Depending on whom one asks, the last decades' proliferation of statutory business structures is a cause for either celebration or concern. Some laud this recent trend, arguing that a highly permutated menu of tax treatments, liability limitations, and governance hierarchies facilitates the alignment of legal status with organizational need. Others view statutory variety more skeptically, warning that it may simply portend greater cost externalization, strategic behavior, and distributional inequity.1 But one set of legal doctrines has persisted throughout: the concept of fiduciary duty. Indeed, fiduciary obligations remain fundamental to the legal governance structure of virtually every statutory business entity.
That said, the precise normative relationship between fiduciary standards and organizational form remains highly contested. A number of courts and commentators maintain that fiduciaries of "closely-held" firms (e.g., close corporations and partnerships) should be subject to substantially more onerous fiduciary obligations than their counterparts in public corporations.2 Lacking the convenient exit options and the external discipline provided by well-developed securities markets, the argument goes, owners of closely-held firms must rely exclusively (or nearly so) on fiduciary duties to check managerial opportunism. Critics have challenged this view, pointing out that the larger ownership stake typically possessed by fiduciaries of closely-held firms requires them to bear a substantial share of the costs from their own managerial decisions.3 Moreover, such firms frequently comprise participants with long-standing (and even familial) relationships-a source of repeat interaction that facilitates the formation of extra-legal behavioral norms to stem managerial misfeasance.4 Consequently, these critics contend, the categorical case for strict legal duties within closely-held structures is far from compelling.
In the pages below, I endeavor to revisit this governance debate, albeit through a slightly different lens: the "team-production" theory of the firm. In its most basic form, the team-production account spotlights the observation that productive activities within many economic organizations require coordinated, fim-specific investments from two or more participants. (Stronger forms of this account posit that team structures are pervasive within commercial activity, and are in fact the defining characteristic of all multi-person firms).5 Although the team-production model is enjoying renewed popularity within numerous industrial and academic realms,6 it poses particular challenges for organizational governance issues. Indeed, the output produced by a team is frequently non-separable in nature, a characteristic that frustrates attempts to deduce ex post the contributions of individual team members.7 In turn, this form of non-contractibility can exacerbate problems of strategic behavior, reducing the overall productive capacity of the team.8 But within this quagmire of opportunism lies a potentially important role for law. Appropriately-crafted default legal rules can mollify team-production dilemmas by reshaping the incentive structure faced by team members to enhance the well-being and productivity of the firm's participants.
So animated, a team-production approach can inject helpful new insights into the existing debate over the relationship between organizational structure and fiduciary obligation. This Article explores one such insight. Explicitly, I argue that imposing enhanced fiduciary duties on closely-held firms may actually be counter-productive once one accounts for the strategic effects that enhanced duties can have on the members of a productive team. In fact, I shall argue, these strategic effects can be sufficiently grave to undermine the aggregate productivity of the team, thereby justifying fiduciary duties in at least some closely-held firms that are weaker than those that govern widely-held organizations. …