Corporate Power in Civil Society

David Sciulli

• Publisher: NYU Press
• Year: 2001
• ISBN:
  9780814739952
• Topic: Betriebswirtschaft
• Subtopic: Business allgemein

The corporate mega-mergers of the 1980s and 1990s raise many troubling questions for social scientists and legal scholars. Do corporate globalism and the new, streamlined corporation help or hinder the development of civil society? Does the new power that increasingly deregulated businesses wield undermine the rights of citizens, or is this threat being exaggerated? Who has the authority to get things done in a corporation's name and who can be held legally responsible for a corporation's misbehavior? What role, if any, should the courts play in strengthening the rights of individuals who challenge the actions of big business?

David Sciulli maps the legal limits of corporate power in our democratic society, and explores the role of the corporate judiciary in creating public policy. He argues that the judiciary must be more vigilant and act to curb corporate abuses. He demonstrates that when corporations exercise their private power in civil society, they are just as capable as the state of exercising it in ways that are dangerous, arbitrary, and challenge the basic institutional arrangements of society. Finally, Sciulli calls for sociologists to involve themselves more deeply in issues of corporate governance and commit their discipline to influencing the decisions of the courts.

1
Corporations and Civil Society
Institutional Externalities of Corporate Power

Hostile corporate takeovers and leveraged buyouts of publicly traded corporations in the United States disrupted the lives of millions of Americans in the 1980s. Although the typical business in the United States is not organized as a corporation, but rather as a proprietorship or partnership, corporations account for 90 percent of all business sales and receipts.¹ This is why reverberations stemming from the turbulence of the 1980s continue to be felt today on Wall Street, Main Street, and in boardrooms. Management, now more attuned to shareholder acquisitiveness, continues to restructure companies.² Business headlines routinely announce workforce cutbacks and at times medical benefit reductions and pension withholdings. From 1993 to 1995, 8 percent of all working Americans lost their jobs involuntarily.³ Workers between the ages of 35 and 54 were 55 percent more likely to be laid off or otherwise experience a job loss than during the 1970s.⁴

A case can also be made, however, that turbulence in the 1980s prepared the way for inflation-free economic growth in the 1990s and today.⁵ Beginning in mid-1997, the unemployment rate fell below 5 percent and has since inched down. Labor Department reports for October, released in November 1999, put unemployment at 4.1 percent, the lowest since January 1970. The rate for adult women—at 3.5 percent—is the lowest since 1953.⁶ In such a tight labor market, even workers at lower wage levels—those being paid $6 to $11 an hour—are able to push for pay increases and more flexible hours.⁷

The economic turbulence of the 1980s had a second broad impact on American society, however, one more significant and certainly more enduring than today’s job displacements and low unemployment. The hostile activity of the 1980s cast adrift from their traditional moorings three major institutions that structure—and control—corporate power in American society: corporate governance structures, the corporate judiciary, and corporate law doctrine. Our major concern in this book is to explore this second outcome of the 1980s. We wish to identify the larger, institutional consequences of today’s changes in corporate governance, judicial practice, and legal doctrine. Put more succinctly, our focus in this book is to identify what we call institutional externalities of corporate power. Which changes in corporate governance, judicial practice, and legal doctrine support the institutional design of American society, the most basic institutional arrangements spanning the state and civil society? And which changes if any enervate and ultimately challenge this design, these arrangements?

The institutional externalities of corporate power are elusive. In the absence of concepts that specifically bring them into view, they elude ready observation and, therefore, empirical study.⁸ We will see, however, that Delaware courts intervene into the internal governance of corporations at times on this ground. They operate on a traditional assumption unique to courts in equity, including Delaware’s Chancery Court, that there is some relationship between corporate governance and institutional design. Economists and “legal contractarians” cannot explain this behavior by Delaware courts. They fail here precisely because their concepts obscure the institutional externalities of corporate power rather than bring them into view. “Legal traditionalists,” legal scholars who continue to operate with more traditional legal concepts—including those employed by courts in equity—share Delaware courts’ concern about corporate power. However, they approach the issue of institutional externalities in exceedingly general ways, as part of an inquiry into “corporate purpose.” When contractarians ask them explicitly to point directly to some possible harms that corporate power might cause the larger society, traditionalists falter.

Both sets of legal scholars, therefore, share a difficulty. They have difficulty accounting fully for how Delaware courts analyze and resolve major corporate governance disputes. They have difficulty explaining the judicial behavior before them even as they describe this behavior, and the facts in dispute, in identical ways.

