Written by Brian R. Cheffins, S.J. Berwin Professor of Corporate Law, Faculty of Law, University of Cambridge, UK.

What do you need to know about key corporate participants to understand corporate governance and the corporate law rules applicable to publicly traded companies, the type of firm corporate governance addresses primarily?  Advanced Introduction to Corporate Governance Law and Regulation identifies the aspects which are essential.  This post describes the economically oriented analytical framework the book draws upon to do so before discussing briefly other features that help to ensure the book offers the advanced introduction its title advertises.

The term “corporate governance” was first used with regularity in the 1970s.  During the same decade what would become a highly influential “contractarian” model of the corporation initially gained traction.  Economists traditionally treated firms as “black boxes” undeserving of close attention because of confidence that competitive forces would dispatch to oblivion any business enterprise that failed to prioritize profit-seeking effectively.  However, with a much-cited 1976 article by Michael Jensen and William Meckling’s serving as a departure point, economists began to concern themselves with how the conflicting objectives of individual participants associated with firms might be aligned so as to yield the hypothesized firm-level focus on profit seeking. 

As economists began to look inside the firm, the prevailing view became that market exchanges did not end at a firm’s front door.  Instead, the internal organization of business enterprises was the result of voluntary arrangements market forces did much to shape.  Market dynamics in turn defined in substantial measure the relationship between a firm’s shareholders, creditors, managers and so on.  A corporation thus was, as Jensen and Meckling said, a “nexus for contracting relationships,” or, according to other observers, a “nexus of contracts.”

In contrast with the contractarian conceptualization of the corporation as a mere nexus for contracting relationships, from a legal perspective a corporation is a distinct entity and an artificial person.  The fact a corporation is treated under the law as a separate entity does much to shape corporate formalities and corporate law doctrine.  Still, notwithstanding incorporation, individuals associated with companies become involved in corporate affairs voluntarily and interact on the basis of reciprocal expectations and behaviour.  Correspondingly, despite a company’s legal status, to understand the challenges corporate governance is designed to address it is beneficial to deconstruct the corporate entity and examine directly the bargaining dynamics affecting key corporate participants. 

In the early 1980s, American corporate law academics began to adopt and deploy the nexus of contracts metaphor and contractarian analysis has loomed large in corporate law scholarship in the years since.  Still, while the nexus of contracts conceptualization of the corporation moved to the intellectual forefront, numerous corporate law academics have had serious misgivings.  For instance, a deregulatory emphasis has rankled.  There indeed has been a tendency among contractarian corporate law theorists to use economic analysis to argue against regulation.  Nevertheless, thinking about the corporation from a contractarian perspective does not foreclose arguments in favour of state intervention.  With respect to the key corporate constituencies that comprise the nexus of contracts a corporation represents there are various economically oriented rationales for regulation where the animating principle is increasing economic efficiency.  Chapter Four of Advanced Introduction to Corporate Governance Law and Regulation canvasses examples while also drawing attention to plausible justifications for state intervention in the corporate governance space not based on economic reasoning.   

Bargaining arrangements within companies are rarely uniform.  Dimensions along which publicly traded companies vary include the size and type of the business, the personalities and skills of the directors, the share ownership structure and the attributes of the senior management team.  Despite the wide range of bargaining arrangements companies potentially encompass, a number of common elements can be discerned and deployed analytically to understand the market dynamics that shape corporate governance.  Chapter Two of Advanced Introduction to Corporate Governance Law and Regulation summarizes these. 

Chapter Two categorizes the core elements of bargaining arrangements underpinning the contractual nexus corporations represent under the headings of duration, return, risk of loss, control, conflicts of interest and bargaining.  Succinctly, duration relates to the longevity of a relationship involving corporate participants, anticipated and actual.  Returnis comprised of whatever a party associated with a company receives from a bargaining relationship.  Risk encompasses the possibility that a transactional arrangement will not provide the return for which the participants have contracted or otherwise anticipate receiving.  Those with control in the corporate context have scope to shape the long-term objectives of the business and to decide how those objectives are to be met.  Conflicts of interest frequently affect intra-corporate relationships, with the best known in the corporate governance realm being a concept Jensen and Meckling popularized, managerial agency costs.  Finally, company participants often rely on bargaining to resolve issues which affect relations between them, including conflicts of interest. 

Chapter Three of Advanced Introduction to Corporate Governance Law and Regulation focuses on the core elements of the bargaining arrangements companies encompass to describe the position of shareholders, creditors, employees, directors and executives in publicly traded companies.  Subsequent chapters draw heavily on Chapter Three’s analysis to offer numerous governance-related insights regarding these key corporate participants.  For instance, as Chapter Four discusses, achieving complete specificity with bargaining arrangements is usually not feasible, which creates scope for potentially beneficial state intervention. 

The deployment of economic analysis is just one way Advanced Introduction to Corporate Governance Law and Regulation puts corporate governance and corporate law into perspective for the reader.  Chapter Four builds on the overview of justifications for regulation it identifies to offer a general primer on corporate governance regulation.  The book also contextualizes corporate governance and corporate law by offering a historical overview.  It additionally has a robust cross-border orientation lacking in most books dealing with corporate law.  The upshot is that Advanced Introduction to Corporate Governance Law and Regulation offers an ideal academic-oriented entree for readers interested in either corporate governance or corporate law, or both.  

Advanced Introduction to Corporate Governance Law and Regulation

Brian R. Cheffins, S.J. Berwin Professor of Corporate Law, Faculty of Law, University of Cambridge, UK

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Examination copy available here.