Much misconduct has been laid at the doorstep of the modern corporation, particularly in light of a historic surge in corporate corruption beginning in 2001.1 On many levels, this has resulted in a healthy rethinking of the premises of the modern corporation and whether some degree of legal restructuring is needed.2 This Article takes a different path. It focuses on what is right about the modern publicly held corporation and attempts to decouple these attributes from the debate about what needs to be fixed.3 It therefore attempts to show that much of this "blame game" is ill-founded and misdirected.4 It instead argues for a more austere restructuring that would actually transcend the corporation per se and focuses on the apparent locus of the difficulties-the management of the large, publicly held business enterprise.5
The misdeeds commonly attributed to the corporation are hardly inherent to the corporation, or the inexorable result of exclusive attributes of the corporation.6 The essence of the modern corporation consists of two important elements: (1) limited liability; and (2) the ability to lock in capital regardless of the desires of individual owners or creditors.7 Combined with the shareholder primacy principle, which holds that a corporation operates chiefly for the benefit of stockholders,8 these elements have maximized the flow of capital from passive investors to productive enterprises and rightfully make the corporation a candidate for the "greatest single discovery of modern times."9 These elements explain why society has, and needs, the modern corporation.10 These elements need not be associated with the misconduct that corporations happen to perpetrate. Nor do these elements logically create inappropriate incentives or proclivities toward such misconduct.
This is not to say there are no structural problems with the modern corporation. The corporation is a profit-maximizing institution.11 As such, it will rationally seek to externalize as many costs associated with its activities that it possibly can within the bounds of the law.12 This is the cost externalization issue. Similarly, a corporation will fail to see and exploit socially desirable investments which yield external benefits in excess of costs if it cannot internalize sufficient benefits to justify its investment costs.13 This is the benefit internalization issue. There are also problems associated with corporate governance. A chief executive officer ("CEO") of a modern corporation will often wield tremendous economic power and be tempted to use such power to enrich himself without regard to the welfare of the corporation.14 This is the agency costs issue. These three issues pose economic challenges to the institutional structure of the corporation, but they do not give rise, inevitably, to the corporate misbehavior that has been a recurring historical experience. Because these issues transcend the corporation and are not inherent to the corporation, I term these problems "minor" problems even though I recognize they impose major economic costs. Essentially, these problems go to the management of the public corporation rather than corporate structure per se. Thus, the challenge to the law is to permit society to exploit fully the benefits of the corporation while minimizing the costs associated with externalization, internalization, and governance.
This Article seeks to highlight these central points, in the specific context of race in America.15 Part I will seek to show what is right and wrong with the modern corporation. Part II will demonstrate, in general, how the law should respond to this realization of the fundamental strengths and the more "minor" weaknesses of the modern corporation. Part III will apply these lessons to the problems of race in America in 2005. The Article concludes that law plays an important role in the dementia of corporate wrongdoing but that the legal foundation of the corporation itself is not to blame. Instead, the blame lies largely in the legal infrastructure (or lack thereof) surrounding the corporation.16 The real question that recent corporate misconduct raises is whether it is now past time to insist upon professional management of publicly held companies.17
This Article suggests a road map for racial reformers thinking about the central role that the corporation has played in our economy. It is certainly the case that as the central economic institution in America, the public corporation transmits and amplifies racial oppression and inequality resulting from race.18 When, on May 17, 1954,19 America finally turned its back on large-scale apartheid ensconced in law,20 virtually all the capital locked into corporate America was racist capital, dominated and controlled by a racially exclusive power elite.21 Nevertheless, the problem in terms of race is not the foundation of our corporate structure but the apex of that structure.22 Specifically, our system of corporate governance is dysfunctional in terms of permitting excessive externalization, allowing systematic failure to internalize mass investment benefits, and permitting managers to enrich and entrench themselves at the expense of shareholders.23 Indeed, governance is so dysfunctional as to have transmogrified shareholder primacy into CEO primacy.24 Our system of CEO primacy is fraught with problems, particularly with respect to race.
