The Derivative Nature of Corporate Constitutional Rights

This Article engages the two hundred year history of corporate constitutional rights jurisprudence to show that the Supreme Court has long accorded rights to corporations based on the rationale that corporations represent associations of people from whom such rights are derived. The Article draws on the history of business corporations in America to argue that the Court’s characterization of corporations as associations made sense throughout most of the nineteenth century. By the late nineteenth century, however, when the Court was deciding several key cases involving corporate rights, this associational view was already becoming a poor fit for some corporations. The Court’s failure to account for the wide spectrum of organizations labeled “corporations” became increasingly problematic with the rise of modern business corporations that could no longer be fairly characterized as an identifiable group of people acting in association. Nonetheless, the Court continued to apply the associational rationale from early case law and expand corporate rights into the realm of speech and political spending without careful analysis of when the associational approach would be appropriate. We set forth a theoretical framework that we believe is consistent with the underlying logic of the Court’s jurisprudence, based on the concepts of derivative and instrumental rights. Specifically, we argue that the Court, to date, has not granted constitutional rights to corporations in their own right. Instead, it has granted rights to corporations either derivatively, when necessary to protect the rights of natural persons assumed to be represented by the corporation, or instrumentally, when necessary to protect the rights of parties outside the corporation. Further, we consider the implications that this framework, with a more nuanced view of the spectrum of corporations in existence, would have if applied to recent corporate rights cases, such as Citizens United. We believe this framework provides a principled path forward for the difficult line drawing between corporations that needs to be done

Making Money: Leverage and Private Sector Money Creation

In the wake of the financial crisis of 2008-2009, practitioners and theorists in law, finance, and economics are rethinking our theories about how the financial sector influences the real economy. In particular, they are reexamining the linkages among financial innovation, supply of credit and money, monetary policy, bubbles, financial stability, and economic growth. One of the key issues that is being reconsidered is the dynamics of how banks and other financial institutions drive credit creation and credit allocation, and how these factors, in turn affect the performance of the macroeconomy. In this article, I argue that, by providing an alternative to “money” (as traditionally defined), credit acts like money in stimulating the economy. When financial institutions that provide credit to the real economy borrow too much and become over-leveraged, the effect is like an uncontrolled expansion of the money supply, increasing the risk of dangerous asset bubbles and making financial markets unstable. Excessive leverage in the financial sector can set the stage for sudden and catastrophic contractions when multiple financial institutions all try to deleverage quickly and at the same time. This is because when financial institutions collectively withdraw credit from the market, this depresses aggregate economic growth, I further argue that the tendency of financial institutions to use too much leverage will not be self-correcting because leverage has helped to drive up profits and incomes over time in the financial sector. Thus, because of the substantial negative social externalities of excessive leverage, financial market regulations must be deployed to prevent financial institutions from using too much leverage

Are Publicly Traded Corporations Disappearing?

Corporate law scholars and economists have expressed concern recently about the fact that the number of publicly traded corporations in the United States has declined significantly since a peak in the late 1990s. In this Essay, in honor of the late Professor Lynn Stout, who devoted much of her career to the study of large publicly traded corporations, I show that despite a decline in the number of such corporations in the last two decades, they collectively account for about the same share of total economic activity as they have for the last six decades. While there has been turnover in the ranks of the largest corporations in recent decades, there is no reason to believe that these entitles are disappearing or becoming less important

