The Financial Determinants of Corporate Governance

Abstract:     
This chapter is a preliminary exploration of the interdependence of finance and the rules of corporate governance. The authors argue that the surviving rules and norms of corporate governance, among many that jurists articulated throughout the twentieth century, were primarily those that reflected the financial realities of their times. Finance drove the reconceptualization of New Jersey corporate law at the turn of the twentieth century, which in turn facilitated the great merger wave that catalyzed the intertwined movements for federal incorporation and antitrust reform. Finance made the 1920s’ and 1930s’ attempts to restrain corporate power ineffective. Finance shaped our understanding of the form and function of the board of directors during the mid-century age of managerialism. And finance led to the broad acceptance of the monitoring board and the norm of shareholder valuism in the last decades of the twentieth century. The current financial crisis illustrates some of the consequences of law’s deference to finance.

Keywords: securities, finance, corporate law, stock market, retained earnings, shareholder valuism, shareholder rights, proxies, Rule 14a-8, shareholder proposals

working papers series