The New Corporate Governance in Theory and Practice

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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 little more 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 board of 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 institutional economics 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.

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Editorial Reviews

From the Publisher
"The phenomenon that lies at the heart of this book - which Stephen Bainbridge describes as 'director primacy' - is both real and important. Directors now exercise control over most corporations in a way that directors did not just a few decades ago, and while this director-centered governance structure has been embedded in corporation statutes from the advent of general corporation laws in the 1800s, prior to the 1970s most corporations in the United States combined imperial managers with compliant boards of directors. Bainbridge tells the back story on this 'transformation of corporate governance from managerialism to director primacy,' which is an important aspect of his theory because it supports the view that corporate law has evolved to an efficient state. He offers an updated and comprehensive statement of his theory that will become one of the touchstones of corporate governance debates for many years."
D. Gordon Smith
Glen L. Farr Professor of Law, Brigham Young University

"Stephen M. Bainbridge's book is a welcome and timely clarification of the truly important issues in the current debate over the governance structure of American corporations. Bainbridge marshals historical, theoretical and practical reasons to explain why the central role in corporate governance has always been assigned to the board of directors and should continue to be. In doing so, Bainbridge demonstrates the weaknesses in the claims of a small group of institutional investors (mainly state pension funds and labor unions) for a larger role in the management of American businesses. While Bainbridge's arguments are sophisticated, his presentation is straight-forward and easy to follow. This is an important book that should command the attention of anyone interested in corporate governance, whether specialist or layperson."
Michael P. Dooley
William S. Potter Professor of Law, University of Virginia

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Product Details

  • ISBN-13: 9780195337501
  • Publisher: Oxford University Press, USA
  • Publication date: 7/23/2008
  • Edition description: New Edition
  • Pages: 264
  • Product dimensions: 6.10 (w) x 9.30 (h) x 1.00 (d)

Meet the Author

Stephen 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.

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Table of Contents

Introduction 1

On the Necessity of Models 2

The Basic Dichotomy: Consensus Versus Authority 3

The Separation of Ownership and Control 4

The Central Problem of Corporate Governance 6

The Survival Value of the Separation of Ownership and Control 6

Theories of Corporate Governance 8

The Domain of Director Primacy 12

Is a Unified Field Theory of Corporate Governance Possible? 14

The Plan of the Work 16

1 The Means and Ends of Corporate Governance 23

The Corporation as Person 25

The Corporation as Entity 26

The Corporation as Nexus of Contracts 28

Judicial Acceptance 30

The Hypothetical Bargain Methodology 30

Implications of the Contractarian Model 32

Locating the Nexus 33

The Shareholders' Deal 35

The Bargaining Parties 37

The Bargain over the Means of Corporate Governance 37

On the Necessity of Fiat 38

Fiat by Contract? 45

The Inefficiency of Multiple Constituencies 45

Allocating Control: Why Do Only Shareholders Vote? 50

Why Not Shareholder Primacy? 53

The Bargain over the Ends of Corporate Governance 57

Director Primacy Versus Team Production 60

Incorporating Shareholder Wealth Maximization into Director Primacy 65

The "Problem" of Agency Costs 73

2 Why a Board? 77

Groups and Individuals 78

The Board as Production Team 79

Groups v. Individuals: Experimental Evidence 82

Groups and Bounded Rationality 89

Individual v. Group Decision-Making Biases 94

Agency Costs 100

3 Director Primacy in the Courts 105

The Business Judgment Rule 106

Judicial Review of Operational Decisions 108

First Principles 111

Defending Deference to Board Authority 114

Encouraging Risk-Taking 114

Judges Are Not BusinessExperts 120

Impact on the Board's Internal Dynamics 124

Corporate Decisions Affect Nonshareholder Constituencies, But So What? 126

The Limits of Abstention 127

The Rule of Undivided Loyalty 129

The Presumption in Favor of Authority 130

The Paradigm Conflict of Interest: The Unsolicited Takeover Bid 134

The Academics' Balance(s) 134

Delaware's Balance 136

Why Not Passivity? 141

Summation 153

4 The Shift from Managerialism to Director Primacy 155

The Evolving Role of the Board of Directors 157

The Emergence of the Monitoring Board 160

Boards Today 161

Best Practices 163

Compensation Practices 167

Reputational Concerns 171

Judicial Insistence on Informed Decision Making 173

Judicial Pressure for Director Independence 175

Sarbanes-Oxley and the Board of Directors 176

The Majority Independent Board and Its Committees 177

Is an Independent Board Essential for Director Primacy? 187

The Bottom Line: Are Boards Becoming More Effective? 198

5 The Future of Corporate Governance: Director or Shareholder Primacy 201

Shareholders Are Rationally Apathetic 202

Institutional Passivity 203

Why Are Institutions Passive? 207

Vehicles for Shareholder Activism 209

Exit 209

Proxy Contests 210

Withholding One's Votes in Director Elections 212

Shareholder Proposals 214

Communication 219

Litigation 220

Proposals for Expanding the Shareholder Franchise 222

Reforming the Director Nomination Process 222

Proposals to Reform the Mechanics of the Voting Process 224

Expanding the Substance of Shareholder Voting Rights 225

Should the Shareholder Franchise Be Expanded? 225

Pathologies of Voting 226

The Revealed Preferences of Shareholders 227

Why Not Shareholder Democracy? 228

The Risk of Private Rent Seeking 228

The Case for Preserving the Board of Directors' Authority 233

Index 237

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