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A Team Production Theory of Corporate Law


Margaret M. Blair


Vanderbilt University - Law School

Lynn A. Stout


Cornell Law School - Jack G. Clarke Business Law Institute


Virginia Law Review, Vol. 85, No. 2, pp. 248-328, March 1999

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.

Number of Pages in PDF File: 83

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Date posted: July 23, 2003  

Suggested Citation

Blair, Margaret M. and Stout, Lynn A., A Team Production Theory of Corporate Law. Virginia Law Review, Vol. 85, No. 2, pp. 248-328, March 1999. Available at SSRN: http://ssrn.com/abstract=425500 or http://dx.doi.org/10.2139/ssrn.425500

Contact Information

Margaret M. Blair (Contact Author)
Vanderbilt University - Law School ( email )
131 21st Avenue South
Nashville, TN 37203-1181
United States
615-322-6087 (Phone)
Lynn A. Stout
Cornell Law School - Jack G. Clarke Business Law Institute ( email )
524 College Ave
Myron Taylor Hall
Ithaca, NY 14853
United States
607-255-8431 (Phone)
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