Corporate Governance in the Shadow of the State

The following post comes to us from Marc Moore, Deputy Director of the University College London Centre for Commercial Law.

Over recent decades, corporate governance has become an increasingly high profile aspect of legal scholarship and practice. But despite this widespread interest, there remains considerable uncertainty about how exactly corporate governance should be defined or understood. Of particular concern is whether corporate governance is most appropriately understood as an aspect of ‘private’ (facilitative) law, or else as a part of ‘public’ (regulatory) law. In my recent book, Corporate Governance in the Shadow of the State (2013, Hart Publishing), I demonstrate that this question is not just an academic one in the pejorative sense. On the contrary, it is arguably the most important issue confronting those who study or teach the subject of corporate governance in any level of depth or analytical rigour.

The way in which scholars and students characterise a phenomenon academically is of enormous – and often underappreciated – significance, especially when it comes to aspects of the law. How we characterise an area of law – or, in other words, what the dominant academic paradigm of that subject is – affects how we customarily think about it, write about it and teach it. Crucially, it also affects our normative perspective on that subject. That is to say, it determines what we regard to be its strengths and weaknesses, its ‘rights’ and ‘wrongs’, and the appropriate course of its future development. The opinions and attitudes that are shaped in legal monographs, law review articles and law school classrooms don’t just echo around the proverbial ivory towers of elite academic institutions. Ultimately – albeit often very gradually – they trickle down into the so-called ‘real world’ either when former students of the law later become influential practitioners of it, or when leading academic texts are used by judicial or policy-making figures to help shape their critical understanding of challenging legal issues.

Within the Anglo-American environment, the dominant academic characterisation of corporate governance – and indeed corporate law generally – is as an aspect of private or facilitative law. As such, corporate law is conventionally bracketed alongside other traditional private law subjects such as contract, property, equity, agency and trusts law. Accordingly, the efficacy of the various laws and regulations concerning corporate governance is ordinarily judged by reference to how responsive those rules are to the supposed private preferences of key corporate participants or ‘contractors’. This category is normally restricted to include the common shareholders who supply the corporation’s equity or risk capital; and, by necessary implication, the managerial officers (including directors) who are appointed to make executive policy decisions on shareholders’ collective behalf. It follows from this premise that the core and motivating purpose of corporate governance laws should be to reflect or ‘mimic’ the governance ‘terms’ that shareholders and managers would be inclined to agree upon with one another privately, in the hypothetical scenario where no antecedent laws exist and therefore all norms stand to be determined by private negotiation alone. This is what is commonly known as the ‘contractarian’ or ‘nexus of contracts’ theory of corporate law.

Correspondingly, corporate law is ordinarily not characterised as an aspect of ‘public’ or regulatory law, in the way that subjects like tort, criminal, environmental, antitrust and securities law are. That is to say, unlike the above areas of law, corporate law – including corporate governance law – is typically not perceived as being designed to coerce social-behavioural change, or to bring about direct distributional outcomes within society whether in terms of risk, power or wealth. Therefore academic characterisations of corporate governance normally do not seek to portray the laws and norms in this field as exhibiting such characteristics, which would run counter to their purportedly facilitative – and thus fundamentally non-socially-determinative – nature.

Where one understands corporate governance as a fundamentally private or ‘organic’ phenomenon, they are ordinarily led to the ensuing normative position that the relevant laws in future should rightfully be developed along the same basic path: that is, lawmaking in this field should be responsive to private preferences, rather than determinative of such. Vice versa, those who adopt a public or ‘synthetic’ view of corporate governance tend consequently to arrive at the contrary normative position. That is, that the laws in this field should be coercive and socially-determinative, aimed at eliciting direct change in the behavioural patterns and relative resources of key corporate participants in line with general democratic opinion in society; and irrespective of whether or not such regulatory outcomes are consistent with the affected participants’ (especially shareholders’) private preferences.

To a significant extent the contractarian characterisation is supported by the actual form and substance of US (and also UK) corporate governance law. However, the fact that many fundamental corporate governance norms are determined on a mandatory (and thus contractually irreversible) basis – either directly or indirectly at the behest of the regulatory state – sits uneasily alongside the dominant contractarian paradigm. Accordingly, I attempt in this book to develop what I believe to be a more convincing explanation for the somewhat peculiar combination of facilitative and regulatory rules that together constitute Anglo-American corporate governance law. Essentially, it involves recognising the inherent limitations to effective private ordering of corporate governance at the individual firm level, and the consequent inevitability of regulatory state interventionism as a necessary means of achieving the core objectives of law in this area.

From a normative standpoint, the conceptual portrayal of corporate governance developed in this book calls for a more tolerant and progressive attitude towards regulatory state action in this field. Increasingly over recent decades, ‘regulation’ has come to be understood in a highly pejorative sense by many private (and especially corporate) lawyers, as a mechanism that is liable to deprive individuals of their economic freedom of action in the service of (frequently misguided) governmental ‘grand plans’. However, the findings of this book demonstrate that regulatory state interventionism can ultimately contribute to securing individual contractual freedom in corporate governance, by counteracting economic-organisational power disparities that would otherwise impede the effective selection of norms by private actors. Thus ‘regulation’ is not the dirty word that it is frequently made out to be.

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One Comment

  1. steven cole
    Posted Wednesday, July 17, 2013 at 3:50 am | Permalink

    Dear June,

    I enjoyed reading your synopsis on this topic.
    The role of regulatory intervention in our corporate and governance affairs is obviously an important issue as to whether it should be a “shaper” of normative values, or rather a “safety net” for base values below which society should not tolerate, and should then consider the withdrawal of its “license” to the corporation (or its directors/officers) to continue to operate.
    Personally I ascribe to the freer market theories, but at the same time have expectations of society (in this case the corporations and their officers) taking a more professional approach to matters – driven by sincere shareholder expectations and action (not just by short term opportunistic behaviours) to encourage and require long term sustainable outcomes for the betterment of all shareholders and society at large.

    In Australia where I am based (Perth), our regulatory environment has reached the zenith (in terms of regulatory imposts upon directors and officers relative to other developed nations) or the nadir (in the case of the impost of regulatory liabilities upon directors and officers).

    On behalf of the Australian Institute of Company Directors in 2012 I authored a “white paper” published by AICD addressing this issue (“Mind the Expectation Gap – the role of the company director”). It is available as a free download from the AICd website

    You may care to avail yourself of a copy. The work is not “academic” in nature but rather a practical insight into the reality of mattes from the perspective of a practising director.

    For your information I have recently authored a follow up paper which takes the thoughts in “Mind the Expectation Gap” a little further suggesting practical steps available to each sector of society to help bridge the “gap”. This has not been formally published anywhere as yet.

    I hope these references might assist you in your work.

    Best regards

    Steven Cole
    +618 92260622
    +614 11244320

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