Corporate Governance and the Coase’s Legacy: A Reply to Henry Manne

THE LAW AND ECONOMICS OF CORPORATE GOVERNANCE - CHANGING PERSPECTIVES, Alessio M. Pacces, ed., Elgar, 2010

16 Pages Posted: 16 Feb 2010

See all articles by Alessio M. Pacces

Alessio M. Pacces

Amsterdam Law School / Amsterdam Business School; European Corporate Governance Institute

Date Written: November 11, 2009

Abstract

This paper is a comment on Henry G. Manne (2010), “Corporate Governance – Getting Back to Market Basics.” Professor Manne authoritatively contends that regulation should not tamper with corporate governance, because in so doing regulation undermines the efficiency of stock markets and of the contractual choices operated therein. Taking stock of the problem of contractual incompleteness in corporate governance, this reply emphasizes that corporate law (and regulation of corporate governance in general) has a more daunting task than simply minimizing transaction costs through an appropriate set of default rules. On the one hand, it needs to provide the parties (management and shareholders) with a sufficiently broad set of entitlements to contract upon. On the other hand, it has to tackle the problem of opportunistic renegotiations of the corporate contract, which can lead to expropriation of non-controlling shareholders.

This paper reviews Professor Manne’s advocacy of a freedom-of-contract approach to corporate governance in a Coasian framework. Important implications are derived from the need to balance discretion and accountability in a world of high transaction costs. Those implications are discussed with regard to three important topics in the governance of publicly held companies: boards, takeovers, and insider trading. Because of the limitations of the contractual technology, these mechanisms need some sort of legal intervention: enabling rules to facilitate efficient choice ex-ante; and mandatory rules to support commitment ex-post. A more general approach to the debate on mandatory vs. default rules in corporate governance is sketched out on this basis.

Keywords: Coase Theorem, Incomplete Contracts, Authority vs. Accountability, Shareholder Empowerment, Shareholder Protection, Market for Corporate Control, Mandatory vs. Default Rules

JEL Classification: G30, G34, G38, K22

Suggested Citation

Pacces, Alessio Maria, Corporate Governance and the Coase’s Legacy: A Reply to Henry Manne (November 11, 2009). THE LAW AND ECONOMICS OF CORPORATE GOVERNANCE - CHANGING PERSPECTIVES, Alessio M. Pacces, ed., Elgar, 2010. Available at SSRN: https://ssrn.com/abstract=1553820

Alessio Maria Pacces (Contact Author)

Amsterdam Law School / Amsterdam Business School ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

HOME PAGE: http://www.uva.nl/profiel/p/a/a.m.pacces/a.m.pacces.html

European Corporate Governance Institute ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://https://ecgi.global/users/alessio-pacces

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