Academic journal article Washington and Lee Law Review

The Next Iteration of Progressive Corporate Law

Academic journal article Washington and Lee Law Review

The Next Iteration of Progressive Corporate Law

Article excerpt

Table of Contents

I. Introduction..........739

II. Moving to the Theory of the Firm........741

III. Employees, Not Stakeholders.......748

IV. The Need for Structural Corporate Law Reform......761

V. Conclusion...........766

I. Introduction

Corporate law-in theory, in statute, and in practice-is oriented around the idea of shareholder primacy.1 A sizeable and prestigious swath of the corporate law academy has adopted shareholder wealth maximization as the field's normative touchstone,2 uses finance-based law and economics as the field's primary methodology,3 and employs share-price-oriented event studies to assess the success and failure of various corporate law doctrines empirically.4 In contrast, progressive corporate law has provided resistance to the law and economics movement, has drawn upon alternative disciplines for its research and analysis, and seeks to move beyond shareholder primacy to a communitarian vision of the corporation.5 In so doing, progressive corporate law has provided an important intellectual counterweight to the predominant paradigm.

Ultimately, however, progressive corporate law must change if it is to continue to provide shareholder primacy with a robust academic alternative. In many ways, progressive theory remains trapped in the dialectic with corporate law and economics that began in the 1980s.6 Thus far, it has not won the argument.7 My recommendations are for significant changes in the literature upon which progressive corporate law draws; changes in the conception of the corporation upon which it builds; and changes in the types of reforms for which it advocates. In brief, I argue that progressive corporate law should draw upon economic literature concerning the theory of the firm; should focus on employees and shareholders as the true participants in the firm; and should advocate for structural changes in corporate governance. These changes will likely not be amenable to those who remain comfortable with the communitarian, CSR-oriented approach that has characterized progressive corporate law. But we are stuck in a rut. Below I discuss why progressive corporate law needs to head in new directions and how it can do so.

II. Moving to the Theory of the Firm

When law and economics burst onto the corporate law scene in the 1980s, it had a significant advantage over its doctrinal rivals: namely, a rigorous interdisciplinary methodology that could be applied to arrive at doctrinal answers.8 In some ways, the corporate law and economics revolution was a part of the broader law and economics movement that began sweeping the academy in the 1970s.9 That revolution-based largely on using the tools of microeconomic analysis to resolve legal questions-endeavored to reexamine and retheorize all areas of law, from torts and contracts to family law and constitutional theory.10 However, corporate law had its own tradition of using economics. In 1965, Henry Manne's article on takeovers introduced the notion of economic concepts to challenge existing doctrinal precepts.11 And in 1972-the same year as Posner's first treatise-Victor Brudney and Marvin Chirelstein published their casebook on corporate finance.12 Roberta Romano specifically credits their casebook with "introducing] a new methodology, modern finance, into the business law curriculum."13

Ever since, mainstream corporate law and economics has had a rigorous set of interdisciplinary research upon which to draw insights about corporate behavior.14 Using economic modeling, corporate law academics can work through specific scenarios and develop algorithms to resolve questions about likely responses to various inputs within the model.15 Models can definitively demonstrate that, under certain conditions, one set of actions will provide greater efficiency than others.16 In conjunction with these models, quantitative analysis of stock prices and other corporate economic data can provide empirical results to illuminate underlying debates. …

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