In this chapter we begin to present a framework of sociological concepts that we believe reveals (a) how to identify specifically the broader consequences of corporate power and (b) how to explain more fully the behavior of the corporate judiciary. On the one hand, it identifies the institutional externalities of corporate power today. On the other, it accounts for judicial behavior that contractarians and traditionalists acknowledge they cannot explain.⁹ More generally, we propose that the success of any theory of corporate power in civil society—economic, legal, or social—stands or falls on its ability to describe, explain, and then possibly predict the empirical behavior of the corporate judiciary and the empirical consequences of corporate power.

We can begin to suggest the importance of such a theory by taking four steps. First, we define corporate governance and begin to consider its general, social importance. Second, we elaborate by distinguishing the institutional design of democratic societies from that of formal democracies and imposed social orders. Third, we draw two related distinctions that begin to reveal at least in a preliminary way the possible institutional externalities of corporate power, those that challenge or enervate institutional design. Finally, we review American courts’ traditional role in monitoring corporate power.

I. Corporate Governance

“Corporate governance” refers to how decisions are made and, more importantly, how disputes are settled within publicly traded corporations.¹⁰

The term draws our attention to a basic fact of any complex team activity: Team members are not simply individuals but also players of positions. As individuals, team members may harm a team by acting in their own self-interests. This is well known and does not concern us here. Less well known, and of concern, is another threat to team success, namely when members promote a position one-sidedly. Team members may act one-sidedly in their own “positional interest,” thereby endeavoring to increase their “positional power” relative to that of other members in an honest belief that what is good for anyone in their position is good for the team. Thus, legal traditionalist Melvin Eisenberg (1989) distinguishes “positional conflicts” from traditional conflicts of interest (that is, self-dealing or lining one’s own pockets at the team’s expense) and shirking (that is, goldbricking).

Team success rests on whether and how conflicting positional interests are reconciled, that is, governed. This implies that effective governance also hinges on whether team leaders act relatively disinterestedly, by endeavoring to identify and then advance the collective interests of the whole, as opposed to acting one-sidedly in their positional interests. A central issue in any team activity, then, is how do members recruit and retain disinterested leaders?¹¹

The corporation is a complex team activity.¹² Its governance is a multi-player game—involving directors, managers, shareholders, and “stakeholders”—that takes place within an identifiable structure of authority.¹³

The term stakeholder is important but is also a catchall.¹⁴ It refers to all corporate constituents whose primary contribution to the enterprise is neither ownership (shareholding) nor overall control (top management). Thus, the term includes bondholders, long-term suppliers, and middle managers as well as line employees, retirees, and even residents of the local communities in which corporations operate or are headquartered. All of these constituents have a “stake” in the enterprise but neither own it nor control it.

With our team analogy in mind, we can now see that corporate governance refers to two distinct processes. The first is whether and how corporate officers (directors, top managers, controlling shareholders) reconcile the competing positional interests of shareholders and stakeholders. The second distinct process of corporate governance is whether and how a structure of authority encourages corporate officers to act disinterestedly, in the corporate entity’s collective interests, and discourages them from acting more one-sidedly, in their own positional interests.

Corporate governance therefore has little to do with how corporate officers settle personal squabbles and antagonisms at headquarters.¹⁵ It also has little to do with how they deal more generally with constituents’ self-interested behavior as individuals. Corporate governance has everything to do with the identifiable structure of authority within which corporate officers resolve disputes and make decisions over time. Does this structure institutionalize disinterested behavior by corporate officers, or does it permit directors, top managers, or controlling shareholders to act in their own positional interests?

Corporate governance is our central concern, but we cannot study it to the exclusion of everything else a corporation does. One major responsibility of top management, after all, is to see to it that the firm’s governance function facilitates, rather than needlessly obstructs, the firm’s production function, its competitiveness in securing resources and generating sales in domestic and global markets.¹⁶ Top management falls short here when the governance function needlessly consumes resources, hampers decision making, or distorts corporate officers’ scanning of markets for business opportunities. To prevent this from happening, top management endeavors to keep the ongoing, healthy competition for positional power within corporations from degenerating into trench warfare. Legal scholars call such warfare “positional conflicts.” When a corporation’s governance structure fails to resolve positional conflicts internally, when these conflicts reach state courts (in the form of a derivative suit, as we will see later), they become what legal scholars call “corporate governance disputes.”

It is instructive to consider some examples of positional conflicts that often escalate into governance disputes in state court, without yet considering the issues involved:

• Must management maximize share price during a change in corporate control, to shareholders’ immediate benefit? Or may management plan for the longer term, taking into account the stakes of other constituents, even as this also increases its positional power rather than maximizing shareholder wealth?

• When must a top management team facilitate the sale of its company to the highest bidder? When (and how) may management maintain or erect defenses against a particular bidder or against bidders in general?

