The New Corporate Governance in Theory and Practice

by Bainbridge, Stephen

• ISBN13: 9780195337501
• ISBN10: 0195337506
• Format: Hardcover
• Copyright: 2008-07-23
• Publisher: Oxford University Press

Summary

Forty years ago, managerialism dominated corporate governance. In both theory and practice, a team of senior managers ran the corporation with little or no interference from other stakeholders. Shareholders were essentially powerless and typically quiescent. Boards of directors were littlemore than rubber stamps. Today, the corporate governance landscape looks vastly different. The fall-out from the post-Enron scandal and implementation of the Sarbanes-Oxley Act have resulted in shareholder activism becoming more widespread, while many observers call for even greater empowerment. The notion that the boardof directors is a mere pawn of top management is increasingly invalid, and as a result, modern boards of directors typically are smaller than their antecedents, meet more often, are more independent from management, own more stock, and have better access to information. The New Corporate Governance in Theory and Practice offers an interdisciplinary analysis of the emerging board-centered system of corporate governance. It draws on doctrinal legal analysis, behavioral economic insights into how individuals and groups make decisions, the work of new institutionaleconomics on organizational structure, and management studies of corporate governance. Using those tools, Stephen Bainbridge traces the process by which this new corporate governance system emerged, and explores whether such changes are desirable or effective.

Author Biography

Stephen M. Bainbridge is the William D. Warren Professor of Law at UCLA, where he currently teaches Business Associations, Unincorporated Business Associations, and Advanced Corporation Law. He previously taught at the University of Illinois Law School, where he received the 'Best Instructor Award' from the Class of 1990. He also taught at the Harvard Law School, La Trobe University in Melbourne, Australia, and at the Aoyama Gakuin University in Tokyo. Professor Bainbridge has published several books and over 50 law review articles on a variety of topics, but with a strong emphasis on the law and economics of public corporations. He currently serves on the Editorial Advisory Board of the Journal of Markets and Morality and the Executive Committee of the Federalist Society's Corporations, Securities, & Antitrust Group.

Table of Contents

Preface	p. ix
Acknowledgements	p. xiii
Introduction	p. 1
On the Necessity of Models	p. 2
The Basic Dichotomy: Consensus Versus Authority	p. 3
The Separation of Ownership and Control	p. 4
The Central Problem of Corporate Governance	p. 6
The Survival Value of the Separation of Ownership and Control	p. 6
Theories of Corporate Governance	p. 8
The Domain of Director Primacy	p. 12
Is a Unified Field Theory of Corporate Governance Possible?	p. 14
The Plan of the Work	p. 16
The Means and Ends of Corporate Governance	p. 23
The Corporation as Person	p. 25
The Corporation as Entity	p. 26
The Corporation as Nexus of Contracts	p. 28
Judicial Acceptance	p. 30
The Hypothetical Bargain Methodology	p. 30
Implications of the Contractarian Model	p. 32
Locating the Nexus	p. 33
The Shareholders' Deal	p. 35
The Bargaining Parties	p. 37
The Bargain over the Means of Corporate Governance	p. 37
On the Necessity of Fiat	p. 38
Fiat by Contract?	p. 45
The Inefficiency of Multiple Constituencies	p. 45
Allocating Control: Why Do Only Shareholders Vote?	p. 50
Why Not Shareholder Primacy?	p. 53
The Bargain over the Ends of Corporate Governance	p. 57
Director Primacy Versus Team Production	p. 60
Incorporating Shareholder Wealth Maximization into Director Primacy	p. 65
The "Problem" of Agency Costs	p. 73
Why a Board?	p. 77
Groups and Individuals	p. 78
The Board as Production Team	p. 79
Groups v. Individuals: Experimental Evidence	p. 82
Groups and Bounded Rationality	p. 89
Individual v. Group Decision-Making Biases	p. 94
Agency Costs	p. 100
Director Primacy in the Courts	p. 105
The Business Judgment Rule	p. 106
Judicial Review of Operational Decisions	p. 108
First Principles	p. 111
Defending Deference to Board Authority	p. 114
Encouraging Risk-Taking	p. 114
Judges Are Not Business Experts	p. 120
Impact on the Board's Internal Dynamics	p. 124
Corporate Decisions Affect Nonshareholder Constituencies, But So What?	p. 126
The Limits of Abstention	p. 127
The Rule of Undivided Loyalty	p. 129
The Presumption in Favor of Authority	p. 130
The Paradigm Conflict of Interest: The Unsolicited Takeover Bid	p. 134
The Academics' Balance(s)	p. 134
Delaware's Balance	p. 136
Why Not Passivity?	p. 141
Summation	p. 153
The Shift from Managerialism to Director Primacy	p. 155
The Evolving Role of the Board of Directors	p. 157
The Emergence of the Monitoring Board	p. 160
Boards Today	p. 161
Best Practices	p. 163
Compensation Practices	p. 167
Reputational Concerns	p. 171
Judicial Insistence on Informed Decision Making	p. 173
Judicial Pressure for Director Independence	p. 175
Sarbanes-Oxley and the Board of Directors	p. 176
The Majority Independent Board and Its Committees	p. 177
Is an Independent Board Essential for Director Primacy?	p. 187
The Bottom Line: Are Boards Becoming More Effective?	p. 198
The Future of Corporate Governance: Director or Shareholder Primacy	p. 201
Shareholders Are Rationally Apathetic	p. 202
Institutional Passivity	p. 203
Why Are Institutions Passive?	p. 207
Vehicles for Shareholder Activism	p. 209
Exit	p. 209
Proxy Contests	p. 210
Withholding One's Votes in Director Elections	p. 212
Shareholder Proposals	p. 214
Communication	p. 219
Litigation	p. 220
Proposals for Expanding the Shareholder Franchise	p. 222
Reforming the Director Nomination Process	p. 222
Proposals to Reform the Mechanics of the Voting Process	p. 224
Expanding the Substance of Shareholder Voting Rights	p. 225
Should the Shareholder Franchise Be Expanded?	p. 225
Pathologies of Voting	p. 226
The Revealed Preferences of Shareholders	p. 227
Why Not Shareholder Democracy?	p. 228
The Risk of Private Rent Seeking	p. 228
The Case for Preserving the Board of Directors' Authority	p. 233
Index	p. 237
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