of the contributions and returns of all stakeholders in the firm. Under this model stakeholders other than investors are not given direct representation on the corporate board. Rather, these other stakeholders are to be protected by relaxing the board's duty or incentive to represent only the interests of shareholders, thus giving the board greater discretion to look after other stakeholders'interests The fiduciary model finds its most explicit recognition in U.s. law in the form of constituency statutes that permit boards to consider the interests of constituencies other than shareholders in mounting takeover defenses. Margaret Blair and Lynn Stout sophisticated American advocates of the fiduciary model, also claim to find support for this normative model in other, broader aspects of U.S. corporate law. 11 In the U.K., the fiduciary model is a key element in the ongoing debate over the duties of corporate directors. 12 The second group of stakeholder models substitutes direct stakeholder representatives for fiduciary directors. In this"representative"model of the corporation two or more stakeholder constituencies appoint representatives to the board of directors who then elaborate policies that maximize the joint welfare of all stakeholders, subject to the bargaining leverage that each group brings to the boardroom table. In this case the board functions ideally as a kind of collective fiduciary, even though its individual members remain partisan representatives. The board of directors(or supervisory board)then becomes an unmediated"coalition of stakeholder groups"and functions as an arena for cooperation with respect to the function of monitoring the management as well as an arena for resolving "conflicts with respect to the specific interests of different stakeholder groups. "13 Neither the fiduciary nor the representative stakeholder models, however, constitute at bottom a new approach to the corporation. Rather, despite the new rhetoric with which the stakeholder models are presented, and the more explicit economic theorizing that 11. Margaret M. Blair& Lynn A Stout, A Team Production Theory of Corporate Lay 85VA.L.REV.247(1999) 12. Company Law Reform Steering Group, Modern Company Law for a Competitive Environment: The Strategic Framework 39-46 March 1999)(setting forth the alternatives of maintaining the existing directorial duty of following enlightened shareholder interest or reformulating a pluralist duty to all major stakeholders in order to encourage firm specific investment. 13. Reinhard H. Smith and Gerald Spindler, Path Dependence, Corporate Governance and Complementarity-A Comment on Bebchuk and Roe, the Johann Wolfgang Goethe-Universitat Working Paper Series in Finance and Accounting, No 27 (1999),atp.14 8
11. Margaret M. Blair & Lynn A. Stout, A Team Production Theory of Corporate Law, 85 VA. L. REV. 247 (1999) 12. Company Law Reform Steering Group, Modern Company Law for a Competitive Environment: The Strategic Framework 39-46 (March 1999) (setting forth the alternatives of maintaining the existing directorial duty of following enlightened shareholder interest or reformulating a “pluralist” duty to all major stakeholders in order to encourage firm specific investment.) 13. Reinhard H. Smith and Gerald Spindler, Path Dependence, Corporate Governance and Complementarity – A Comment on Bebchuk and Roe, the Johann Wolfgang Goethe-Universitat Working Paper Series in Finance and Accounting, No. 27 (1999), at p. 14. 8 of the contributions and returns of all stakeholders in the firm. Under this model, stakeholders other than investors are not given direct representation on the corporate board. Rather, these other stakeholders are to be protected by relaxing the board’s duty or incentive to represent only the interests of shareholders, thus giving the board greater discretion to look after other stakeholders’ interests. The fiduciary model finds its most explicit recognition in U.S. law in the form of constituency statutes that permit boards to consider the interests of constituencies other than shareholders in mounting takeover defenses. Margaret Blair and Lynn Stout, sophisticated American advocates of the fiduciary model, also claim to find support for this normative model in other, broader aspects of U.S. corporate law.11 In the U.K., the fiduciary model is a key element in the ongoing debate over the duties of corporate directors.12 The second group of stakeholder models substitutes direct stakeholder representatives for fiduciary directors. In this “representative” model of the corporation, two or more stakeholder constituencies appoint representatives to the board of directors, who then elaborate policies that maximize the joint welfare of all stakeholders, subject to the bargaining leverage that each group brings to the boardroom table. In this case the board functions ideally as a kind of collective fiduciary, even though its individual members remain partisan representatives. The board of directors (or supervisory board) then becomes an unmediated “coalition of stakeholder groups” and functions as “an arena for cooperation with respect to the function of monitoring the management” as well as an arena for resolving “conflicts with respect to the specific interests of different stakeholder groups.”13 Neither the fiduciary nor the representative stakeholder models, however, constitute at bottom a new approach to the corporation. Rather, despite the new rhetoric with which the stakeholder models are presented, and the more explicit economic theorizing that
