The (Misunderstood) Genius of American Corporate Law
In case it might be of interest, I wanted to share the abstract of a new article I’ve just finished, and submitted to the mysterious black box that is the law review selection process. The full paper is posted here.
In essence, the article challenges the conventional rhetoric of the corporate literature, which cites federalism as “the genius of American corporate law” – an engine of efficiency, motivating a race (or at least a leisurely walk) to the top. Others have dissented from this prevailing wisdom, of course, variously suggesting it is wrong as to either the vitality or the direction of the promised race (i.e., whether there is a race, and where it’s leading us). Upon closer reflection, however, such critiques are too forgiving. At least on its face, the conventional account misunderstands the basic question; its answer, as such, is not even wrong.
My critique, then, does not simply weigh in on the never-ending debate over a race to the top versus the bottom in corporate law. Instead, I highlight a fundamental flaw in the discourse behind the debate. Most critically, I decry the literature’s all but universal linkage of corporate law’s central goal – efficient regulation of the separation of ownership and control – with the central element of its institutional design – federalism and resulting state charter competition. In place of such linkage, I suggest an alternative account of the role of federalism in American corporate governance. This account identifies a distinctive purpose for federalism in corporate governance, highlights particular metrics of its efficiency, and encourages a reinvigorated study of institutional design in corporate law.
The full abstract is beneath the fold.
In the standard rhetoric of the corporate law literature, federalism is “the genius of American corporate law” – an engine of efficiency, motivating a race (or at least a leisurely walk) to the top. Some have dissented, suggesting that the prevailing wisdom is wrong as to either the direction or the vitality of the promised race. But the latter critiques are too forgiving. The standard account misunderstands the basic question; its answer, as such, is not even wrong. Rather than weighing in on the “race debate,” thus, I challenge the fundamentally flawed discourse behind it. I offer a distinct framework for evaluating the role of federalism in American corporate governance, which points to distinct measures of efficiency and a reinvigorated study of institutional design in corporate law.
To begin, I challenge the literature’s merger of two distinct competitions – state and managerial – into one. More critically, I decry the resulting linkage between corporate law’s central goal – efficient regulation of the separation of ownership and control – and the central element of its institutional design – federalism. That rhetorical linkage has led us astray in important respects: First, it has bootstrapped a role for federalism in advancing not merely the quality of corporate law, but also the substantive quality of corporate governance. Second, it has essentialized the role of federalism, casting it as indispensable to the production of good law. Dominant as these conceptions are in the discourse of corporate law, neither is true.
I suggest an alternative account of federalism’s contribution to American corporate governance. Federalism is not directed to the traditional goal of corporate law – regulation of the vertical separation of ownership and control within the firm. Rather, it advances a distinct, horizontal goal of regulating the relationship of the firm as a whole with state regulators external to it. Given as much, a federal regime is not dictated by a commitment to efficiency in corporate law. Rather, it is an institutional design choice, to be evaluated for its efficacy and utility – as well as its limitations – in one area of corporate law versus another.
I’d welcome your thoughts!