Reforming Corporate Governance: What History Can Teach Us

In this article, I briefly review the history of corporate law, and then describe current legal distinctions among organizational forms in order to argue that one of the characteristics that distinguishes corporations from partnership-type forms is the set of default rules that help organizers to lock in capital, without locking in the investors. I argue that such lock-in is probably attractive because it allows business organizers to precommit not to withdraw capital from the venture prematurely or capriciously. I then propose that corporate governance reform proposals be distinguished according to whether their purpose and effect is to strengthen the independence and information available to boards, to enhance shareholder "voice," or to make it easier for shareholders to "exit." If the purpose and effect of a corporate governance reform proposal is to make it easier for shareholders to "exit," by, say, requiring boards to submit takeover offers to a shareholder vote, or permitting shareholders to propose and mandate (by election) distributions, dissolution or asset sales, I argue in this paper that such a proposal is at odds with the "lock-in" function of corporate law. Since business organizers would find it difficult to achieve effective lock-in using other currently available organizational forms, eliminating or weakening the lock-in potential of the corporate law choice by statutorily requiring corporations to give shareholders such powers would take away an important organizational option that business organizers and investors currently have. This option has been eagerly sought out and used by business organizers in the U.S. for more than 150 years, and appears to be associated with substantial economic innovation and growth. Thus, it seems unwise on the face of it to change the law in ways that would eliminate this option. On the other hand, if the purpose and effect of a corporate governance reform proposal is to enhance the monitoring capabilities of corporate boards, or to facilitate shareholder "voice," such a proposal is not obviously at odds with the lock-in function of the corporate form, and may well reduce agency costs without unduly subverting the role that the corporate form serves in addressing the team production problem.