I. WHAT Is RIGHT AND WHAT Is WRONG WITH THE MODERN CORPORATION
This part of the Article will attempt to articulate a unified economic theory of the corporation as a means of isolating strengths and weaknesses of the corporate structure from a microeconomic and macroeconomic perspective. At its foundation, this means showing that limited liability and the ability to lock in capital serve to enhance efficiency as well as macroeconomic growth and stability. On the other hand, the fact that the corporation "leaks" investment opportunities because of its fragmented capital base and inability to capture all investment benefits means that macroeconomic growth is sacrificed and investment transactions are foregone.25 Externalities impose economically unjustified costs upon society generally that also impose costs of inefficiencies and associated macroeconomic drags.26 Corporate governance flaws lead to a higher-than-necessary cost of capital that is inefficient and stunts growth while creating conditions of financial instability.27 I will start with the corporation's strengths.
Limited liability has certainly been a success.28 The vast majority of productive assets in the United States are held by publicly held corporations.29 This is not an accident. Investors likely have insisted upon it. Every publicly held company in the United States enjoys limited liability.30 Any company that did not enjoy limited liability would no doubt face a significantly higher cost of capital.31 Limited liability, therefore, is properly seen as essential to a modern economy and conducive to macroeconomic growth.32 Any significant pull back from limited liability would impose severe macroeconomic costs as investors would shun public capital investments, thereby driving the cost of capital higher.33 Thus, regardless of the efficiency of limited liability, it is fundamental to the macroeconomic performance of modern industrial society.34 In any event, it is difficult to see the efficiency in imposing costs upon shareholders who do not exercise control over the activities generating the costs.35
Similarly, it is difficult to quarrel with the legal innovations of the nineteenth century-fundamental to the history of the corporation-which allowed capital to be committed to business enterprises free of the disruptive claims of shareowners and their creditors.36 One may think of this element of a corporation as a dimension of legal personality, but, in any event, the effect is to shield the assets of the corporation from the creditors of shareholders.37 These claims were effectively transferred to the value of the shares themselves and the cash flows associated with those shares.38 This bit of legal hocus-pocus meant real benefits in terms of giving business enterprises an infinite investment horizon and the certainty of committed capital.39 The law thus eliminated unnecessary risks that had previously plagued the capital formation process.40
As tempting as it may be, caution is also warranted in modifying the shareholder primacy value.41 Dilution of the shareholder primacy norm is necessarily a dilution of shareholder rights. Diluting shareholder rights, in turn, would lead to a high cost of capital as shareholders would naturally be unwilling to pay the same amount of money for a smaller bundle of rights within the corporate entity. It is difficult to see how there would be any offsetting benefits to this cost of capital increase. Indeed, it appears that the dilution of shareholder primacy may well be associated with corporate governance deficiencies.42 While some nations have emphasized a corporate purpose beyond shareholder wealth maximization, the dominant universal business form adheres to shareholder primacy.43 This suggests that shareholder primacy has real value that may well exceed any costs.44
To some extent, my focus on a cost of capital justification has been effectively challenged by other commentators. For example, Professor Lynn Stout has demonstrated that arguments that treat shareholders as owners of the corporation are difficult to square with the actual powers of shareholders over a corporation, including their ability to receive distribution only when decided by directors.45 I take issue with Professor Stout, however, on a number of levels. First, if an individual owns all of the shares of a corporation, there is no reason to doubt that he can operate the firm as if he enjoys all of the emoluments of ownership. As such, why should a fragmented ownership structure lead to a legally cognizable diminution of those very real ownership rights? second, there is little evidence that labor would find the value of control or earnings to be as high as shareholders find it to be. In fact, the evidence seems to the contrary.46 Finally, reducing shareholder primacy neglects the fact that investors in public corporations seem particularly ill-suited to negotiate in advance for their rights47 yet particularly inclined toward panics when their rights are destabilized.48 This poses significant macroeconomic risks.49
Nevertheless, the heart of my analysis is that granting the shareholder primacy norm to stockholders is in accordance with their reasonable expectations for investing, and diminishing those rights in a legally cognizable fashion is not costless. Indeed, the costs may well be more significant than is generally believed. While major changes in corporate governance law have gone largely unnoticed in capital markets, significant threats to shareholder interests tend to result in a large loss in market value and thereby lead to large increases in the cost of capital that can have significant macroeconomic impact.50
In the end, limited liability, committed enterprise capital, and shareholder primacy clearly work in the sense that capital markets are founded on these premises and that deep and developed capital markets are associated around the world with superior economic performance.51 Moreover, financial experts and economists have demonstrated that more austere versions of investor protection and minority shareholder rights are associated with less effective legal regimes from an economic perspective.52 Therefore, it appears that these elements of the corporation should be preserved pending evidence that alternative models can match the largely successful results yielded by the current legal model of the corporation.53
This is different from suggesting that all is well with the corporation. In fact, much ails the modern corporation. Indeed, Professor Mitchell's book on corporate irresponsibility is a virtual "little house of horrors" of the problems plaguing the modern corporation.54 I simply seek to isolate the malady beyond the shareholder primacy norm, limited liability, and the fact that corporate law provides enterprises with committed capital. For the most part, I conclude that the problem with the corporation is the lack of professional management, particularly within public corporations, and not the essential structural elements of the corporation.
