Yale law school Program for Studies in Law Ec d Public polie Law and Economics Working Paper No 235 New York University Center for Law and Business Law and economics Working Paper No 013 Harvard law school John M. olin Center for Law Economics. and business Discussion Paper no 280 Yale International Center for Finance Working Paper No. 00-09 The end of History for Corporate law January 2000 Henry hansmann and reinier Kraakman This paper can be downloaded without charge from The Harvard John M. Olin Discussion Paper Series http://www.lawharvardedu/programs/olincenter The Social Science Research Network Electronic Paper Collection http://papers.ssrn.com/paper.taf?abstractid=204528
Yale Law School Program for Studies in Law, Economics, and Public Policy Law and Economics Working Paper No. 235 New York University Center for Law and Business Law and Economics Working Paper No. 013 Harvard Law School John M. Olin Center for Law, Economics, and Business Discussion Paper No. 280 Yale International Center for Finance Working Paper No. 00-09 The End of History for Corporate Law January 2000 Henry Hansmann and Reinier Kraakman This paper can be downloaded without charge from: The Harvard John M. Olin Discussion Paper Series: http://www.law.harvard.edu/programs/olin_center/ The Social Science Research Network Electronic Paper Collection: http://papers.ssrn.com/paper.taf?abstract_id=204528
THE END OF HISTORY FOR CORPORATE LAW Henry Hansmann Yale law school Visiting, NYU School of Law Reinier Kraakman Harvard law school January 2000 Comments welcome. Send correspondence to Henry Hansmann Reinier Kraakman NYU School of law room 335 Harvard Law school 40 Washington Square South Cambridge, MA 02138 New York. NY 10012 617496-3586 212-998-6132 617-496-6118fax 212-995-4763fax kraakman @law. harvard. edu henry hansmann @yale. edu Earlier drafts of this essay were presented at conferences entitled"Are corporate Governance Systems Converging? held at Columbia Law School, December 5 1997, and"Convergence and Diversity in Corporate Governance Regimes and Capital Markets, sponsored by Tilburg University in Eindhoven, The Netherlands on November 4-5, 1999. We both wish to thank the New York University School of Law and its Dean, John Sexton, for generous support in this project while both authors were visiting professors
THE END OF HISTORY FOR CORPORATE LAW Henry Hansmann Yale Law School Visiting, NYU School of Law Reinier Kraakman Harvard Law School January 2000 Comments welcome. Send correspondence to: Henry Hansmann NYU School of Law, Room 335 40 Washington Square South New York, NY 10012 212-998-6132 212-995-4763 fax henry.hansmann@yale.edu Reinier Kraakman Harvard Law School Cambridge, MA 02138 617-496-3586 617-496-6118 fax kraakman@law.harvard.edu Earlier drafts of this essay were presented at conferences entitled “Are Corporate Governance Systems Converging?” held at Columbia Law School, December 5, 1997, and “Convergence and Diversity in Corporate Governance Regimes and Capital Markets,” sponsored by Tilburg University in Eindhoven, The Netherlands, on November 4 - 5, 1999. We both wish to thank the New York University School of Law and its Dean, John Sexton, for generous support in this project while both authors were visiting professors
The End of History for Corporate Law Henry Hansmann Yale Law school Reinier Kraakman Harvard law school ABSTRACT Despite the apparent divergence in institutions of govenance, share ownership, capital markets, and business culture across developed economies, the basic law of the corporate form has already achieved a high degree of uniformity and continued convergence is likely. A principal reason for convergence is a widespread normative consensus that corporate managers should act exclusively in the economic interests of shareholders, including noncontrolling shareholders. This consensus on a shareholder- oriented model of the corporation results in part from the failure of alternative models of the corporation, including the manager-oriented model that evolved in the U.s. in the 1950s and 60s, the labor-oriented model that reached its apogee in German co-determination, and the state-oriented model that until recently was dominant in france and much of asi Other reasons for the new consensus include the competitive success of contemporary British and American firms, the growing influence worldwide of the academic disciplines of economics and finance, the diffusion of share ownership in developed countries, and the emergence of active shareholder representatives and interest groups in major jurisdictions. Since the dominant corporate ideology of shareholder primacy is unlikely to be undone, its success represents the "end of history for corporate law The ideology of shareholder primacy is likely to press all major jurisdictions toward similar rules of corporate law and practice. Although some differences may persist as a result of institutional or historical contingencies, the bulk of legal development worldwide will be toward a standard legal model of the corporation. For the most part, this development will enhance the efficiency of corporate laws and practices. In some cases however, jurisdictions may converge on inefficient rules, as when the universal rule of limited shareholder liability permits shareholders to externalize the costs of corporate torts JEL Classifications: F20. G34 K22
