Team Production Theory Across the Waves

Brian Cheffins is S. J. Berwin Professor of Corporate Law and Richard Williams is Hogan Lovells University Lecturer in Corporate Law at the University of Cambridge. This post is based on their recent paper.

At first glance, team production theory and U.K. company law are ships passing in the night. The team production model of corporate law, a highly influential theory that debuted in a 1999 Virginia Law Review article by Margaret Blair and Lynn Stout, has as its defining feature the idea that the board of directors of a company operates as a mediating hierarchy tasked with balancing the interests of a corporation’s various constituencies in a manner that addresses the challenges associated with fostering “team production” in a corporate setting. They hypothesized that team production would occur most effectively in a publicly traded company if no one constituency affiliated with the company enjoyed dominant influence over the board. U.K. company law, however, is widely perceived as exhibiting exactly this feature, ascribing a dominant role to shareholders. In our working paper Team Production Across the Waves we show that U.K. corporate governance features a stronger degree of board centrality than would be anticipated with a legal framework that seems to be resolutely shareholder-friendly. In this instance, then, team production theory travels well.

Blair and Stout’s team production analysis, both in their original Virginia Law Review article and in subsequent work, focused exclusively on the United States. Team production theory has not been canvassed extensively in U.K. corporate law scholarship but it has been warmly received. British academics have generally limited themselves to normative analysis, using the team production approach to assess how U.K. corporate governance should be organised rather than as a tool for analyzing actual governance arrangements. While Blair and Stout maintained similarly that team production theory was persuasive normatively they also focused explicitly on the “fit” between team production theory and U.S. corporate law, making the case that their model was accurate descriptively. Our paper carries out an analogous descriptively oriented exercise for the U.K., executing a case study that assesses the extent to which Blair and Stout’s model corresponds with key features of U.K. company law and corporate governance. In showing the “fit” is better than would be anticipated we draw attention to an under-explored facet of team production theory that likely merits further analysis even in an American context, namely the role private ordering can play in moving governance arrangements in a team production-friendly direction.

Blair and Stout took pains to contrast with “shareholder primacy” with their board-oriented team production theory. Seemingly in tension with that stance, shareholder friendly rules are a core feature of U.K. law “on the books”. Shareholders of UK companies enjoy significant rule making power because they set the terms of the corporate constitution, comprised primarily of the articles of association. The Companies Act 2006 lacks a provision equivalent to s. 141 of the Delaware General Corporation Law from which it is possible to draw general conclusions about the powers of directors; any grant of managerial authority to the board is conditional on what the shareholders choose to say in the corporate constitution. Company articles invariably grant shareholders of UK public companies substantial power over the appointment of directors and shareholders have the statutory right to remove any director from office simply by means of a majority vote at a shareholders’ meeting. Shareholders who collectively own 5 percent or more of a company’s shares also have a statutory right to summon shareholder meetings. Moreover, when in office directors are required by section 172 of the UK Companies Act 2006 to discharge their duties “in good faith, in a manner that they consider promotes the success of the company for the benefit of its members (i.e. shareholders) as a whole.”

While the shareholder-friendly features of U.K. company law depart from what team production theory would predict, when the focus is on the “law in action” rather than the “law in books”, the gap is not as substantial as it would seem. In fact, boards of U.K. public companies typically enjoy the sort of significant freedom to act independently of shareholders that would be anticipated under team production theory. For instance, shareholders in such firms almost invariably grant boards exactly the sort of broad managerial powers American directors enjoy. This freedom of action in turn is reinforced by case law doctrines which prevent shareholders from interfering in the exercise of managerial authority granted to the board. Likewise shareholders invariably elect nominees to boards that their companies put forward and instances of directors of public companies being removed by a shareholder vote are extremely rare. Indeed on the latter point it is noteworthy that similar shareholder powers to remove directors exist in the ostensibly team production friendly Delaware General Corporation Law. Moreover, s. 172 of the Companies Act 2006, which does much to sustain perceptions of the pro-shareholder nature of UK law, is by no means antithetical to stakeholder interests. The duty to promote shareholder interests” is balanced by a statutory list of stakeholder orientated matters to which directors are required to “have regard when discharging their duties.” The subjective nature of s. 172 also gives directors considerable scope to prioritize non-shareholder constituencies in a manner akin to its common law antecedent.

Corporate law academics—American as well as British—assume that the U.K. is a shareholder playground. Our team-production-driven case study of U.K. corporate law and corporate governance provides a much more nuanced view. Team production theory has greater explanatory power in the doctrinally shareholder-friendly U.K. than might have been anticipated, with boards having in practice substantial scope to act as the mediating hierarchs that are the fulcrum of the team production model. The substantial explanatory power of team production in the British context arises in large measure because of the voluntary choices of actors within public companies rather than from U.K. corporate law doctrine. Blair and Stout did anticipate in their work on team production theory team production with a strong voluntary underpinning but did not explore private ordering in any detail. Our case study of the U.K., with its shareholder-friendly legal departure point, suggests this aspect of team production is deserving of more in-depth analysis.

The complete paper is available for download here.

Both comments and trackbacks are currently closed.