For example, the corporation has been attacked for its proclivity to maximize profits by ruthlessly externalizing costs.55 Professor Mitchell has called the corporation a "perfect externalizing machine."56 This attack, in many respects, is an attack on the shareholder primacy norm and limited liability.57 Yet, as Professor Litowitz has persuasively highlighted, this effort to seek profits through the externalization of costs is hardly inherent to the corporation.58 Partnerships, sole proprietorships, and individuals will all seek to externalize costs in the name of profit maximization.59 Professor Litowitz also recognizes that corporations may serve to depersonalize and institutionalize profit-enhancing, cost-externalizing decisions that individuals themselves may not make.60 Still, here the problem is not corporations per se but large institutions in general.61 "In other words, cruelty is inversely correlated with proximity to the victim."62 This suggests that scholars should largely focus on legal structures external to corporate law to prevent excessive externalization of costs by all large institutions.63 Thus, the primary problem here is not corporate law, but rather the constraints of non-corporate law and its inadequacy in light of the size and scale of the modern public corporation.
Similar considerations govern the issues of internalization of mass investment benefits and governance. The problem is not the corporate structure per se, but considerations that transcend that structure to businesses generally and the large public corporation in particular. The next section therefore focuses upon potential solutions that transcend the corporation.
II. WHAT CAN LAW Do TO FIX THE "MINOR PROBLEMS" IN THE MODERN CORPORATION?
With respect to the problem of internalization of potential benefits from mass-investment activities that generate widely distributed benefits, this problem is not inherent solely to the corporation. Instead, this problem materializes in any system of fragmented capitalization that lacks any centralized means of weighing costs and benefits from mass investment. In other words, the problem of internalization of investment benefits is a fundamental feature of any free market system of capitalism that recognizes private property as the primary means of holding wealth within a society. This problem, therefore, transcends the legal foundation of the modern corporation. Indeed, when Adam Smith identified the problem over 225 years ago, he did not limit the issue to one of corporations.64 Smith focused on the problem of private versus public benefits-terming public benefits those which no single private actor could capture.65 Consequently, Smith's prescription for the problem did not focus on corporate law but on the role of government.66
Smith maintained that the government should fill in the role of investor of last resort, at least for those investment projectsmass investment-that throw off widely diffused benefits.67 The problem is that after 225 years of experience, it is painfully clear that the government is less than facile at identifying and funding such projects. Certainly, government has occasionally stepped in to make massive investments in projects that have proven to pay tremendous returns, including the Interstate Highway System and the G.I. Bill.68 These projects generated benefits that far exceeded their costs.69 Still, this process has neither been institutionalized nor rationalized.70
Today, the landscape is pocked with government investment activity that cannot be considered justified by cost, and is dominated by special interest influence and directed into projects that can only be termed looney.71 For example, consider missile defense. The threat it addresses seems contrived-we have never been attacked by missiles, and any nation that permitted a missile to be launched from its territory against the United States would face certain annihilation.72 The benefits seem even more contrived. Indeed, after numerous tests the interceptors have significantly failed to hit simulated ballistic missilesunless the mock missile carries a homing beacon.73 The interceptor also fails to distinguish between decoy missiles and actual missiles.74 Yet, through 2004, total expenditures have reached $130 billion with a projected $53 billion more to come over the next five years75 and $230 billion over the next ten years.76 The last two tests77 of the interceptor rockets failed to get off the ground at all-literally.78 Even the Pentagon itself has acknowledged that the program has been marred by a trivialization of failures and an aggressive "rush to failure."79 Apparently, even if the system functioned, it could be easily overcome.80
Given the central failure of government mass investment,81 can the fragmentation of capital implicit in private property and free markets be overcome to assure a mass investment function that fully comprehends the total investment benefits accruing to society from mass investment projects? Perhaps, to some extent, it can.82 What is needed is elimination of legal barriers and legal structures to encourage consortium investments.83 Naturally, a comprehensive analysis of the legal structures that could accomplish this goal is beyond the scope of this Article. Nevertheless, there is no reason to think that this is a less important area of inquiry than the issue of cost externalization.