The End of History for Corporate Law by Henry Hansmann Yale Law School Reinier Kraakman Harvard Law School ABSTRACT Despite the apparent divergence in institutions of governance, share ownership, capital markets, and business culture across developed economies, the basic law of the corporate form has already achieved a high degree of uniformity, and continued convergence is likely. A principal reason for convergence is a widespread normative consensus that corporate managers should act exclusively in the economic interests of shareholders, including noncontrolling shareholders. This consensus on a shareholderoriented model of the corporation results in part from the failure of alternative models of the corporation, including the manager-oriented model that evolved in the U.S. in the 1950's and 60's, the labor-oriented model that reached its apogee in German co-determination, and the state-oriented model that until recently was dominant in France and much of Asia. Other reasons for the new consensus include the competitive success of contemporary British and American firms, the growing influence worldwide of the academic disciplines of economics and finance, the diffusion of share ownership in developed countries, and the emergence of active shareholder representatives and interest groups in major jurisdictions. Since the dominant corporate ideology of shareholder primacy is unlikely to be undone, its success represents the “end of history” for corporate law. The ideology of shareholder primacy is likely to press all major jurisdictions toward similar rules of corporate law and practice. Although some differences may persist as a result of institutional or historical contingencies, the bulk of legal development worldwide will be toward a standard legal model of the corporation. For the most part, this development will enhance the efficiency of corporate laws and practices. In some cases, however, jurisdictions may converge on inefficient rules, as when the universal rule of limited shareholder liability permits shareholders to externalize the costs of corporate torts. JEL Classifications: F20, G34, K22
l. INTRODUCTION Recent scholarship has emphasized institutional differences in governance, share ownership, capital markets, and business culture among European, American, and Japanese companies. Despite this apparent divergence, however, the basic law of corporate governance -indeed, most of corporate law-has achieved a high degree of uniformity across these jurisdictions, and continuing convergence toward a single standard model is likely. The core legal features of the corporate form were already well established in advanced jurisdictions 100 years ago, at the turn of the twentieth centur Although there remained considerable room for variation in governance practices and in the fine structure of corporate law throughout the twentieth century, the pressures for further convergence are now rapidly growing. Chief among these pressures is the recent dominance of a shareholder-centered ideology of corporate law among the business government, and legal elites in key commercial jurisdictions. There is no longer any serious competitor to the view that corporate law should principally strive to increase long term shareholder value. This emergent consensus has already profoundly affected corporate governance practices throughout the world. It is only a matter of time before its influence is felt in the reform of corporate law as we I. CONVERGENCE PAST: THE RISE OF THE CORPORATE FORM We must begin with the recognition that the law of business corporations had nineteenth century By that time, large-scale business enterprise in every ma/or o already achieved a remarkable degree of worldwide convergence at the end of the commercial jurisdiction had come to be organized in the corporate form, and the core functional features of that form were essentially identical across these jurisdictions. Those features, which continue to characterize the corporate form today, are: (1)full legal personality, including well-defined authority to bind the firm to contracts