Academic journal article Boston College Law Review

Organic Corporate Governance

Academic journal article Boston College Law Review

Organic Corporate Governance

Article excerpt


Corporate governance scholarship remains in constant conflict in part because our understanding of how corporations are optimally governed is incomplete. In spite of decades of scholarly debate,1 including thousands of articles in the past ten years alone,2 there is no consensus about the optimal role of corporate governance in the firm. Under predominant views, a corporation is monitored by the board of directors and managed on a day-to-day basis by the CEO and other members of senior management. These actors are then ultimately accountable to shareholders.3 However, substantial schisms remain over fundamental questions such as the propriety of executive compensation,4 the use of corporate governance ratings,5 and the relative primacy of shareholders versus directors.6 Empirical studies examining the impact of corporate governance on firm performance7 and the efficacy of corporate governance reforms remain frustratingly inconclusive.8

In spite of the widespread belief that the American system of corporate governance is one of the best in the world,9 substantial evidence shows that many CEOs frequently prioritize their own interests over those of shareholders,10 boards excessively indulge CEOs,11 and shareholders exert weak influence over board composition and decision-making.12 While the market for corporate control offers some ability to discipline inefficient managerial behavior in enabling shareholders to exercise their exit power in selling their equity stock,13 this instrument is inherently blunt and limited.14 The rise of institutional investors, such as pension funds and mutual funds, insulates individual shareholders from corporate action, thus dulling their motivation to exercise their control rights.15 Furthermore, ongoing changes in the capital markets cast doubt on the long-established role of equity shareholders as the most efficient means of managing agency costs.16

In the United States, the predominant response to these trends has been to regulate corporate governance. In particular, federal securities law has become a powerful mechanism to intervene in corporate governance.17 Despite sharp disagreements regarding their effectiveness, the Sarbanes-Oxley Act ("SOX")18 and the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act")19 impose mandatory governance rules on matters understood by many academics and practitioners to be solely under the control of the board of directors.20 SOX and the Dodd-Frank Act include numerous regulatory mandates and incentives that empower shareholders.21 Rules enacted under SOX and the Dodd-Frank Act regulate mandatory disclosure, shareholder proxy access, executive compensation, audit committees, and internal controls.22 Scholars have questioned whether this newfound faith in regulatory intervention is misplaced.23

The ability of corporations to attract enormous amounts of equity investment and return a profit to shareholders belies the above-mentioned weaknesses of modern corporate governance.24 How can this be explained? This Article posits that the currently predominant view of corporate governance is inherently incomplete. While legal scholars have extensively examined various combinations of board, shareholder, and CEO power, little atten tion has been given to essential sources of corporate governance inside the firm itself. This view of the firm as a "black box" that is monolithic and coordinated obscures the important role that internal forces play in governing the firm,25 and it is the goal of this Article to show how these internal forces serve an essential role in corporate governance.

Specifically, this Article argues that corporate governance works in part because it operates intrinsically in organizations where there is a separation of ownership and control. Integrating legal analysis with insights from organizational management and finance scholarship, this Article argues that three forces work in loose concert to motivate organizational actors to promote corporate governance in pursuit of their own self-interest. …

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