I have addressed the issue of corporate governance in depth in another article.84 I have argued that corporate governance suffers from two fatal flaws: (1) the tremendous special interest influence that corporate managers hold over the corporate governance regulatory environment; and (2) the distorting impact of an antiquated system of corporate federalism.85 There can be no "race to the top" in terms of corporate governance regimes that are economically optimized in the absence of a depoliticized regulatory regime that reduces special interest influence and allows an expert administrative agency to articulate governance standards based upon the most scientifically proven corporate governance standards,86 just as a depoliticized agency of economic experts determines monetary policy in the United States.87 This leaves us hobbled with a system of corporate governance that is subject to periodic special interest raids resulting in a "race to the bottom."88 My proposed remedy is a depoliticized corporate governance authority with the ability to articulate optimized corporate governance norms based upon empirical analysis.89
These structural problems are manifest in the precise terms of corporate governance that prevail in the United States today. For example, "directors are selected by management and not elected by shareholders."90 While there was an initiative to reform the federal proxy rules to give shareholders a real opportunity to have a voice in director selection, managers were able to use their special interest influence to preclude this reform.91
The Sarbanes-Oxley Act and the Enron scandals seem to have had little impact upon executive compensation.92 Indeed, the long-term trend has been termed "troublesome" by key regulators and lawmakers; in 1993, executive compensation at public companies totaled 4.8% of profits, and, by 2003, compensation totaled more than 10%.93 In 2004, executive compensation increased by 25% while stock prices and wages for other workers stagnated.94 Shareholder primacy is supposed to ensure that shareholders control corporations and that profits of the corporation inure to the primary benefit of the shareholders.95 It is increasingly clear, however, that the balance on both of these fronts is tipping more than ever in favor of management, and is in fact approaching a CEO primacy model. Management has used its political power, backed by the corporate wealth with which it is entrusted to systematically tilt corporate governance in its favor.96 This special interest influence must be quelled through the creation of a more depoliticized regulatory framework.
An additional means for creating a more optimal internalization of costs and benefits, as well as securing superior corporate governance, is to professionalize America's corps of senior officers and directors, akin to the effort to professionalize the securities brokerage industry.97 Like the securities brokerage business, there is a macroeconomic basis for imposing a federal professionalization regime for directors and officers of publicly held corporations.98 Specifically, a loss of investor confidence in the integrity of corporate governance and transparency can threaten macroeconomic performance and stability." As such, the senior officers and directors of our publicly held corporations wield tremendous economic power in ways that impact more than the narrow interests of the corporations they captain.100 This economic power pervades virtually all aspects of the lives of our citizens, from employment to health care to retirement to environmental hazards.101
Given the very broad definitions of professionals in other contexts, from lawyers to doctors to hairdressers,102 it is easy to think of senior officers and directors as meeting the definition of a professional.103 Professionals typically owe non-waivable, extra-contractual duties to their clients.104 Professional relationships are generally imbued with a high degree of public interest-either in protecting the client, as in an attorney-client relationship, or for federal professional standards to protect investor confidence and macroeconomic performance, as in the securities broker-client relationship.105 The professional relationship between managers and the publicly held corporation is at least as important to the economy as the broker-client relationship.106 Moreover, shareholders are as much at informational disadvantages as are clients of lawyers or patients of doctors.107 There is also reason to believe that serving as a senior officer or director of a public corporation is ever more complex and requires specialized training.108 For example, after the Sarbanes-Oxley Act of 2002,109 it is clear that many members of the board are going to require increasing legal expertise and accounting facility.110 The time is past where individuals without specialized training can serve at such lofty positions without serving in a professionally competent capacity.111 All things considered, it is difficult to articulate any reason why managers of publicly held companies should not have to endure some kind of qualification exam and bear professional obligations.
