Deconstructing Corporate Governance: The Mechanics of Trusting

89 Pages Posted: 24 Aug 2013 Last revised: 27 Aug 2013

René Reich-Graefe

Western New England University School of Law

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Date Written: 2013

Abstract

The phenomenon of trust among firm participants is a much neglected academic inquiry in corporate governance research and the theory of the firm. This Article elaborates on the comparatively small sample of existing legal research on the intersection of trust and corporate governance and tries to interrupt the selective (in-)attention given to the philosophical, psychological, political, sociological, economic, and legal phenomenon that is our individual as well as collective, everyday trust (or distrust) in the functionality and explainability of the world tomorrow in accordance with our preferences of today and our experiences of the past. Trust — as a phenomenon — is a concrete but severely underappreciated reality for the success of corporate investments and the accountability of corporate management. It constitutes part of a complex solution for encouraging investor confidence in the face of absolute decision-making power of corporate directors. Trust efficiently combines and balances otherwise unrestricted managerial power with a robust measure of accountability of corporate management — an entirely elusive measure within the realm of corporate governance law. It thereby provides a sophisticated, yet poorly understood, remedy to the most significant but unresolved academic dilemma in corporate governance theory — namely, the lack of predictive ability of existing microtheoretical models of the firm. This Article primarily discusses trust (and trustworthiness) as a mechanism, not as a virtue. By focusing on the procedural and substantive mechanics of trusting as a phenomenon, this Article explains the cohesive power and low-transaction-cost functionality which is built into successful exercises of trusting for purposes of encouraging and establishing pervasive corporate investments as the rational-choice baseline for voluntary firm participants.

Keywords: corporate governance, trust, trustworthiness, corporate law, social norms

Suggested Citation

Reich-Graefe, René, Deconstructing Corporate Governance: The Mechanics of Trusting (2013). Delaware Journal of Corporate Law (DJCL), Vol. 38, p. 103, 2013; Western New England University School of Law Legal Studies Research Paper No. 13-7. Available at SSRN: https://ssrn.com/abstract=2314065

René Reich-Graefe (Contact Author)

Western New England University School of Law ( email )

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413.782.1451 (Phone)

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