Theories and Models of Corporate Governance

Abstract

This essay is a brief historical survey of the leading models of the corporation in American legal theory, with emphasis on the contemporary theory of contractarianism. "Corporate governance" is often said to chiefly concern the "internal" governance of corporations: that is, the relationship among the participants in the corporate enterprise. "Internal" governance is sometimes distinguished from "external" regulation of the nominally "private" business corporation by the state. But the internal and external relationships are intertwined and not mutually exclusive. Thus, even as the contemporary legal discourse on corporate governance purports to focus on internal matters, it advances arguments regarding the extent to which internal relationships are, and should be, structured by private claimants, and the extent to which they are, or should be, structured externally by the state.

These issues are often framed in terms of a debate over the "nature" or "essence" of the corporation. Recurring questions include who "owns" the corporation, whether a corporation is an "artificial" phenomenon created by state fiat or a "natural" byproduct of human interaction, whether the corporation is an entity separate from its constituent individuals, and why decision-making authority is concentrated in professional managers. The shifting answers to these questions are presented as justifications for, or critiques of, the existing corporate governance regime, but can also be seen as shorthand for unspoken normative assumptions about the respective roles of the group, the state, and the individual.

Keywords: corporations, corporate governance, corporate theory, legal theory

JEL Classification: K22