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Introduction
Caveat emptor: This book is normative and it rests upon certain pillars which may be unsettling to some, particularly those brought up intellec- tually within the confines of the mainstream. I intend, nonetheless, to argue in favor of those pillars and to build upon them a kind invitation to see our subject matter not as a finished, undisputable product but, instead, as an opportunity for open debate. Those intertwined pillars are, first, that economics is political philosophy, at best, and not a science in the way that natural science proper is; second, that company law is about how to make good society and is thus political; and, third, that corporate governance without philosophical and historical inquiry is vacuous and deceitful. Few ideas have had an impact on the state of corporate governance study and practice as profound as Jeremy Bentham’s. His utilitarian ethics have served as a sound basis for a neoclassical economic doctrine which rests upon methodological individualism and positive empiricism.1 Its most notorious offspring, law and economics,2 is the dominant school in corporate governance, and, due to its parentage, it benefits from the halo of scientific neutrality despite its heavy ideological bent. It takes as given that the primary goal of company law is to boost efficiency and to address agency problems involving a firm’s shareholders and managers, among shareholders, or the firm vis-à-vis third parties3 – a debatable reductionism which rests upon a value judgement, i.e. that the purpose of a firm, without caveats, is first and foremost to maximize shareholder
1 See David Colander, Hans Föllmer, et al., ‘The Financial Crisis and the Systemic Failure of Academic Economics’ (2009) University of Copenhagen, Department of Economics, Discussion Paper No. 09-03
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2 Reframing corporate governance
value.4 The latter is a legitimate worldview, specifically regarding how to make a good society, although it essentially paints company law as it is, i.e. political at its core.5 Making such value judgments requires assump- tions to be made, such as conceptions of ‘progress’ and ‘development’, which are deeply embedded in the dominant discourse.6 And because corporations are the vehicle of choice for wealth creation and accumu- lation,7 bringing material wealth parallel to negative consequences, they also function as a moral deflection device8 that requires us to take a step back and study corporate governance from a wider, multidisciplinary perspective. In 2011, systems theorists from the Swiss Federal Institute of Tech- nology in Zurich used a database of 37 million companies worldwide and cross-checked it against all 43,060 transnational corporations and share ownerships, linking them into what can be called a blueprint for the structure of economic ‘muscle’. The results were revealing: 80% of the wealth in the network is controlled by 737 corporations, of which 40% rests placidly in the balance sheet of 147 firms. A considerable part of the revenue of various firms did not even come from operations but was speculative, i.e. financialized arrangements mounted on top of complex, multijurisdictional special purpose vehicles (SPVs). The names of these corporations are well known, for example Barclays, Capital Group, Fidelity, AXA, JP Morgan Chase, Vanguard, UBS, Merrill Lynch, Deutsche Bank, Credit Suisse, Wal-Mart, Goldman Sachs, etc.9 If com- panies were countries (and they are simultaneously powerful wealth producers and capable of immense destructive potential10) and we compared a country’s GDP with corporate revenues, we would find that, for example, Yahoo is bigger than Mongolia, Visa is bigger than
4 See Mitchell Polinsky and Steven Shavell, ‘Economic Analysis of Law’ (2005) Harvard Law and Economics Discussion Paper No. 536
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Introduction 3
Zimbabwe, eBay is bigger than Madagascar, Nike is bigger than Para- guay, McDonald’s is bigger than Latvia, Amazon is bigger than Kenya, Apple is bigger than Ecuador, Microsoft is bigger than Croatia, Ford is bigger than Morocco, Bank of America is bigger than Vietnam, Berkshire Hathaway is bigger than Hungary, General Electric is bigger than New Zealand, Chevron is bigger than the Czech Republic, and Walmart is bigger than Norway.11 And this is a leverage that has been used time and again. For all the material prosperity that has been brought about through the corporation,12 it has also been a tool for toying with democratic processes that are fundamental in the self-determination of entire com- munities, countries, and regions. Think of the United Fruit Company in cahoots with repressive regimes in Central America,13 or, more recent times and closer to home, BlackRock Inc., the world’s biggest fund manager with over five trillion dollars in assets under administration, using its muscle to influence the gun debate in the United States in a specific political direction.14 With the gargantuan amount of power harnessed by corporations, paired with an unquestioned primacy of shareholder value – both in academia and policy – it is unsurprising that abuses committed through corporations only get more strident with time. As we enter a highly polarized age, in which some claim everything is subject to interpretation and others ritually sacrifice morality to the deities of hyper rationalism, the human capacity both for good and for evil is magnified through the unchained leviathan that is the corporation. In such a landscape, it seems like a disservice to the social disciplines (a.k.a. social sciences) to be
11 See Vicent Trivett, ‘25 US Mega Corporations: Where They Rank If They Were Countries’, Business Insider, 27 June 2011
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4 Reframing corporate governance
ruled by a thirst for singular causes, i.e. to encroach normative research with a monomaniac, cult-like attempt to explain complex phenomena by causally linking them to a simple motivation – and to disguise such sleight of hand as an exact science. Freud tried it with sex, Marx with class struggle, Foucault with power, and neoclassical economics is doing it with a hyper-rational, selfish being whose sole concern is to maximize pleasure and avoid pain. It is quite ironic, in these circumstances, that the presumption of absolute knowledge – the cardinal sin of the rational spirit – negates creative exploration.15 What legal scholars and their students can do about this state of affairs is the same that some within the field of economics are working hard to achieve from the fringes, i.e. to break the shackles of dogma and look at things from different angles, all in the service not of efficiency but of heterodoxy in the pursuit of knowledge. Political philosophy, the field of study in which both economics and law firmly rest, can be either descriptive or normative. The former is occupied by efforts to point out how things ‘are’ while the latter attempts to speak about how they ‘ought to be’. However, none can be an exact or a natural science (as mainstream economics tries to sell itself) for the simple reason that they deal in morality. Newton’s law of universal gravitation, the molecular weight of sodium, or Bernoulli’s principle concerning the increase in the speed of a fluid vis-à-vis a decrease in pressure, are not matters of opinion and morality. They are tested theories that can be used for accurate prediction, and opinions are irrelevant to them; they stay put until proven incorrect by systematic observation, measurement, and experiment – in which case a new, testable hypothesis is formulated and then life goes on under the new paradigm. Neither economics nor law are sculpted out of that clay, and, therefore, corporate governance based on law and economics isn’t either. As an eminently political field, our discipline is all about debate within the confines of history and society, not about a single, mechanical truth with universal applicability. Most importantly, the modern corporation is the shared space where both the left and the right – economically speaking – coincide in order to equally contradict themselves, i.e. the true elephant’s graveyard of political coherence, both for ferocious free market advocates and convinced socialists. Blind to the irony of it all, the latter passionately protest corporations in the fanciest capitals of the West while enjoying the benefits that those same corporations facilitate; while the former tenaciously defend economic freedom as embodied by a legal
