Rethinking the Corporation (and Race) in America: Can Law (and Professionalization) Fix "Minor" Problems of Externalization, Internalization, and Governance?

Article excerpt


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. …