Private Debt and the Missing Lever of Corporate Governance

49 Pages Posted: 31 Mar 2005

See all articles by Douglas G. Baird

Douglas G. Baird

University of Chicago Law School

Robert K. Rasmussen

University of Southern California Gould School of Law

Date Written: March 24, 2005

Abstract

Traditional approaches to corporate governance focus exclusively on shareholders and neglect the large and growing role of creditors. Today's creditors craft elaborate covenants that give them a large role in the affairs of the corporation. While they do not exercise their rights in sunny times when things are going well, these are not the times that matter most. When a business stumbles, creditors typically enjoy powers that public shareholders never have, such as the ability to replace the managers and install those more to their liking. Creditors exercise these powers even when the business is far from being insolvent and continues to pay its debts. Bankruptcy provides no sanctuary as senior lenders ensure that their powers either go unchecked or are enhanced. The powers that modern lenders wield rival in importance the hostile takeover in disciplining poor or underperforming managers. This essay explores these powers and begins the task of integrating this lever of corporate governance into the modern account of corporate law.

Suggested Citation

Baird, Douglas G. and Rasmussen, Robert K., Private Debt and the Missing Lever of Corporate Governance (March 24, 2005). Vanderbilt Law and Economics Research Paper No. 05-08; U Chicago Law & Economics, Olin Working Paper No. 247. Available at SSRN: https://ssrn.com/abstract=692023 or http://dx.doi.org/10.2139/ssrn.692023

Douglas G. Baird

University of Chicago Law School ( email )

1111 E. 60th St.
Chicago, IL 60637
United States
773-702-9571 (Phone)
773-702-0730 (Fax)

Robert K. Rasmussen (Contact Author)

University of Southern California Gould School of Law ( email )

699 Exposition Boulevard
Los Angeles, CA 90089-0071
United States
213-740-6473 (Phone)
213-740-5502 (Fax)

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