Law, Economics, and Beyond: A Case for Retheorizing the Business Corporation

By Vasudev, P. M. | McGill Law Journal, November 2010 | Go to article overview
Save to active project

Law, Economics, and Beyond: A Case for Retheorizing the Business Corporation


Vasudev, P. M., McGill Law Journal


This essay presents a critical analysis of the economic theory of corporations and its idioms, such as "nexus of contracts", "agency costs", and "shareholder value". It calls for the development of a richer and more inclusive theory of business corporations that draws on the experience of the last three decades and better addresses the needs of the post-Enron, post-MG world.

The author identifies the following shortcomings of the economic theory of corporations. First, the contractarian interpretation overlooks the role of law and public policy in corporations. Second, using share prices as the yardstick of corporate performance and encouraging practices such as the buyback of shares have serious implications for the competitiveness and sustainability of corporations. Third, there is inadequate attention to the characteristic and normative distinctions between debt and equity. And fourth, hostile takeovers are treated as virtually the only solution to entrenched managements. The problem of managerial power must be reviewed in the light of evidence regarding managerial power and the efficacy of boards. Equally, there is a case for developing a more deliberated, fair, and equitable policy on executive pay.

A travers une analyse critique de la theorie economique des entreprises et de ses idiomes, cet essai appelle au developpement d'une theorie plus riche et plus inclusive qui profite de l'experience des trois dernieres decennies et qui repond mieux aux besoins d'un monde post-Enron et post-MG.

L'auteur identifie plusieurs defauts de la theorie economique des entreprises. Premierement, l'interpretation contractualiste neglige le role du droit et de la politique publique dans les entreprises. Deuxiemement, l'utilisation du prix des actions comme mesure de performance des entreprises ainsi que les pratiques telles que le rachat d'actions ont des consequences importantes pour la competitivite et la viabilite des entreprises. Troisiemement, il n'y a pas assez d'attention accordee aux distinctions caracteristiques et normatives entre la dette et les actions ainsi que l'encouragement indirect de la dette. Quatriemement, le fait de traiter l'achat hostile comme etant essentiellement la seule solution a la question de l'enchassement des cadres est problematique. Le probleme du pouvoir des gestionnaires doit etre revu a la lumiere des faits sur le pouvoir des gestionnaires et sur l'efficacite des conseils. De plus, les politiques de remuneration des cadres doivent etre mieux reflechies, plus justes et plus equitables.

**********

Introduction

  I. Economic Theory of Corporations: An Outline

 II. Economic Theory: Its Milieu.
     A. Managerial Power and Its Implications
     B. Shareholder Reward and Stagnant Share Prices
     C. Rise of the Anti-regulation Sentiment and the Law and
        Economics Movement
        1. The Anti-regulation Sentiment
        2. The Law and Economics Movement

III. Economic Theory: A Critical Analysis
     A. The Corporation as a Nexus of Contracts
        1. Reporting by Corporations
        2 Audit
        3. Corporate Law and Creditor Protection
        4. Recent Experience: Smith v. Van Gorkom and SOX
     B. Shareholder Reward and Short-termism
     C. Corporate Finance: The Blurring of Boundaries between
        Debt and Equity
     D. Corporate Control." Constitution and Change
        1. Directors' Elections and Takeovers
        2. Corporate Shares: Stock Options and Poison Pills
     E. Managerial Power, Executive Compensation, and Stock
        Options
        1. Managerial Power and the Monitoring Board
        2. Executive Compensation and Stock Options

Conclusion: A Case for a New Theory of Corporations

It is embarrassing to admit that, after several hundred years, social scientists have not yet developed a thorough understanding of the advantages and disadvantages of publicly held profit seeking corporations versus other forms of organizations such as cooperatives, nonprofit corporations, universities, proprietorships, joint ventures and mutuals.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
Loading One moment ...
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited article

Law, Economics, and Beyond: A Case for Retheorizing the Business Corporation
Settings

Settings

Typeface
Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

While we understand printed pages are helpful to our users, this limitation is necessary to help protect our publishers' copyrighted material and prevent its unlawful distribution. We are sorry for any inconvenience.
Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.

Are you sure you want to delete this highlight?