Common Law Corporate Governance and Legal Ambivalence

 

Christopher Bruner’s new book, Corporate Governance in the Common-Law World, is a major contribution to comparative corporate law scholarship.  It will certainly be of interest for scholars in comparative corporate law, but it also offers an important new perspective for scholars focused on a single jurisdiction, such as the United States (or Delaware).  Bruner combines a thorough analysis of corporate law with insights from several other disciplines, including history, sociology, economics, and political science.  The result is a groundbreaking account of corporate law evolution in response to political and cultural pressures.

 

The treatment of stakeholders versus shareholders is often recognized as an area of divergence across jurisdictions.  That said, scholars commonly analyze this topic in the context of a civil law/common law comparison.  Bruner suggests we can gain insights by focusing on differences within the common law world.  As he argues: “while stakeholder-oriented regulatory structures may well correlate with weaker shareholder orientation in corporate governance … in countries where substantial ownership dispersal has occurred, the correlation may reverse.”  Bruner, at 141.  In order to see why, however, we need to consider not only corporate law, but also legal practices external to corporate law.   U.S. law is significantly less shareholder-centric than U.K. law, or, for that matter, Canadian or Australian law.  But U.S. law and policy differs in another way.  Although the variations are complex, U.S. welfare structures are in many respects less protective than their counterparts in the U.K., Australia, and Canada.  This relationship receives less attention in comparative corporate law scholarship, but Bruner painstakingly shows its relevance.

 

Bruner carefully sets out variations among corporate law and external regulatory structures, and he shows how these variations have evolved in tandem in each common law jurisdiction.  He then offers a theory to explain why the U.S. approach to corporate law is distinctive.  “Given the relative weakness of the social safety net in the United States, corporate law has – particularly in times of crisis – been expected to help make up the difference, which has predominantly taken the form of structures enabling managers to deviate from the shareholders’ interests where they directly conflict with those of other stakeholders.”  Id. at 220.

 

While the U.K. approach to corporate law is quite shareholder-centric (and the Australian and Canadian approaches are comparatively so), the U.S. approach is more equivocal.  In a number of respects, shareholders in U.S. corporations are dependent on board decision-making.  And, in a number of contexts, boards are permitted to consider non-shareholder interests.  Bruner demonstrates that U.S. corporate law is ambivalent on questions of both power and purpose.   See id. at 36-53.  There is a striking ambivalence concerning shareholder authority in several core areas, and an equally notable lack of clarity concerning the beneficiaries of board fiduciary duties (classically, directors are said to owe duties to “the corporation and its shareholders”).

 

This ambivalence claim also underpins a core ambition of the book.  In Bruner’s view, “none of the prevailing theories can accommodate U.S. corporate law’s fundamental ambivalence on issues of power and purpose.”  Id. at 53.  The arguments in his book seek to explain this ambivalence, grounding it in the relation between a jurisdiction’s corporate law and other external sources of social welfare.  U.S. corporate law turned in a more stakeholder protective direction, he argues, in response to a coalition comprised of labor and management – a coalition that arose in response to the hostile takeovers of the 1980s.

 

While I agree that corporate law shows a fundamental ambivalence, this ambivalence feature also raises a potential challenge for Bruner’s theory.  We can see why if we look at Bruner’s own arguments against alternative accounts.  For example, under a team production approach, the board of directors should act as a neutral mediating hierarch, considering the interests of shareholders together with the interests of various stakeholders.  (For the leading discussion, see Margaret M. Blair & Lynn A. Stout, A Team Production Theory of Corporate Law, 85 Va. L. Rev. 247 (1999)).  Bruner suggests, however, that a mediating hierarch conception of the board “requires a stakeholder mandate, not mere discretion to show regard for their interests.”  See id. at 58.  See also David Millon, New Game Plan or Business as Usual? A Critique of the Team Production Model of Corporate Law, 86 Va. L. Rev. 1001, 1022 (2000).   For this reason, he questions the team production theory of corporate law, at least as a descriptive account.  Yet, this same discretion raises questions for Bruner’s account.

 

One might expect the outcome of a labor-management coalition to more powerfully reflect both components of the coalition, and a discretionary doctrine is not the most obvious result of pro-employee political pressure.  This might mean little if that discretion would always operate in one direction.  Yet, the board’s discretion to consider the interests of stakeholders will often be exercised in a non-stakeholder oriented fashion.  Many hostile takeovers can easily shift to friendly acquisitions – often in conjunction with management-friendly developments, such as golden parachutes – and consequently the ability to consider employee interests at the board’s discretion takes on added significance.  Political compromises are often messy, and these concerns do not disprove Bruner’s thesis, but there is at least reason for caution in finding that a labor-management coalition is the driving force here.

           

We can also turn to legislative history in assessing these questions.  For example, Bruner considers the constituency statute – an enactment that empowers a board to consider the interests of non-shareholder constituencies.  To what extent are such statutes a product of labor influence?   Unfortunately, this is not an area of academic consensus.  While the interests of labor and management may well have been aligned during the U.S. takeover battles of the 1980s, in many cases it appears that a single corporation played a major role in the passage of anti-takeover statutes, and that the relevant statutes passed with little discussion.  See Roberta Romano, The Future of Hostile Takeovers: Legislation and Public Opinion, 57 U. Cin. L. Rev. 457, 461 n. 11 (1988).  Perhaps unsurprisingly, the legislative history has received varying interpretations.   Compare id. at 462 (“The statutes are not, however, as some might intuit, promoted by a broad coalition of business, labor, and community leaders who fear that a firm’s takeover will have a detrimental effect on the local economy.”), with Eric W. Orts, Beyond Shareholders: Interpreting Corporate Constituency Statutes, 61 Geo. Wash. L. Rev. 14, 24-25 (1992) (suggesting that “[l]abor interests … often supported, either actively or passively, the adoption of antitakeover legislation”).

 

None of this is to say that Bruner is wrong.  His theory may be right, and it has significant advantages over leading alternative theories.  It is an interesting question how much of corporate law in the common law jurisdictions can be attributed to the features Bruner emphasizes, however, and how much merely corresponds to those features.  Bruner makes an elegant argument for a causal connection between shareholder-centric corporate law and the scope of external social welfare regulation.  If he is correct, we may also be able to predict whether certain features of corporate law will be stable in the long run.  Yet his book may also have a more subtle import.  Even if the causal picture should diverge from Bruner’s analysis, this could only be demonstrated by grappling with the cultural, economic, and political arguments he raises.  One of the more substantial contributions of Corporate Governance in the Common-Law World may be its encouragement of corporate law scholarship that crosses both disciplines and jurisdictions.  Bruner’s book is not only compelling, it is a very fine example of the genre.