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The Need to Dethrone Corporate Law

by kent greenfield

Corporate Law Illustration
(Illustration by Ray Bartkus)

The Need to Dethrone Corporate Law

My son, Liam, and I were walking recently in Boston’s Public Garden. Being a five-year-old and trolling for words, he asked me what “public” meant. My answer was that if something was “public,” it belonged to everyone. If I gave a similar answer to the students in my corporate law course, I would be lying.

When used in connection with corporations, the word “public” means that it is owned by shareholders who buy shares in an open market. “Public” corporations are not public in any sense of having responsibilities to society, being owned by the community, or being subject to stringent public oversight. Managers of most “public” companies are prohibited by law from taking into account the interests of the public when making decisions, if the shareholders of the company would be harmed.

This was not always the case. For much of our national history, “public” corporations were deemed to have important civic responsibilities. Now, however, saying that a corporation is “public” is among the most misleading terms in all of law or business.

The public should have a greater say in how corporations are governed. It is important that the laws controlling corporations be made more protective of the public good and of corporations’ various stakeholders, such as employees.

At first glance, it may be difficult to grasp the pervasive power of corporate law. But corporate law determines the rules for some of the largest and most powerful institutions in the world and affects everything from employees’ wage rates, to whether companies will try to skirt environmental laws, to whether they will tend to look the other way when doing business with governments that violate human rights.

Existing corporate law is fundamentally flawed, and the flaws are often insulated from attack. Take, for example, shareholder supremacy, the rule that managers of a corporation must pursue shareholder benefit above all else. The rule goes largely unquestioned in most texts used in law schools, even though it creates a gladiatorial culture within businesses that makes corporate scandals more likely and makes it less likely that corporations will take into account the concerns of other stakeholders or the public interest. Unless these concerns can be transformed into financial gain, corporations will neglect them. And when these concerns are neglected by such powerful institutions, it takes a lot of work on the part of other institutions (government, charities, churches) to make up for that neglect.

Another problem in corporate law is the dominance of Delaware in providing the laws of corporate governance. Six of every ten of the nation’s largest corporations choose to incorporate in Delaware. Delaware gets to set the rules of corporate governance for those companies, even though most of the companies have little or no connection to the state other than getting their incorporation papers there. The mainstream view among contemporary corporate law scholars is that corporations’ preferences for Delaware law show that the state is offering the best, most efficient law available.

The more likely story, however, is that corporations prefer Delaware law because it offers corporations a way to bypass democratic pressures and to export the costs of its legal structure to other states. Delaware’s dominance is less a testament to efficiency than to a kind of bizarro democracy that allows a state with less than 1/3 of 1 percent of the nation’s population to govern a majority of the nation’s most powerful businesses.

It is time to spell out some concrete proposals for change. These might include requiring corporations to tell the truth not only to their shareholders but to their employees as well. A CEO who lies to shareholders has violated federal law. A CEO who lies to employees has not. Another idea would be to change the board structure of large corporations to include representatives of all the major stakeholders of the firm.

An alternative would be to require directors to take into account the interests of all stakeholders—not just shareholders—when the board makes important decisions. Such changes will not only make corporate law more coherent (certainly a goal for law professors and their students) but also more beneficial to society generally.

Corporate law has great promise, if we can harness it as a progressive force rather than let it remain a narrow servant of the interests of shareholders.

Professor Greenfield is writing a book that articulates a progressive vision of corporate law, to be published by the University of Chicago Press in 2005. He has been on the faculty of BC Law School since 1995. Before joining the faculty, he clerked for Justice David Souter of the United States Supreme Court and practiced at Covington & Burling in Washington, DC.