The Washington & Lee Law Review is publishing a symposium celebrating the scholarly careers of Professors Lyman Johnson and David Millon on the occasion of their respective retirements. My essay, The Separation of Corporate Law and Social Welfare, is a contribution to the symposium. It reflects on a proposition that has motivated Johnson and Millon’s work across three decades—that corporate law should concern itself with social welfare.
The essay’s approach is historical. It begins with quarter century after World War II, when corporate legal theory pursued an institutional vision in which corporations and the law that creates them protect people from the ravages of volatile free markets. The institutional vision reflected the practice. Corporate managers, seeking to avoid confrontation with a powerful regulatory state, co-operated with it, taking the lead in pension and healthcare provision in tandem with a long run of successful financial performance. Market controls were thought to have been rendered irrelevant in the context of a successfully managed economy. Shareholders were dismissed as wealthy rentiers.
The picture of harmony between corporate institutions and social objectives disintegrated during the 1970s along with the New Deal political coalition. Economic performance stalled, and managers, formally seen as successful technocrats, came to be pictured as failures. Managers concomitantly ceased to cooperate with the government, stonewalling against new regulatory initiatives. Corporate social responsibility came to prominence in response. So did a focus on a newly-invented topic, corporate governance. Advanced theoretical opinion simultaneously took a different turn, seeking to unleash market controls on slack managers under the agency cost rubric. The new agency paradigm brought shareholder value to the fore as the key to agency cost control and enhanced productivity, reversing the assumptions that had prevailed during the post-war period.
As the 1980s began, each of social responsibility, management control, and shareholder value competed to capture the new but largely empty vessel of corporate governance and fill it with content. The competition played itself out when corporate legal institutions and market forces came to blows over questions concerning hostile takeovers. By 1990, it seemed like the institutions, and in particular management, had won. But a different picture has emerged as the years have gone by. It is now clear that the market side really won the battle of the 1980s, succeeding in entering a wedge between corporate law and not only management prerogative but social welfare. The distance between the welfarist enterprise of the post-war era and the concerns that motivate today’s corporations (and today’s corporate legal theory) has been widening ever since. Today we have a vision of the corporation and of the role it plays in society that is markedly different from the vision that prevailed in the post-war era, a vision reflected on the ground, where corporations pursue downsizing, cost-cutting, and outsourcing and so loom less large in the lives of most people.
It is often said today that, as a matter of economics, shareholder value enhancement proxies as social welfare enhancement. But the essay shows the association to be false. It is also said that shareholding has been democratized, aligning the shareholder interest with that of society as a whole. But this proposition also is false. Although more people have interests in shares, the shareholder interest retains substantially the same upper bracket profile that characterized it at the end of World War II.
Corporate law, thus separated from social welfare, today provides a framework well-suited to attainment of shareholder objectives, which in fact have been realized for the most part. If the practice continues to evolve in this mode, the field of corporate law can be expected to fall away from public policy margin and evolve as a narrow private law domain.
William W. Bratton is Nicholas F. Gallicchio Professor of Law and Co-Director of the Institute for Law and Economics at the University of Pennsylvania Law School.