Sunday, January 18, 2009
Two Visions of Corporate Law, by M. Todd Henderson, University of Chicago - Law School, was recently posted on SSRN. Here is the abstract:
In a recent paper, Professor Robert Ahdieh argues that the debate about whether corporate law federalism leads to a race to the top or the bottom is pointless because state corporate law has little to do with the quality of corporate governance. Ahdieh thinks that markets, like those for corporate control and labor, are what make corporate governance what it is, not state competition for corporate charters.
This essay, which will appear in the George Washington Law Review as part of a colloquy on Ahdieh's thought-provoking paper, argues that the race debate matters because while the market for corporate control disciplines managers, it is competition among states that disciplines states from distorting the market for corporate control.
After showing that the race debate matters, the essay then tries to explain the persistence and ideological valence of the debate. Why is it that the debate continues despite innumerable empirical and theoretical studies on both sides, and why is it that defenders of the federalism model are mostly conservatives and critics are mostly liberals? The answer to both questions is that the race debate is really a conflict between two visions of corporate law held by these groups. Using the framework developed by Thomas Sowell, the essay shows how the split in the academic community about the optimality of the corporate law model can be explained by one's faith in experts (what Sowell calls the "unconstrained" vision) or by one's faith in processes, like markets (what Sowell calls the "constrained" vision). The essay then offers some preliminary thoughts on the implications of this description for corporate law scholarship and some ideas on how to move the debate forward.