• When (and how) does a board of directors adequately review a major corporate decision proposed by management—a sale of control, a defensive tactic—and when does a board fail to bear this responsibility?

• Is it permissible for individual directors or top managers to derive personal pecuniary benefits from a merger or any other corporate transaction?

• When, if ever, do the conflicts of interest of individual directors compromise the independence of the board? Is a board to be treated as a collection of individuals, whose possible conflicts are to be analyzed case by case? Or is a board to be treated as a collective entity, whose integrity can be violated by the actions of a few members?

• May management issue more shares of stock in order to dilute the voting power of controlling shareholders or a hostile bidder? May it otherwise substantially alter shareholder interests in the corporation? Is it acceptable to harm shareholder minorities while benefitting shareholder majorities or controlling shareholders?

• May top managers purchase control over the company they are managing from public shareholders—that is, may they “take it private” in an MBO, a management buyout? May they do so with outside financing secured by the company’s assets? May they do so without offering the company for sale, to see if its market value for shareholders is greater than the share price management is offering?

The details of the cases above are not important for our purposes now, nor are the details of how the corporate judiciary decides them. What is important is that state courts intervene into the internal governance of corporations in order to resolve disputes like these, and they do so at times on decidedly normative grounds with an eye ultimately, we propose, to institutional design. They do not restrict themselves to calculating what is the most profitable outcome for shareholders or even necessarily for the corporate entity. Nor do they restrict themselves to compromises, to balancing the positional interests of corporate officers, shareholders, and stakeholders. This will become clear when we review major Delaware court cases of the 1980s and 1990s in Chapter 5.

We can see already that the internal governance of publicly traded corporations is embedded within a larger economic, political, social, and cultural environment.¹⁷ This environment is comprised not only of economic pressures institutionalized in markets and political pressures institutionalized in state legislatures. It is also comprised of legal pressures institutionalized by courts and normative pressures institutionalized by elites’ general (often implicit) understandings of what is acceptable and unacceptable conduct in their society and, more importantly, by their society’s institutional design.¹⁸

The economic pressures on corporations are familiar, namely local, national, and global markets—product markets, capital markets, labor markets, and the new market for corporate control (that emerged in 1983). The pressures that state politics (and to a lesser extent national politics) exerts on corporations are somewhat less familiar but nonetheless well documented.¹⁹ We touch on these pressures at times in this volume. But the central focus is on two other sets of pressures, those stemming from courts and corporate law tradition and those stemming from the relationship between corporate governance and institutional design, which courts can either monitor or neglect. Our goal is to identify when and why the corporate judiciary imposes social norms of behavior on corporate officers, and when this reflects an implicit or explicit effort on its part to support institutional design. At these moments the corporate judiciary is enforcing corporate law, to be sure. But corporate law tradition itself is instructing them to bring social norms to corporate governance disputes, not legal standards that are more strictly economizing, what legal scholars call market mimicking. The empirical behavior we wish to describe, explain, and predict, therefore, is when and why the corporate judiciary intervenes into corporate governance disputes on extra-economic grounds, on normative grounds.

The most important statutory laws broadly framing or mediating the internal governance of corporations are those contained in the General Corporation law of the state in which companies are incorporated. However, state courts do more than interpret and enforce these statutes. They also enforce certain mandatory rules of corporate governance independently of state statutes (and independently of common law contracts).²⁰ Both General Corporation law and the courts’ own mandatory rules, we propose, are windows to social norms and to the institutional design of the larger society. Changes in state statutes and mandatory rules therefore typically reflect, at times anticipate, changes in social norms and changes in institutional design.²¹

II. Institutional Design

The institutional design of a democratic society goes further than normatively mediating governmental power short of abuse or arbitrariness. This is where the institutional design of a formal democracy stops and where the institutional design of an imposed social order already falls short.²² The institutional design of a democratic society extends normative mediations of power from government to major intermediary associations in civil society. Putting this point formally, a democratic society prohibits those who hold positions of trust in at least some structured situations in civil society from exercising power one-sidedly, in their own positional interests. This general principle is the most fundamental tenet of the fiduciary law tradition that originated in fourteenth-century England, and on this basis the American corporate judiciary today prohibits corporate officers from exercising their positional power one-sidedly in corporate governance structures.²³ Today’s judicial limits on corporate power are designed to prevent directors, management, and controlling shareholders from so altering a corporation’s structure of governance that only its positional interests prevail in this structured situation.²⁴ In this way these limits at least indirectly encourage disinterested behavior by anyone who occupies a position of trust in a structured situation in American civil society.

There is no federal law in the United States that extends to the interna...