Boards of Directors as Mediating Hierarchs

In June of 2014, the board of directors of Demoulas Supermarkets, Inc.—better known as Market Basket, a mid-sized chain of grocery stores in New England—decided to oust the man who had been CEO for the previous six years, Arthur T. Demoulas. Most likely, the board of directors did not anticipate what happened next: Thousands of employees, customers, and fans of Market Basket boycotted the stores and staged noisy public protests asking the board to reinstate “Arthur T.” The reaction by employees and customers made what had been a simmering, nasty, intrafamily feud within the closely held Market Basket chain into national news. In this era of overpaid and aloof CEOs, who expects employees and customers to go to bat for the CEO? The Demoulas clan feud provides useful context for thinking about the institutional mechanism for resolving disputes at the heart of corporate rate law: the granting of decisionmaking authority to a board of directors. In this Essay, the author highlights and explores the dispute resolution function of the corporate law requirement that corporations have boards of directors with “all corporate powers.” In Part II, the author briefly review the theory of team production in the economic literature, and walk through the argument laid out by Blair and Stout that the institution of boards of directors in corporations fits the description in the economics literature of an important solution to a “team production” problem. Part III discusses how the legal structure and duties of boards of directors ensures that most of the potentially highly contentious decisions that must be made in the management and governance of corporations will be resolved internally, without recourse to a court. If they cannot be resolved at a lower level, they will go to the board of directors and be resolved there, which means that a major task of boards is mediation and dispute resolution. Because the law requires that certain decisions must be made by the board, and that most decisions, once made by the board, cannot be challenged in court, board governance helps minimize the number of disputes that might otherwise boil over and require court adjudication. The Article argues that corporate law has traditionally supported this interpretation of what boards are supposed to be doing better than it supports the idea that boards are supposed to be agents of shareholders. In Part IV, the author reviews new theoretical work on corporate law that explores this idea, and Part V reviews empirical findings on boards of directors that provide support for this interpretation. Part VI reviews several developments in the Delaware courts that may inhibit the ability of boards to carry out this function before concluding how the effect that these developments may have on how corporate boards carry out their duties

The Great Pension Grab: Comments on Richard Ippolito, Bankruptcy and Workers: Risks, Compensation and Pension Contracts

Richard Ippolito models and attempts to assign a value to assets that employees have at risk in their employer firms. Second, he documents and proposes to explain the significant changes that we have seen in the last two decades in the terms on which corporations provide pension benefits to their employees, when they provide them at all. Third, and perhaps most importantly, the Article documents some of the changes in the degree to which employees today are actually bearing substantial risk in connection with the business enterprises that they work for than they have historically. This commentary begins with a discussion of Ippolito’s explanation of the changes in the pension plans and then makes comments on the significance of the fact that employees have become substantial risk bearers in corporations

Making Money: Leverage and Private Sector Money Creation

Contrary to the beliefs of most macroeconomists, the financial sector in the United States has grown too large in the last few decades as a consequence of financial innovation that has encouraged the use of too much “leverage” (financing with debt) by financial institutions (as well as by consumers and other borrowers). In Part II, I connect the dots between excessive leverage, risk, and financial market volatility. In Part III, I explore the role that the “shadow-banking sector” has had in driving leverage. In Part IV, I explain why leverage at the level of financial institutions matters for the macroeconomy. In Part V, I argue that excessive leverage causes instability in financial markets and in the economy as a whole. Finally, I conclude by arguing that these problems in the financial sector will not be selfcorrecting because leverage has helped to drive up profits and incomes over time in the financial sector

Boards of Directors as Mediating Hierarchs

In June of 2014, the board of directors of Demoulas Supermarkets, Inc.—better known as Market Basket, a mid-sized chain of grocery stores in New England—decided to oust the man who had been CEO for the previous six years, Arthur T. Demoulas. Most likely, the board of directors did not anticipate what happened next: Thousands of employees, customers, and fans of Market Basket boycotted the stores and staged noisy public protests asking the board to reinstate “Arthur T.” The reaction by employees and customers made what had been a simmering, nasty, intrafamily feud within the closely held Market Basket chain into national news. In this era of overpaid and aloof CEOs, who expects employees and customers to go to bat for the CEO? The Demoulas clan feud provides useful context for thinking about the institutional mechanism for resolving disputes at the heart of corporate rate law: the granting of decisionmaking authority to a board of directors. In this Essay, the author highlights and explores the dispute resolution function of the corporate law requirement that corporations have boards of directors with “all corporate powers.” In Part II, the author briefly review the theory of team production in the economic literature, and walk through the argument laid out by Blair and Stout that the institution of boards of directors in corporations fits the description in the economics literature of an important solution to a “team production” problem. Part III discusses how the legal structure and duties of boards of directors ensures that most of the potentially highly contentious decisions that must be made in the management and governance of corporations will be resolved internally, without recourse to a court. If they cannot be resolved at a lower level, they will go to the board of directors and be resolved there, which means that a major task of boards is mediation and dispute resolution. Because the law requires that certain decisions must be made by the board, and that most decisions, once made by the board, cannot be challenged in court, board governance helps minimize the number of disputes that might otherwise boil over and require court adjudication. The Article argues that corporate law has traditionally supported this interpretation of what boards are supposed to be doing better than it supports the idea that boards are supposed to be agents of shareholders. In Part IV, the author reviews new theoretical work on corporate law that explores this idea, and Part V reviews empirical findings on boards of directors that provide support for this interpretation. Part VI reviews several developments in the Delaware courts that may inhibit the ability of boards to carry out this function before concluding how the effect that these developments may have on how corporate boards carry out their duties

