The essays collected in PROGRESSIVE CORPORATE LAW are like so many breaths of fresh air or beams of sunlight for
those of us who toil in the mines of corporate law. Since the late 1970s, law and economics has dominated corporate law to
the extent that economic analysis has all but replaced traditional forms of legal scholarship. These essays, however, present a
powerful critique of law and economics as well as a series of alternatives for corporate law.
Conceptually, the law and economics paradigm is clear. Assume that Farmer Jones has a bushel of wheat that he values at $1
and Farmer Smith has a bushel of corn that he values at $1. At this point the collective wealth of Jones and Smith is $2.
Assume also that Jones values corn at $2 per bushel and that Smith values wheat at $2 per bushel. If Jones and Smith acted in
a profit or wealth maximizing way, they will trade wheat for corn. After the trade, Jones will have a bushel of corn that he values
at $2 and Smith will have a bushel of wheat that he values at $2. As a result of the self-interested trade the collective wealth of
Jones and Smith has increased from $2 to $4. Consequently, good laws facilitate profit maximizing conduct and bad laws
interfere with it.
As applied to corporate law, this paradigm treats the corporation a form contract that enables shareholders and
nonshareholders to avoid the transactions costs inherent in negotiating individuals contracts dealing with issues of limited liability,
etc. To ensure that the corporation engages in profit maximizing conduct, a legal duty to maximize profits is imposed on
corporate management. Beyond this, however, the law should allow shareholders and nonshareholders to negotiate whatever
changes they want in the form contract provided corporate law.
Although they provide different reasons for doing so, the essays in PROGRESSIVE CORPORATE LAW share a common
theme in rejecting the law and economics approach to corporate law. Indeed, one cannot read this collection of essays without
seriously questioning the validity of law and economics, both as it is applied to corporate law and to law more generally. The
essays, however, present widely diverging views of what should replace law and economics.
In "Communitarianism in Corporate Law: Foundations and Law Reform Strategies," David Millon argues for a communitarian
approach. Communitarianism views corporations not as an expedient way of establishing contracts between shareholders and
nonshareholders, but as a "community of interdependence, mutual trust, and reciprocal benefit" (p. 10). Consequently, Millon
calls for adoption of a "multifiduciary model" of corporate law which recognizes that "nonshareholders as well as shareholders
ought to be the beneficiaries of managerial decisionmaking" (p. 13). The problem with this approach over the single profit
maximizing duty recognized by law and economics is the difficulty in balancing the competing interests of shareholders and
nonshareholders. Yet too much can be made of this objection. The realities of business force managers to make decisions on
the basis of inadequate information all the time, and courts have effectively dealt with balancing of interests in other areas of law
such as tort and constitutional law.
In "Working Toward a New Paradigm," Lynne L. Dallas attempts to explain corporate behavior in terms of "power coalition"
theory. Shareholders and different groups of nonshareholders such as consumers and employees create coalitions within the
corporation as each groups seeks to increase its discretion and decrease its uncertainty. Thus, corporate conduct and decisions
are best understood as the decisions and conduct desired by the dominant coalition at any given point in time. While Dallas
does not propose much in the way of specific doctrinal changes, her power coalition theory provides an important alternative to
wealth maximization as a descriptive model.
In what is perhaps the volume's best essay, "Some Observations on Writing the Legal History of the Corporation in the Age of
Theory," Gregory Mark points out that whatever utility law and economics may have in other contexts, it has failed to deliver
"an adequate historical explanation of the evolution of corporate law" (p. 67). Mark adeptly surveys the historical literature and
reveals huge gaps in our understanding of how modern corporate law came to be. Mark's essay should be the starting point for
anyone interested in historical research on corporate law.
Douglas Branson offers one of the most severe attacks on law and economics in "The Death of Contractarianism and the
Vindication of Structure and Authority in Corporate Governance and Corporate Law." Branson contrasts the recommendations
of the American Law Institute on the duty of loyalty with the decisions of the Delaware Supreme Court, which he describes as
"our nation's chief arbiter of corporate practices and their interaction with law" (p. 97). Unfortunately, Branson does not give
enough emphasis to the issue of corporation statutes, including the Delaware legislature's reaction to the judicial decisions he
cites. Nor does offer a clear alternative to law and economics.
One of the more intriguing essays, "Experiencing Limited Liability: On Insularity and Inbreeding in Corporate Law" by Theresa
Gabaldon, challenges the "textbook" basis for forming corporations, i.e., limited liability. Gabaldon correctly points out the
inconsistency between tort and corporate law with respect to the compensation of victims of tortious conduct by corporations,
particularly in the area of product liability. She offers a number of admittedly partial solutions to this problem based on what she
calls "unadulterated common sense and, what is (in some manifestations) the close cousin common sense, feminism" (p. 112).
Many, however, would characterize her methodology, which emphasizes experience over the abstract theory and logic used by
law and economics, as traditional legal analysis at its best.
Two essays, "Game Theory and the Restoration of Honor to Corporate Law's Duty of Loyalty" by William W. Bratton and
"Trust. Contract. Process" by Lawrence E. Mitchell (the editor of this collection), emphasize the importance of protecting trust
as a substantive value in corporate law. Utilizing game theory, Bratton shows that trust is essential to efficient operation of
business enterprise. In so doing, he replaces the neoclassical micro economic model traditionally used in law and economics
with a more sophisticated economic model for legal analysis. Mitchell, by contrast, is concerned with the role trust as "one of
the most import institutions binding our society" (p. 185). Modern corporate law's emphasis on procedural fairness over
substantive fairness, a trend exacerbated by law and economics' insistence that there is no way to determine whether a
particular transaction is substantively fair, jeopardizes trust and "risks increasing the atomization of and interpersonal indifference
among its members" (p. 209).
Marleen O'Connor tackles the issue of employee expectations in "Promoting Economic Justice in Plant Closings: Exploring the
Fiduciary/Contract Law Distinction to Enforce Implicit Employment Agreements." Despite its imposing title, O'Connor's essay
presents a tightly argued and doctrinally useful solution to the problem of protecting employee's reasonable expectations of long
term employment. Combining communitarian arguments regarding trust with economic arguments regarding X-efficiency, she
makes a powerful case for finding implicit long-term contracts in what are normally considered "at-will" employment
agreements. Like Bratton's use of game theory, O'Connor's attention to X-efficiency has great promise since it allows for
doctrinal change without wholesale rejection of wealth maximization as a principle of corporate law.
In a particularly timely essay, "Legitimacy of Multinational Corporations," Eric W. Orts calls for the creation of a specific law of
multinational corporations. Corporate lawyers generally view legal problems for multinational firms as a choice of law question.
From this point of view, the trick is to determine which country law applies to the issue at hand. Orts, however, suggests that
multinational corporations should be treated as a specific type of business firm governed by a separate body of international
law, i.e., something similar to a NAFTA or GATT for corporate law. Political realities present obvious impediments to the
realization of this goal, but Orts nonetheless establishes a framework for further research.
The final essay, "On the Frontier of Capitalism: Implementation of Humanomics by Modern Publicly Held Corporations -- A
Critical Assessment" by Lewis D. Solomon, calls for the most radical change in corporate law. Solomon argues that
management must consider not only the competing interests of shareholders and nonshareholders but also the interests of the
environment. However attractive "humanomics" maybe in theory, it is probably too unwieldy to be taken seriously as a basis for
reforming corporate law.
The essays in PROGRESSIVE CORPORATE LAW deserve a wide reading. Not only do they provide a devastating critique
of the paradigm foisted on corporate law by the law and economics movement, the essays also suggest innovative new
paradigms for the future of corporate law.
