New Principles for Corporate Law

Abstract

The fundamental assumptions of corporate law have changed little in decades. Accepted as truth are the notions that corporations are voluntary, private, contractual entities, that they have broad powers to make money in whatever ways and in whatever locations they see fit. The primary obligation of management is to shareholders, and shareholders alone. Corporations have broad powers but only a limited role: they exist to make money. Those who maintain these principles – a group that includes most of the legal scholars who teach and write in the area – have derived the narrow role of corporations in one of two ways. A few traditionalists take it as an article of faith, developed from a rights-based view of the private nature of corporations. Such view holds that shareholders are owners, and the corporation is their individual property. An argument that corporate governance operates in the realm of natural rights is a difficult, unpersuasive, and increasingly undefended contention: few of even the most vehement proponents of shareholder primacy make it anymore. Instead, the best and most thoughtful argument for shareholder primacy is not a rights-based claim, but an instrumental one. The claim is that maintaining the narrow role of corporations and of corporate governance is the best way to benefit society as a whole. The problem with the instrumental claim is that it is largely unsupported by empirical data and untested by rigorous counterargument. Absent both, the instrumental claim for shareholder primacy reveals itself to be as founded on faith as the traditionalists’ rights-based arguments. The instrumentalist justification is often merely a post-hoc explanation for the status quo rather than a serious examination of what society’s “best interest” would require in corporate governance. This article takes a novel approach to developing a set of principles and policies for corporate law, starting with a focus on society’s well being. With society’s interest as the explicit foundational principle, other principles for the regulation of corporations emerge that are strikingly different from the status quo. The principles derived here, five in all, begin at a high level of generality and become more particular and presumably more controversial. Nevertheless, all of them are rational, practical, and rooted in the protection of the public good. If adopted, these new principles and proposals would provide the basis for significant change in the way we govern corporations in this country. Of course, the foundational assumption that society’s interest should be pursued will not satisfy those who see corporate law as governed by the realm of rights. Indeed, this article will not convince anyone who starts with the assumption that businesses can be run by their shareholder-owners as they see fit. For most people honestly wrestling with issues of corporate governance, however, shareholder primacy is not the foundational assumption but rather one of the potential conclusions. What this article makes clear is that other potential conclusions exist as well.