoning but follows that reasoning to a different conclusion. The argument uses a "team production" model to make the case that the mutual "contract" that corporate participants enter into requires granting directors very wide discretion in making decisions about the use of corporate assets, including discretion to use corporate assets for philanthropic causes or charitable causes.
Abstract: This paper focuses on contracting problems in firms caused by asset specificity and investment incentives, particularly the problems that arise when employees make investments in ?firm specific human capital.? In such cases, employee investments will also be seriously at risk in the enterprise. Under the nexus of contracts theory of corporations, corporation law is viewed as providing a standardized solution to a central contracting problem, namely the agency problem between shareholders (who are assumed to be the ?owners? of the firm) and their hired managers. All other relationships are seen as governed by ordinary, negotiated contracts. But where employees make important specific investments, it is no longer appropriate to assume that shareholders are, and should be, the hiring party, or the "owners." A broader view of what a firm is, and what corporation law accomplishes, is needed, one that permits exploration of why one set of participants in the firm might end up with certain control rights rather than some other set. For a firm in which such firm-specific employee investments are important, one would expect, for example, to find institutional arrangements that are central to the nature of the firm and that encourage continuity in the relationships between employees and the firm, as well as give employees the means to protect their stakes. Such institutions might include unions, severance pay, and social norms of lifetime employment, together with internal job ladders, career paths, seniority rules, and direct and formal control rights. The paper then reviews several new theories that view the firm alternately as a system of incentives, or as a nexus of specific investments. In other words, they conceptualize the firm as a mechanism for governing the relationships among all the participants (those who contribute labor as well as those who contribute capital), not just the relationship between shareholders and managers.
© 2009 Social Science Electronic Publishing, Inc. All Rights Reserved. Terms of Use Privacy Policy This page was served by apollo2 in 0.359 seconds.