and to bond those contracts with assets that are the property of the firm as distinct from the firms owners, (2) limited liability for owners and managers, 3) shared ownership by investors of capital, (4) delegated management under a board structure, and ( 5) transferable shares 1. See, e.g., Mark Roe, Some Differences in Company Structure in Germany, Japan, and the United States, 102 YALE L.J. 1927(1993) Ronald J. Gilson Mark J Roe, Understanding the Japanese Keiretsu: Overlaps Between Company Governance and Industrial Organization, 102 YALE L.J. 871(1993): Bernard s Black& John C Coffee, Hail Britannia? Institutional Investor Behavior Under Limited Regulation, 92 McH.L.REVv.197(1994) 2. See Henry Hansmann and Reinier Kraakman, The Essential Role of Organizational Law (Yale Law School and Harvard Law school, 1999)
1. See, e.g., Mark Roe, Some Differences in Company Structure in Germany, Japan, and the United States, 102 YALE L. J. 1927 (1993); Ronald J. Gilson & Mark J. Roe, Understanding the Japanese Keiretsu: Overlaps Between Company Governance and Industrial Organization, 102 YALE L. J. 871 (1993); Bernard S. Black & John C. Coffee, Hail Britannia? Institutional Investor Behavior Under Limited Regulation, 92 MICH. L. REV. 1997 (1994). 2. See Henry Hansmann and Reinier Kraakman, The Essential Role of Organizational Law (Yale Law School and Harvard Law School, 1999). 1 I. INTRODUCTION Recent scholarship has emphasized institutional differences in governance, share ownership, capital markets, and business culture among European, American, and Japanese companies.1 Despite this apparent divergence, however, the basic law of corporate governance -- indeed, most of corporate law -- has achieved a high degree of uniformity across these jurisdictions, and continuing convergence toward a single standard model is likely. The core legal features of the corporate form were already well established in advanced jurisdictions 100 years ago, at the turn of the twentieth century. Although there remained considerable room for variation in governance practices and in the fine structure of corporate law throughout the twentieth century, the pressures for further convergence are now rapidly growing. Chief among these pressures is the recent dominance of a shareholder-centered ideology of corporate law among the business, government, and legal elites in key commercial jurisdictions. There is no longer any serious competitor to the view that corporate law should principally strive to increase longterm shareholder value. This emergent consensus has already profoundly affected corporate governance practices throughout the world. It is only a matter of time before its influence is felt in the reform of corporate law as well. II. CONVERGENCE PAST: THE RISE OF THE CORPORATE FORM We must begin with the recognition that the law of business corporations had already achieved a remarkable degree of worldwide convergence at the end of the nineteenth century. By that time, large-scale business enterprise in every major commercial jurisdiction had come to be organized in the corporate form, and the core functional features of that form were essentially identical across these jurisdictions. Those features, which continue to characterize the corporate form today, are: (1) full legal personality, including well-defined authority to bind the firm to contracts and to bond those contracts with assets that are the property of the firm as distinct from the firm’s owners,2 (2) limited liability for owners and managers, (3) shared ownership by investors of capital, (4) delegated management under a board structure, and (5) transferable shares
These core characteristics, both individually and in combination, offer important efficiencies in organizing the large firms with multiple owners that have come to dominate developed market economies. We explore those efficiencies in detail elsewhere. What is important to note here is that, while those characteristics and their associated efficiencies are now commonly taken for granted, prior to the beginning of the nineteenth century there existed only a handful of specially chartered companies that combined all five of these characteristics. The joint stock company with tradeable shares was not made generally available for business activities in England until 1844, and limited liability was not added to the form until 1855. While some American states developed the form for general use a few years earlier, all general business corporation statues appear to date from well after 1800. By around 1900, however, every major commercial jurisdiction appears to have provided for at least one standard-form legal entity with the five characteristics listed above as the default rules and