Recently, Congress federalized the accounting profession, specifically auditors of public corporations, for the sake of rescuing investor confidence and protecting the macroeconomy.112 This effort to federalize the auditing profession has its roots in the spectacular accounting scandals of 2001-2002, including Enron, WorldCom, and a host of others.113 Although many of these scandals could be blamed upon an errant accounting industry, the accountants were hostage to the "infectious greed" originating in the CEO's suite and the boardroom, not the other way around.114 Consequently, the justification for federal intervention seems stronger for corporate managers than for auditors.115 While it is true that Sarbanes-Oxley and related "reform" initiatives did revamp much of the role of the board of directors, federal law has never operated to mandate professional obligations for corporate managers as it now has for both accountants and securities brokers.116 This seems anomalous given the power of managers of public corporations and the manifest breakdown of state-law regulatory systems to appropriately control manager malfeasance.117 Therefore, I propose a comprehensive scheme of professionalization for senior officers and directors of public corporations-complete with examinations, professional norms and discipline, continuing education, and professional liability.
Inherent in the concept of professional obligations is the concept of training and qualification in order to assure the competency of those serving as directors or officers of publicly held corporations. In the securities brokerage industry, representatives must pass a qualification examination before they can do business with the public.118 These standards and examinations are administered by the industry itself pursuant to a self-regulatory regime imposed by Congress and supervised under the plenary authority of the Securities Exchange Commission ("SEC").119 In other words, the brokerage industry itself sets brokerage industry standards.120 Although there are constraints upon the industry's ability to promulgate promiscuous professional standards, perhaps the most significant is the economic self-interest of the industry itself.121 I have argued that professionalism in the securities industry has over time enhanced the market niche occupied by securities brokerdealers.122 This should come as no surprise to those familiar with economic inefficiencies imposed by agency costs. Typically, legal infrastructure that serves to minimize agency costs implicit in all agency-principal relationships also serves to enhance market outcomes for both agent and principal.123 "In general, reducing agency costs is in the interests of all parties to a transaction, principals and agents alike."124 When a principal faces reduced transaction costs, like agency costs, he is willing to pay more for the agent's services.125 Thus, professionalizing corporate governance for public companies is likely to be both economically efficient, as well as macroeconomically beneficial, as it enhances investor confidence thereby reducing panics and lowering the cost of capital.126
Another important dimension of professional competency is the duty of care.127 The duty of care had never really operated to generate much liability of directors of public corporations.128 Other than cases involving financial institutions, it is difficult to find cases where directors or senior officers have been held liable for breaches of the duty of care. I have argued that the most famous duty of care case which actually held outside directors liable, Smith v. Van Gorkom,129 had little to do with the directors' duty of care and everything to do with the professional responsibility of attorneys.130 In any event, professionalizing the securities industry may only marginally expand director liability, as that liability would be measured by the standards of the industry and would turn in the end on the testimony of experts.131 Thus, the directors' industry itself would define liability to a very large degree.132 Moreover, this prospective definition of duty of care obligations, pursuant to more detailed professional standards, would avoid the uncertainty and risks inherent in fiduciary duty adjudications that in the end turn upon ad hoc factual findings.133 Perhaps, after centuries of struggle, a professional duty of care for senior managers and directors of public corporations would get this issue just about right.134
This is particularly so if a regulated self-regulatory regime similar to that in the securities industry were imposed.135 A broad code of ethics, that transcended mandatory law, could impose expertly promulgated standards that could provide detailed guidance to professional managers on a prospective basis.136 In addition, this code could be enforced, as are many such professional codes, without regard to whether misconduct caused losses and through sanctions that do not run afoul of traditional concerns about disproportionate liability.137 In the securities brokerage industry, sanctions include suspension, censure, fines, or a permanent bar from the industry.138 All of this could be administered without expanding the federal bureaucracy through the authority of a self-regulatory organization supervised by the SEC as is the case in the brokerage industry.139 In short, a professional code of ethics could help prevent future Enron scandals without generally burdening those corporations that already adhere to sound principles of corporate governance.140
There is more to being a professional, however, than competency. Professionals are not permitted to simply enter into arm's-length transactions that benefit themselves at the expense of the client.141 Professionals face the prospect of career termination for failing to adhere to professional standards of conduct.142 In addition, professionals must be abreast of, and guided by, the best learning extant.143 In the corporate context, this entails a thorough understanding of the externalization problem, the internalization problem, and the manner in which these problems interact with governance activity to make the corporation too often a vessel for destructive mischief. Professor Litowitz has stated the need here well: "In the end, the problem with corporate law is that it lacks fail-safe mechanisms . . . ."144 I posit that a regime of professional self-regulation, supervised by an expert regulatory agency, would be such a fail-safe device.
