The Moral Basis of State Corporate Law Disclosure
Catholic University Law Review, May 2000
44 Pages Posted: 14 Apr 2000 Last revised: 15 Jan 2008
Since the 1930s, publicly held American corporations have been subjected to an increasingly elaborate federal system of mandatory disclosure. The merits of this system have been the subject of extensive scholarly commentary. In contrast, state-mandated corporate disclosure, which is minimal, has received no sustained scholarly attention. The central puzzle is why federal disclosure is extensive while state disclosure is minimal. Interestingly, the dominant explanation of the origin of those differences has a very strong moral dimension. More specifically, the traditional analysis of corporate disclosure asks why the states have not imposed greater disclosure obligations on their corporations and suggests that the states have been immoral in not doing so. The actual origin of the state disclosure requirements shows that the states were acting completely ethically. The approach they took was rooted in the division of power they imposed between shareholders and managers. Rather than being unable to impose more elaborate disclosure or unethical in their choice of disclosure levels, the states were instead powerful, rational, and moral. Today, claims for increased state corporate disclosure requirements are posited on two moral bases. The stronger of the two asserts that increased state disclosure would result in the needed reform of corporate managers. The second claim argues that increased state disclosure would facilitate the primary purpose of federal disclosure: protection of potential investors and increased confidence in the secondary capital markets. I argue that neither of these ends is likely to result from additional state disclosure obligations. My thesis is that the current state corporate disclosure requirements are morally defensible both in their origins and in their modern functioning. Today, as in the past, shareholders are charged primarily with selecting corporate directors. It is the directors who set corporate policy, not the shareholders. Directors are accountable annually to the shareholders but are not agents of the shareholders nor of the corporation. That is, directors are not subject to the control of the shareholders. Shareholders can either dismiss directors or reappoint them but cannot instruct them directly as to corporate policy. The appropriate corporate disclosure should reflect this division of function. In my view, the current state disclosure scheme fulfills this task.
JEL Classification: K22
Suggested Citation: Suggested Citation