this has remained the case ever sInce Thus there was already strong and rapid convergence a century ago regarding the basic elements of the law of business corporations. It is, in general, only in the more detailed structure of corporate law that jurisdictions have varied significantly since then The five basic characteristics of the corporate form provide, by their nature, for a firm that is strongly responsive to shareholder interests. They do not, however, necessarily dictate how the interests of other participants in the firm -such as employees, creditors other suppliers, customers, or society at large - will be accommodated. Nor do they dictate the way in which conflicts of interest among shareholders themselves-and particularly between controlling and noncontrolling shareholders-will be resolved Throughout most of the twentieth century there has been debate over these issues, and experimentation with alternative approaches to them Recent years, however, have brought strong evidence of a growing consensus on these issues among the academic, business, and governmental elites in leading jurisdictions. The principal elements of this consensus are that ultimate control over the corporation should be in the hands of the shareholder class; that the managers of the corporation should be charged with the obligation to manage the corporation in the interests of its shareholders; that other corporate constituencies, such as creditors 3. Henry Hansmann and Reinier Kraakman, What is Corporate Law?, Chapter 1 in Reinier Kraakman, Gerard Hertig, Henry Hansmann, hideki Kanda, eds, THE ANATOMY OF CORPORATE LAW: A COMPARATIVE AND FUNCTIONAL APPROACH(working draft, June 999); Henry Hansmann, The OWNERSHIP OF ENTERPRISE(1996) 4. Phillip Blumberg, THE LAW OF CORPORATE GROUPS: SUBSTANTIVE LAW, 9-20 (1988)
3. Henry Hansmann and Reinier Kraakman, What is Corporate Law? , Chapter 1 in Reinier Kraakman, Gerard Hertig, Henry Hansmann, & Hideki Kanda, eds, THE ANATOMY OF CORPORATE LAW: A COMPARATIVE AND FUNCTIONAL APPROACH (working draft, June 1999); Henry Hansmann, The OWNERSHIP OF ENTERPRISE (1996). 4. Phillip Blumberg, THE LAW OF CORPORATE GROUPS: SUBSTANTIVE LAW, 9-20 (1988). 2 These core characteristics, both individually and in combination, offer important efficiencies in organizing the large firms with multiple owners that have come to dominate developed market economies. We explore those efficiencies in detail elsewhere.3 What is important to note here is that, while those characteristics and their associated efficiencies are now commonly taken for granted, prior to the beginning of the nineteenth century there existed only a handful of specially chartered companies that combined all five of these characteristics. The joint stock company with tradeable shares was not made generally available for business activities in England until 1844, and limited liability was not added to the form until 1855.4 While some American states developed the form for general use a few years earlier, all general business corporation statues appear to date from well after 1800. By around 1900, however, every major commercial jurisdiction appears to have provided for at least one standard-form legal entity with the five characteristics listed above as the default rules, and this has remained the case ever since. Thus there was already strong and rapid convergence a century ago regarding the basic elements of the law of business corporations. It is, in general, only in the more detailed structure of corporate law that jurisdictions have varied significantly since then. The five basic characteristics of the corporate form provide, by their nature, for a firm that is strongly responsive to shareholder interests. They do not, however, necessarily dictate how the interests of other participants in the firm -- such as employees, creditors, other suppliers, customers, or society at large -- will be accommodated. Nor do they dictate the way in which conflicts of interest among shareholders themselves – and particularly between controlling and noncontrolling shareholders – will be resolved. Throughout most of the twentieth century there has been debate over these issues, and experimentation with alternative approaches to them. Recent years, however, have brought strong evidence of a growing consensus on these issues among the academic, business, and governmental elites in leading jurisdictions. The principal elements of this consensus are that ultimate control over the corporation should be in the hands of the shareholder class; that the managers of the corporation should be charged with the obligation to manage the corporation in the interests of its shareholders; that other corporate constituencies, such as creditors