Originally uploaded at SSRN.

Abstract

Prevailing theories of corporate law tend to rely heavily on strong claims regarding the corporate governance primacy and legitimacy of either the board or the shareholders, as the case may be. In this article I challenge the descriptive power of these theories as applied to widely held public corporations and advance an alternative, arguing that corporate law is, and will remain, deeply ambivalent - both doctrinally and morally - with respect to three fundamental and related issues: the locus of ultimate corporate governance authority, the intended beneficiaries of corporate production, and the relationship between corporate law and theachievement of the social good.

Part I begins with a brief discussion of our long-standing misgivings regarding the status of the corporation as an entity, arguing that concerns regarding the potential negative consequences of permitting human beings to act behind the veil of a distinct legal person are as old as the corporate form itself. I then turn to an examination of prevailing theories of corporate governance in part II, arguing that they exhibit substantial shortcomings as descriptive theories due to their inability to account for fundamental elements of corporatelaw as it actually exists. Based upon a re-examination of the roles and powers of shareholders and directors in the public corporation across various doctrinal contexts, I conclude in part III that corporate law is, and will remain, deeply ambivalent. In so doing I draw upon utilitarianism - corporate law's implicit moral theory - to describe more clearly the nature and degree of corporate law's commitment to shareholder wealth maximization. Corporate law's weak utilitarian commitment to shareholder wealth maximization, I argue, reflects real but incomplete confidence in the consistency of shareholders' incentives and interests with those of the larger public - an uncertainty reinforced by the corporate form's lack of legitimacy or practical ability to articulate an authoritative conception of the social good.

I then turn to the rise of institutional shareholders in part IV, assessing their effects on the issues discussed in the article, and in part V offer some brief reflections on the implications of my analysis for an important doctrinal debate cutting to the heart of corporate governance: the scope of the shareholders' authority to enact bylaws affecting the business and affairs of the corporation. Ultimately it is suggested that corporate law's fundamental ambivalence represents a keen awareness of the limitations and pitfalls inevitably attendant upon this mode of human organization, and that awareness of this core characteristic ought to be brought to bear upon the corporate governance debate.

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