Corporate Governance

Jon Macey on Corporate Governance (Part 2)

By J Robert Brown Jr et al.

We are discussingCorporate Governance, Promises Kept, Promises Broken, the provocative book by Jon Macey, Deputy Dean and Sam Harris Professor of Corporate Law, Corporate Finance, and Securities Law at Yale.

Macey defines corporate governance in terms of promises.

• The purpose of corporate governance is to persuade, induce, compel, and otherwise motivate corporate managers to keep the promises they make to investors.  another way to say this is that corporate governance is about reducing deviance by corporations where deviance is defined as any action by management or directors that are odds with the legitimate, investment-backed expectations of investors.  good corporate governance, then, is simply about keeping promises.  Bad governance (corporate deviance) is defined as promise-breaking behavior.

The metaphor allows Macey to immediately disarm critics who see corporate governance as not limited to the interests of shareholders and profit maximization.  In Macey's view, there is nothing wrong with promoting other interests as long as it is part of the promise made between owners and managers.  As he notes:

• The purpose of corporate governance is to safeguard the integrity of the promises made by corporations to investors, but investors and companies are left to their own devices (i.e., the contracting process) to define the content of the promises themselves.  Generally, the baseline goal is profit maximization.  Corporations are almost universally conceived as economic entities that strive to maximize value for shareholders.  But the goal of maximizing wealth for shareholders is, or should be, a matter of choice.  Investors should be free to choose to invest in ventures that purse others goals besides profit maximization.  

He concludes that there is "no legitimate theoretical or moral objection to those who assert that the goals of the modern corporation shold be to serve the broad interests of all stakeholders rather than to serve the narrow interests of just the shareholders . . . "  The only real limitation is that the company state in advance that this is the goal before investors invest.  In other words, the corporation is a "nexus of contracts" and the parties are free to order their relationships in any way that they deem best (within all legal parameters, of course).

In addition to providing a mechanism for expanding board considerations, Macey's approach also runs head long into the interpretive approach used by the Delaware courts.  Presumably, he would disagree with the determination in CA v. AFSCME, where the Court struck down a proposed bylaw that would require a board to reimburse expenses to insurgents who engage in a proxy contest and successfully elect a candidate to the board.  Private ordering presumably means that managers and shareholdes can effectively enter into these types of agreements.

We will continue this thread in the next post.

Full post as published by The Race to the Bottom on December 02, 2008 (boomark / email).