Director Accountability and the Mediating Role of the Corporate Board

One of the most pressing questions facing both corporate scholars and business people today is how corporate directors can be made accountable. Before addressing this issue, however, it seems important to consider two antecedent questions: To whom should directors be accountable? And for what? Contemporary corporate scholarship often starts from a shareholder primacy perspective that holds that directors of public corporations ought to be accountable only to the shareholders, and ought to be accountable only for maximizing the value of the shareholders\u27 shares. This perspective rests on the conventional contractarian assumption that the shareholders are the sole residual claimants and risk bearers in a public firm. More recent work in economics suggests, however, that this assumption is false. In particular, options theory and the growing literature on the contracting difficulties associated with firm-specific investment both support the claim that a wide variety of groups are likely to bear significant residual risk and enjoy significant residual claims on firm earnings. These groups include not only shareholders, but also creditors, managers, and employees. Thus economic efficiency may be best served not by requiring corporate directors to focus solely on shareholders\u27 interests, but by requiring them instead to maximize the sum of all the interests held by all the groups that bear residual risks and hold residual claims. In accord with this view, we argue that corporate directors ought to be viewed not as agents who serve only the shareholders, but as mediating hierarchs who enjoy ultimate control over the firm\u27s assets and outputs and who are charged with the task of balancing the sometimes-conflicting claims and interests of the many different groups that bear residual risk and have residual claims on the firm. This mediating model of the board\u27s role offers to explain a variety of important doctrines in U.S. law that preserve director autonomy and insulate the board from the command and control of the shareholders or indeed any other group. At the same time, the mediating model raises the question of why directors who are largely insulated from outside pressures should be expected to do a good job of running the firm. We suggest that answers to this question are available, but only if we are willing to look beyond the homo economicus model of rationally selfish behavior commonly employed in economic analysis and to consider as well the extensive empirical evidence in the social sciences literature on the phenomenon of intrinsically trustworthy, other-regarding behavior. We briefly explore how this literature both supports the claim that directors may behave trustworthily even when they do not have explicit incentives to do so, and suggests some of the circumstances that are likely to promote accountable director behavior

Director\u27s Duties in a Post-Enron World: Why Language Matters

This essay observes that, in the face of corporate scandals of the last few years, a number of prominent advocates for shareholder primacy have retreated to the position that directors and officers should attempt to maximize long run share value performance, rather than short term value. But the mantra of share value maximization has no distinctive meaning and policy implications if it is not interpreted to mean maximization of short term value. This is because the actions required to maximize share value in the long run are indistinguishable in practice from actions taken in pursuit of other more broadly-stated goals such as the maximization of wealth for all corporate stakeholders. Moreover, once its advocates accept the goal of long run share value maximization, then they should consider discarding the language of shareholder primacy, and the associated emphasis on high-powered, equity-based incentive systems. Such language is unnecessarily divisive and provocative. It draws attention to conflicting interests in corporate enterprises and announces that, when faced with conflicts, directors should choose actions that benefit shareholders even if those actions harm other stakeholders. In so doing, it tends to reduce cooperation, send signals that other participants and other values are of secondary importance, and undermine the ethical climate inside corporations. This essay proposes that, by contrast, the language of team production supports cooperative behavior, sharing of burdens and rewards, and win-win solutions