Private Ordering and Public Policy: The Paradoxical Foundations of Corporate Contractarianism

Abstract

This paper critically examines the dominant ‘private ordering’ account of corporate law evolution as presented within the Anglo-American contractarian theory of the firm. The paper highlights, in a UK context, the normative effect of this hypothesis in asserting the public legitimacy of prevailing corporate governance norms and structures, especially the longstanding contractual / shareholder exclusivity principle which lies at the heart of British company law jurisprudence.

It will be demonstrated that contractarian rationality, by presenting the (public) corporation’s core institutional features as the uncoercive product of free and unanimous civil society choice (as opposed to ‘coercive’ regulatory imposition), seeks conceptually to ‘opt out’ corporate law from wider public processes of political debate and democratic consensus-formation. It will be argued, however, that in accepting the inevitability of mandatory state-formulated rules within corporate law as an effective proxy for (unattainable) optimal contractual outcomes, contractarianism’s market-liberal logic strays beyond its own self-asserted boundary between (private) civil society and (public) state. In doing so, it implicitly and unavoidably admits the need for a preceding political discussion about the public policy objectives that those rules and ensuing power structures are designed to achieve.

Part II provides a brief summary of the historical and intellectual background to the initial development of corporate contractarianism in the United States, and then explains the theory’s key normative characteristics. Part III queries whether contractarianism can be said to provide a valid rationalisation of the most fundamental aspects of British corporate governance law, by examining the combination of quasi-contractual and mandatory rules that together shape the contours of the corporation’s internal decision-making structure in the UK. Part IV critically assesses the main contractarian rationales for mandatory corporate governance rules. Part V concludes by highlighting the political challenges for academic corporate lawyers posed by the paper’s core claim that the private ordering paradigm of corporate governance is prone to logical implosion when subjected to close analytical scrutiny, at least within a British legal context.

Keywords: corporate governance, theory of the firm, shareholder exclusivity, law, legitimacy, United Kingdom

JEL Classification: B25, G30, G34, G38, K00, K20, K22, P12, P16