The ability for business to exploit the proven value of the corporation is a powerful economic privilege which in the end exists and is embedded in law to serve the economic needs of society.145 Too often it fails even on its own economic terms, and this stark reality is simply beyond cavil.146 Requiring these privileges to be exercised under professional stewardship, complete with a tutored understanding of both the strengths and blind spots of the modern public corporation, is the least that society should insist upon to secure the corporation's economic benefits.147 Indeed, one nearly magical element of professionalization is that in the long run it tends to serve the commercial interests not only of the client, but also of the professionals themselves, while at the same time securing important public policy goals.148
The next part of this Article seeks to exit the realm of abstraction and enter the realm of application. I chose race to be the testing ground of this idea of professionalization as a means of illustrating its potential, specifically because I believe race is a central economic problem of our age.149
III. RACE AND THE MODERN CORPORATION
Race is a compelling problem in America today, exacting catastrophic macroeconomic costs.150 Although economists have not recently quantified these costs, I have estimated that race exacts a toll of $1 trillion per year.151 I also maintain that race problems are inextricably linked to economics: "The very concept of race amounts to the wanton and pervasive destruction of human capital."152 Moreover, if race is centrally an economic problem, then the modern corporation, as our central economic institution, must play a role. Indeed, the largest five hundred corporations in America control over seventy-five percent of our nation's most productive assets;153 those assets are almost exclusively under the control of white males who have powerful incentives to continue to perpetuate a racially monolithic power structure.154
Nevertheless, a corporate legal structure-broadly defined to include the fundamental parts of the definition of the corporation, as well as the environment in which it operates-requires the perfect internalization of costs and benefits, as well as the optimization of corporate governance. This would maximize the economic performance of the institution as well as serve to reduce drastically the costs of race in America. For example, if race inflicts costs of $1 trillion on our economy annually, then it would significantly benefit corporate America to eliminate the destruction of human capital that is central to race.155 This suggests that investment consortia consisting of major corporate sponsors could conceivably privatize the mass investment function envisaged by Adam Smith some 225 years ago, in a fashion consistent with profit maximization.156 The devastation of human capital implicit in race could conceivably be stemmed through a massive recapitalization of previously marginalized communities. The facilitation of such investment consortia basically operates to allow a broader capture of the benefits of this kind of mass investment initiative.157 Indeed, it may well be that the pursuit of a program of reparations could be profitably pursued by a consortia of corporations that in the past have profited from sordid racial policies.158
Similarly, race in America has always operated in a manner that indulged an individual's need for domination, exploitation, and subjugation at the expense of a victim's ability to be a fully contributing member of society.159 In other words, racial oppression results in externalities. In the corporate context this means indulging racial mythology at the expense of rational hiring decisions, or using race strategically to achieve higher levels of compensation.160 Of course, it also means massive distortions in our system of developing and harnessing our nation's human capital because of the central role of the corporation in our economy.161 Public corporations have always been governed by the white male elite; they were so governed in 1954 when America finally started to turn its back on apartheid, and they are so governed today.162 As I have demonstrated previously, this reality appears powerfully related to the economic destruction implicit in race and issues relating to a system of corporate governance that facilitates homosocial reproduction as a means of entrenching the power of governing white elites.163 More specifically, the reason that human capital is depleted today in racialized communities is the direct result of the point of racialization-the pervasive and wanton destruction of human capital as a means of subordination.164 The reason the bastions of power are dominated by an exclusive elite of white males is because CEOs who select members of this cadre have powerful incentives to engage in homosocial reproduction-it enhances their power and their compensation.165 In other words, these racial problems are rooted in the fragmented capital structure inherent in private property-implying a distorted mass investment function-and flawed corporate governance.
Nor are the effects of this homosocial reproduction limited to the commanding heights of corporate America. I have shown previously that diversity at virtually all levels of the corporation enhances financial performance.166 In fact, this is now such mainstream management science that the Harvard Business Review recently published a case study of the results of diversity initiatives at IBM and its successful measurement of those results.167 But diversity programs are not likely to succeed without strong senior level support.168 Managers engaging in homosocial reproduction do not provide strong leadership sufficient to support the success of diversity within their corporations.169 Thus, once it takes hold in the boardroom, homosocial reproduction is likely to take root throughout the corporation to distort hiring and advancement.