15 See Jordan B. Peterson, Maps of Meaning (Routledge 1999) 250.
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Introduction 5
vehicle that enjoys the most blatant state subsidy, i.e. limited liability, the very definition of a hands-on, protectionist State. The irony! For all of the above, it is paramount to dig up the ideological underbelly of mainstream law and economics in corporate governance. If some claim (relying on the shtick of economics-as-a-science) that we are witnessing the end of history for corporate law,16 we ought to debunk that from the root, i.e. historically and philosophically. Therefore, Chapter 1 talks about the invention of economics from a historical and methodo- logical perspective, highlighting both its diversity and its rightful place within political philosophy. The chapter then analyzes the pyrrhic victory of the neoclassical over other economic schools and how the former’s constitutive elements glue together to its advantage. This, in turn, allows for an analysis of the concept of economics imperialism and, with it, how law and economics came into existence as a discipline. The corollary of Chapter 1 is a mapping of agency theory, the touchstone of corporate governance for law and economics and also the blueprint that the reader is encouraged to use in order to build their own ideas. Chapter 2 uses the contributions of Hart, Wittgenstein, et al., in order to tackle what should be the first problem addressed by corporate governance theory, i.e. the definition of a corporation. This serves to later unpack the nexus of contracts view as insufficient, then compares it to other approaches by weighing their pros and cons. By disentangling the idea of an enterprise from a company, the chapter closes by offering an alternative view of the definitional problem. Chapter 3 is an exposition of how the current asset partitioning regime came to be, from ancient Rome to the Middle Ages and from chartered entities until today. The chapter discusses the context in which the medieval church solidified the fiction theory of corporations and how the phenomenon of a race to the bottom may have played a key role in shifting the rationale behind limited liability as inherited from Rome. Then, by analyzing the veil-piercing doctrine, the chapter suggests that the dilemma and tradeoffs presented by the current state of the asset partitioning regime may be symptomatic of the divorce from the political, economic, and moral reasoning behind corporations in the prior centuries.
16 See Henry Hansmann and Reinier Kraakman, ‘The End of History for Corporate Law’ (January 2000) Yale Law School Working Paper No. 235
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6 Reframing corporate governance
Once the reader is acquainted with the ideological framework of current mainstream corporate governance and has the historical back- ground preceding the modern corporations, Chapter 4 looks at the agency problems both in a theoretical and historical context. Because agency relationships are at the core of the principal-agent theory, separating the elements of the stakeholder relationships identified in corporate govern- ance doctrine clears the way for testing the latter both as a descriptive and normative framework. This approach leads to a questioning of the internal coherence underlying the mainstream theory, e.g. the idea of shareholders as owners, of managers as agents, and the cohesion between these assumptions and concepts such as the nexus of contracts and residual claimants. Finally, Chapter 5 offers some thoughts on how to go from here. It analyzes the dominant concepts of progress and development, advancing a suggestion that the main school of thought in corporate governance is where it is due to its strengths. However, in the spirit of heterodoxy, upon which the book rests, this chapter also looks at corporate governance’s negative consequences and contradictions. Then, using the latter, it theorizes about why it is necessary to approach corporate governance from as many useful views as possible. All in all, this book neither focuses on efficient mechanisms to align shareholder and manager interests nor quantifies monitoring costs in the crafting of default regulations of contracts within the firm, for example. Instead, it is all about taking a step back and reflecting. By challenging the orthodoxy, its proposal is to reframe how we think about corporate governance and, thus, it aspires to offer various alternative tools to ask deeper, more crucial questions before taking a stand on the mechanisms, processes and relations by which corporations are controlled and directed. One of its core premises is that having one’s cake and eating it too is not an option. The reader may end up concluding that heterodoxy is not her cup of tea, of course, and that is a perfectly legitimate conclusion for any reader – as long as, first, he or she goes through a serious analysis and asks the difficult questions about the distribution of rights and responsibilities among all stakeholders. As a final note, it is proper to warn the reader that throughout this book the terms company law, corporate law and corporate governance are used interchangeably, and the same goes for company and corporation, with the only distinction being enterprise, a notion which occurs spon- taneously in society and does not require the fulfillment of any bureau- cratic formalities in order to exist. Moreover, whenever reference is made
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Introduction 7
to economics, it is meant to refer to mainstream (neoclassical) eco- nomics, while any other school is referred to or preceded by its name, for example Austrian, institutional, behavioral, developmental, etc.
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