sometimes accompanies them, they are at heart just variants on the older manager- oriented and labor-oriented models. Stakeholder models of the fiduciary type are in effect just reformulations of the manager-oriented model, and suffer the same weaknesses While untethered managers may better serve the interests of some classes of stakeholders, such as a firms existing employees and creditors, the managers'own nterests will often come to have disproportionate salience in their decision-making, with costs to some interest groups- such as shareholders, customers, and potential new employees and creditors- that outweigh any gains to the stakeholders who are benefitted Moreover, the courts are evidently incapable of formulating and enforcing fiduciary duties of sufficient refinement to assure that managers behave more efficiently and fairly Stakeholder models of the representative type, in turn, closely resemble yesterdays labor-oriented model --though generalized to extend to other stakeholders as well -and are again subject to the same weaknesses. The mandatory inclusion of any set of stakeholder representatives on the board is likely to impair corporate decision-making processes with costly consequences that outweigh any gains to the groups that obtain representation SHAREHOLDER-OR| ENTED(OR“ STANDARD”) MODEL With the abandonment of a privileged role for managers, employees, or the state in corporate affairs, we are left today with a widespread normative consensus that shareholders alone are the parties to whom corporate managers should be accountable A. In Whose Interest? This is not to say that there is agreement that corporations should be run in the interests of shareholders alone, much less that the law should sanction that result. All thoughtful people believe that corporate enterprise should be organized and operated to serve the interests of society as a whole, and that the interests of shareholders deserve no greater weight in this social calculus than do the interests of any other members of society The point is simply that now, as a consequence of both logic and experience, there is convergence on a consensus that the best means to this end- the pursuit of aggregate social welfare -is to make corporate managers strongly accountable to shareholder interests, and (at least in direct terms) only to those interests. It follows that even the extreme proponents of the so-called "concession theory of the corporation can embrace the primacy of shareholder interests in good conscience 14 14. In a hoary debate that cross cuts jurisdictional boundaries, proponents of the view that corporations exist by virtue of a state"concession" or privilege have also been associated with the view that corporations ought to be governed in the interests of society 9
14. In a hoary debate that cross cuts jurisdictional boundaries, proponents of the view that corporations exist by virtue of a state “concession” or privilege have also been associated with the view that corporations ought to be governed in the interests of society 9 sometimes accompanies them, they are at heart just variants on the older manageroriented and labor-oriented models. Stakeholder models of the fiduciary type are in effect just reformulations of the manager-oriented model, and suffer the same weaknesses. While untethered managers may better serve the interests of some classes of stakeholders, such as a firm’s existing employees and creditors, the managers’ own interests will often come to have disproportionate salience in their decision-making, with costs to some interest groups – such as shareholders, customers, and potential new employees and creditors – that outweigh any gains to the stakeholders who are benefitted. Moreover, the courts are evidently incapable of formulating and enforcing fiduciary duties of sufficient refinement to assure that managers behave more efficiently and fairly. Stakeholder models of the representative type, in turn, closely resemble yesterday’s labor-oriented model -- though generalized to extend to other stakeholders as well -- and are again subject to the same weaknesses. The mandatory inclusion of any set of stakeholder representatives on the board is likely to impair corporate decision-making processes with costly consequences that outweigh any gains to the groups that obtain representation. IV. THE SHAREHOLDER-ORIENTED (OR “STANDARD”) MODEL With the abandonment of a privileged role for managers, employees, or the state in corporate affairs, we are left today with a widespread normative consensus that shareholders alone are the parties to whom corporate managers should be accountable. A. In Whose Interest? This is not to say that there is agreement that corporations should be run in the interests of shareholders alone, much less that the law should sanction that result. All thoughtful people believe that corporate enterprise should be organized and operated to serve the interests of society as a whole, and that the interests of shareholders deserve no greater weight in this social calculus than do the interests of any other members of society. The point is simply that now, as a consequence of both logic and experience, there is convergence on a consensus that the best means to this end -- the pursuit of aggregate social welfare -- is to make corporate managers strongly accountable to shareholder interests, and (at least in direct terms) only to those interests. It follows that even the extreme proponents of the so-called “concession theory” of the corporation can embrace the primacy of shareholder interests in good conscience.14