Corporate Law or the Law of Business? Stakeholders and Corporate Governance at the End of History

Abstract

Corporate law is said to be witnessing the end of history. The long battle between the conservative, private, shareholder-wealth-maximization school of corporate legal thought and the progressive, public, stakeholder-protection/social responsibility school is now over and the victor, it is claimed by conservatives and progressives alike, is the former. This article argues that the private, shareholder-wealth-maximization school's victory is more illusory than real, and depends on a distortedly narrow view of what constitutes corporate governance.

Offering a legal history of how the progressive-inspired ideals of stakeholder protection and corporate social responsibility through mandatory legal rules have shaped the law affecting corporations, this article uncovers two patterns which caution against a rush to declare the ultimate triumph of shareholder primacy. The first pattern is that progressives have successfully influenced several important areas of corporate law, such as the allowance of charitable giving and adoption of constituency statutes. These corporate law victories, however, have had notably mixed results; while sometimes helping stakeholders, they have also expanded managerial discretion and thus permitted self-dealing and opportunism.

A second pattern is that progressives have been tremendously successful in shaping laws outside of corporate law but that nevertheless regulate fundamental features of corporate behavior in the name of stakeholders. From securities and labor law reforms in the New Deal to the environmental and consumer protection laws of the 1960s and 1970s, progressives have won a diverse and broad array of mandatory legal rules designed to limit corporate conduct perceived as harmful to non-shareholder constituencies. These various bodies of law - what might be termed the law of business - are forceful shapers of the choices corporate management can make about basic operational and organizational decisions.

These patterns suggest that today's progressives might find more success changing laws external to corporate law rather than altering fiduciary principles. They also suggest that claims about the "end of history" and the triumph of shareholder primacy depend on an artificially narrow view of the law affecting corporate management. Whatever its explanatory power in corporate law, shareholder primacy is far from an accurate description of the law of business or of corporate practice.

Keywords: corporations, corporate governance, corporate social responsibility, stakeholders, constituencies, legal history