23 Pages Posted: 21 Jul 2009 Last revised: 1 Feb 2010
Date Written: July 20, 2009
This article is the second chapter of the second edition of "The Anatomy of Corporate Law: A Comparative and Functional Approach," by Reinier Kraakman, John Armour, Paul Davies, Luca Enriques, Henry Hansmann, Gerard Hertig, Klaus Hopt, Hideki Kanda and Edward Rock (Oxford University Press 2009). The book as a whole provides a functional analysis of corporate (or company) law in Europe, the U.S., and Japan. Its organization reflects the structure of corporate law across all jurisdictions, while individual chapters explore the diversity of jurisdictional approaches to the common problems of corporate law. In its second edition, the book has been significantly revised and expanded. "Agency Problems and Legal Strategies" establishes the analytical framework for the book as a whole. After further elaborating the agency problems that motivate corporate law, this chapter identifies five legal strategies that the law employs to address these problems. Describing these strategies allows us to more accurately map legal similarities and differences across jurisdictions. Some legal strategies are "regulatory" insofar as they directly constrain the actions of corporate actors: for example, a standard of behavior such as a director's duty of loyalty and care. Other legal strategies are "governance-based" insofar as they channel the distribution of power and payoffs within companies to reduce opportunism. For example, the law may accord direct decision rights to a vulnerable corporate constituency, as when it requires shareholder approval of mergers. Alternatively, the law may assign appointment rights over top managers to a vulnerable constituency, as when it accords shareholders - or in some jurisdictions, employees - the power to select corporate directors. We then consider the relationship between different enforcement mechanisms - public agencies, private actors, and gatekeeper control - and the basic legal strategies outlined. We conclude that regulatory strategies require more extensive enforcement mechanisms - in the form of courts and procedural rules - to secure compliance than do governance strategies. However, governance strategies, for efficacy, require shareholders to be relatively concentrated so as to be able to exercise their decisional rights effectively.
In addition to Chapter 2, Chapter 1, "What is Corporate Law?," is available in full text on the SSRN at http://ssrn.com/abstract=1436551
Keywords: Agency, agency cost, agency problem, appointment rights, decision rights, control rights, regulation, corporate governance, equal treatment, trustee, mandatory disclosure, enforcement, private enforcement, public enforcement, gatekeeper control
JEL Classification: D23, G32, G34, G38, K22, M14
Suggested Citation: Suggested Citation
Armour, John and Hansmann, Henry and Kraakman, Reinier, Agency Problems, Legal Strategies, and Enforcement (July 20, 2009). Oxford Legal Studies Research Paper No. 21/2009; Yale Law, Economics & Public Policy Research Paper No. 388; Harvard Law and Economics Research Paper Series No. 644 ; ECGI - Law Working Paper No. 135/2009. Available at SSRN: https://ssrn.com/abstract=1436555