Corporate law is said to be witnessing "the end of history." (1) 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. (2) The victor, it is claimed, is the conservative school, also known as the "nexus-of-contracts" approach, (3) which holds that corporations should be run for the exclusive benefit of shareholders (what is often termed "shareholder primacy"). To contractarians, the state's role in corporate governance is primarily to provide efficient default rules from which shareholders can choose to depart, (4) and the few mandatory legal rules that do exist to restrain corporate behavior are subject to evasion by choice of form. (5) The terms of corporate activity are thus effectively set by markets, not by law. (6) Progressive corporate law, with its preference for state-imposed mandatory rules to limit excessive pursuit of profit and its promotion of employee, customer, and community voice in corporate governance, (7) has been vanquished. (8) Even progressive corporate lawyers bemoan the end of corporate law's history; they concede that shareholder primacy--not the interests of employees, consumers, or larger communities--has come to dictate corporate practice at the dawn of the twenty-first century. (9)
Are the reports of progressive corporate law's demise exaggerated? This article offers 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 history uncovers two patterns in progressive corporate law reform, discussed in Part II, both of which caution against a rush to declare the ultimate triumph of shareholder primacy. (l0)
The first pattern is that progressive ideals have, in fact, successfully influenced several important areas of corporate law, such as the allowance of charitable giving and the adoption of constituency statutes, which allow management to protect nonshareholder constituencies even at the expense of shareholders. These victories, however, have had notably mixed results. While corporate charitable giving generates large wealth transfers from firms to non-profits, it is achieved through expanded managerial discretion that permits self-dealing and opportunism in allocation decisions. Constituency statutes have also expanded managerial discretion, making stakeholder protection a matter of choice, not legal obligation. To the extent progressive ideals have come to be reflected in corporate law, it has come at the cost of increasing the potential for managerial opportunism.
The second pattern reveals the vibrancy of stakeholder protection and corporate social responsibility outside of "corporate law." While some progressives have attempted to protect stakeholders by changing corporate law, others have looked to other legal regimes to regulate corporate behavior. From securities and labor law reforms in the New Deal to the social welfare laws of the 1960s and 1970s, progressives have advocated for 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"--reflect progressive principles of stakeholder protection and, though outside of corporate law, are powerful forces shaping the choices available to corporate management concerning basic operational and organizational decisions: whom to hire, fire, and promote: which products to produce and how best to produce them; how to set up the workplace; and how to allocate and invest firm assets. All of these decisions are made under the mandatory legal rules embodied in employment and labor law, workplace safety law, environmental law, consumer protection law, and pension law. …