Professionalization is not likely to fully remedy all of these shortcomings in the law surrounding the modern corporation.170 Nevertheless, tutoring senior officers and directors in concepts of broad professional responsibility and the role of the corporate privilege in our society is likely to result in a greater appreciation of the stewardship extended to the captains of industry. Lawyers and stockbrokers still commit malpractice and engage in unethical behavior at the expense of their clients,171 yet there is little doubt that the self-regulatory policing encourages a superior professional culture in terms of competency, loyalty, and diligence.172 With respect to the securities industry, it is clear that the professionalization of the industry-at least when supervised by the sec-has eliminated many excesses.173 With respect to attorneys, the relatively frequent disbarment of errant professionals certainly creates an incentive for other lawyers to put their clients ahead of their narrow, short-term selfinterest.174 Thus, professionalization of the management of the publicly held corporation should lead to more adept business leadership with greater fidelity to shareholders and to society in general.175 If professionalization can help optimize the conduct of corporate operations, then one would expect that some marginal resolution of the problem of race in America would naturally follow.
Professionalizing the management of the public corporation has other advantages. At the root of much corporate dysfunction is the "club" atmosphere at the top of corporate America.176 Professionalism should replace this culture with one of competency.177 A value for the full success of the enterprise should thereby supplant the current model of CEO primacy.178 These professionals can be trained to exploit mass investment opportunities and to avoid externalities.179 The idea of simply running a corporation for the exclusive benefit of the corporation could become an anathema similar to churning in the securities brokerage industry.180 Those managers who violate these professional norms could face sanction or bars. Therefore, while professionalization is not likely to eliminate all problems with corporate management, there is good reason to believe that it could move corporate governance closer to an optimal structure181 and help quell externalization of costs while encouraging a more proficient vision of mass investment opportunities.182
Moreover, given the history of corporate reform, professionalization is likely to outshine other options being tapped to remedy corporate misanthropy. Most recently, SOX has been subject to mixed reviews and seems to be of dubious efficacy in terms of sustainable reform of corporate governance.183 Imposing judicial rigor upon corporate governance is as likely to lead to political backlash as it is to reform effectively the corporation as an institution.184 The sec seems politically incapable of leading any sort of broad corporate reform as special interests appear to have inordinate sway over that agency under normal circumstances.185 One must turn the pages of history all the way back to the Great Depression in order to observe fundamental and sustainable reform taking root.186 Consequently, professionalizing the corps of officers and directors at the pinnacle of corporate America could be a viable reform strategy for the next time that a precipitous erosion in investor confidence threatens the macroeconomy and prompts legislative reform activity.187 Therefore, reformers should recognize professionalization as a possible means both to enhance corporate performance and to secure greater diversity in corporate America.188
At its foundations, the modern corporation is a powerful tool for economic progress and is sound from both a microeconomic and macroeconomic perspective. None of the problems associated with the modern corporation inhere to these foundational elements. Instead, the problems flow from issues of externalization, internalization, and governance-issues that plague all conceivable business forms, and indeed, humanity generally. Oftentimes, governance issues and agency costs are a struggle against greed. Greed is inherent to humans, not the corporation. It is true that the corporation is insatiable, but that simply means that the legal infrastructure around the corporation must take this into account as it must with humans generally. Law is responsible for creating structures that channel such greed productively.
The thesis of this Article is if law can resolve such issues, at least to the maximum extent possible, then the corporation can operate to advance broad societal goals. Indeed, a properly structured corporate law holds the promise of solving many of the most challenging problems, such as race. Professionalizing the management of public companies may facilitate such a resolution of the externalization, internalization, and governance challenges. Yet instead of a professionalized corps of managers, our corporate sector seemingly teeters on the edge of a CEO primacy model. Such a model is unsustainable as investors will not continue to permit CEOs to garner a disproportionate share of corporate earnings. Professionalization is not a cure-all, but it can serve to trump the exclusive atmosphere that currently rules corporate America. This should help put an end to homosocial reproduction, excessive externalization, excessive agency costs, and a lack of mass investment.
These outcomes would allow America to continue to make racial progress. Professionalism could mean a less exclusive class of corporate managers, which would encourage diversity throughout the corporation. Finally, a professionally managed public corporation sector could begin to think about methods of mass investment that could help resolve the economic albatross that is race in America.
STEVEN A. RAMIREZ[dagger]
[dagger] Professor of Law, Washburn University School of Law; Director, Washburn Business & Transactional Law Center.…