Corporate Law and the Team Production Problem

Abstract

For much of the last three decades, the dominant perspective in corporate law scholarship and policy debates about corporate governance has adopted the view that the sole purpose of the corporation is maximizing share value for corporate shareholders. But the corporate scandals of 2001 and 2002, followed by the disastrous performance of financial markets in 2007-2009, has left many observers uneasy about this prescription.

Prominent advocates of shareholder primacy such as Michael Jensen, Jack Welch, and Harvard’s Lucian Bebchuk have backed away from the idea that maximizing share value has the effect of maximizing the total social value of the firm, noting that shareholders may often have incentives to take on too much risk, thereby increasing the value they capture by imposing costs on creditors, employees, taxpayers, and the economy as a whole. In response to the dramatic demonstration of the problems with shareholder primacy, some scholars and practitioners have considered the “team production” framework for understanding the social and economic role of corporations and corporate law (Blair & Stout, 1999) as a viable alternative. Whereas the principal-agent framework provided a strong justification for the focus on share value, the team production framework can be seen as a generalization of the principal-agent problem that is symmetric: all of the participants in a common enterprise have reason to want all of the other participants to cooperate fully. A team production analysis thus starts with a broader assumption that all of the participants hope to benefit from their involvement in the corporate enterprise, and that all have an interest in finding a governance arrangement that is effective at eliciting support and cooperation from all of the participants whose contributions are important to the success of the joint enterprise. Insights from a team production analysis provide a rationale for a number of features of corporate law that are problematic under a principal-agent framework.

Keywords: Shareholder primacy, share value maximization, team productions, team theory, corporate form, legal personality, legal entity status, limited liability, capital lock-in, transferable shares, board governance, indefinite existence