Donald C. Langevoort is the Thomas Aquinas Reynolds Professor of Law at Georgetown Law School. This post is based on his recent article, forthcoming in the Seattle University Law Review. Related research from the Program on Corporate Governance includes The Case for Increasing Shareholder Power, by Lucian Bebchuk; The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here); and Can We Do Better by Ordinary Investors? A Pragmatic Reaction to the Dueling Ideological Mythologists of Corporate Law by Leo E. Strine (discussed on the Forum here).
There is widespread belief in both scholarship and business practice that internal corporate cultures strongly affect economic outcomes for firms, for better or worse. In turn, there is also a growing belief that corporate governance arrangements materially affect corporate cultures. If this is true, it suggests an intriguing three-link causal chain: governance choices influence corporate performance, at least in part via their effects on internal culture. This should be important to lawyers and legal scholars because of the symbiotic nature of law and governance: the increasing risk of enhanced corporate criminal and civil liability when cultures are judged to be deficient. Finding the right place for culture in governance is a heavy lift, and the subject of my recent essay for the “Berle XI” symposium.
By many accounts today (though hardly without controversy), the dominant norm in American corporate governance is shareholder primacy—managers are expected as a result of the combined forces of law, culture and economic incentives to act intently for the wealth-maximizing benefit of their shareholders. The theoretical justification for this truncated autonomy is that managers are naturally self-interested, requiring monitoring of various sorts in the name of (if not by) its shareholders in order to minimize opportunism in the exercise of power. To enthusiasts for this principal-agent model of governance, this embrace of the shareholder primacy norm in the last three or four decades has paid off in greater productivity, innovation and capital formation. Many in financial economics and corporate law thus now take it as a normative given, arguing only about whether we need to empower and protect shareholders a bit more, less, or have it about right to achieve optimal shareholder wealth over the desired time frame and unit of measurement.
