Welfare, Dialectic, and Mediation in Corporate Law

This essay comments on William Klein's Criteria for Good Laws of Business Association. Klein bids us to cull, modify, and restate a set of proposed criteria for good corporate law so as to state the law's goals more clearly. This essay takes up the invitation. It suggests that the criteria on which we can agree lie at a high level of generality: Corporate law makes us all welfare consequentialists who agree that good corporate law is about encouraging productivity. We differ over the means to that end in debates that have over time evolved away from the ideological and toward the functional. Within this framework, corporate law has two core and generally accepted objectives - freedom of action for management and the minimization of the cost of capital. The firm's legal boundaries follow from these core objectives, and adherence to them triggers resistance to theoretical calls for social responsibility and constituent empowerment. In contrast, corporate law's core subject matter, the terms of the shareholder-manager agency relation, implicates tensions between the dual purposes of freedom of action for management and the minimization of the cost of capital. Corporate law mediates these tensions with open-ended terms and piecemeal resolutions. Although theorists have offered meta level means to resolve the tensions, the practice has never responded by endorsing the theories. Absent an ex ante set of empirically verifiable formulas for productive business organization, this debate will continue unresolved.