Vol. 11 No. 5 (May 2001) pp. 249-254.

CORPORATE POWER IN CIVIL SOCIETY, AN APPLICATION OF SOCIETAL CONSTITUTIONALISM by David Sciulli. New York: New York University Press, 2001. Cloth $45.00. ISBN: 0-8147-9786-5

Reviewed by Daniel J. H. Greenwood, University of Utah College of Law.

David Sciulli tells us that it is "remarkable ... how little social theorists and other sociologists have participated in" today's debates over corporations and the law (p. 4). This is indeed true, particularly because, as he says, business corporations are our most significant "intermediary associations" in de Tocqueville's sense, and because the more common market- based law-and-economics analyses have little to say about corporate power or how the judiciary "monitors" it (pp. 4-5, 76).

Unfortunately, I found Sciulli's book only a frustrating beginning to filling this void. Partly this is because the book has remarkably little to say about either corporate power or judicial monitoring of it. Although he characterizes the "central contribution of the volume" as explaining the "actual behavior of the corporate judiciary" (p. 5), neither corporations nor courts appear except as mediated through the law journals. Sciulli instead discusses the theories of academic lawyers. No statute or case appears in his cited authorities, and empirical studies are almost as absent.

Academic corporate law has long suffered from an overdose of simplistic economic theories. In one common version of the mantra, corporations are best understood as a "nexus of contracts," an imaginary creation that is just a convenient way to refer to what is "really" a complex of bilateral contracts at a moment in a market. Combined with a naive faith in markets as characterized purely by voluntary transactions in which (by definition?) power plays are impossible, this picture is extremely comforting. Corporations don't exist; all that exist are market exchanges ("contracts"); and market exchanges are consensual bargains in which participants give only what they get. Corporations as power centers, producers, consumers, political players, determiners of life chances, sources of our rapidly increasing inequality, or even as loci of social life and gossip simply vanish from theoretical view. Corporate law should be no more than "empty girders" facilitating voluntary exchanges.

On this law-and-economics view, market exchanges are inherently equal, and so there can rarely be any reason for governmental interference. In particular, if CEOs and shareholders are receiving a vastly larger share of the corporate pie than a generation ago, it must be because they are contributing more. However, theoretical necessity aside, it seems utterly implausible that our major CEOs are each doing a job hundreds of times better than his 1950s predecessors, although it is clear that they are being paid that much more. Anyone not blinded by a theory that precludes the possibility can see that the last three decades have seen a vast shift in power and wealth in our corporate world. J. K. Galbraith's picture of unions allied with managers to

Page 250 begins here

create stable and predictable growth--in the interests of employees and bondholders but not necessarily shareholders or consumers--bears little resemblance to the reality of the last thirty years, when shareholders and top managers have enjoyed double digit annual returns while line workers barely managed to keep up with inflation.

Full faith in the stock market's perfection suffered from the 1987 crash and had barely recovered before the more recent bubble. So, the simple economic theories have been under some pressure for some time. The fact that they don't fit the law very well didn't help either-shareholders don't "own" public companies in any ordinary sense of the word. Directors are emphatically not their "agents" as that term is understood in the law of agency. Real contract law bears little resemblance to the caricature of equal bargaining in a spot market promoted by at least the more primitive "nexus" theories. The most important characteristics of corporate status can't be created by private agreements; no state holds that corporations must be run in the exclusive short-term interests of shareholders (even if the concept is meaningful).

In short, corporations, in addition to their economic functions, clearly are political entities governed by political processes, in which the relative power of shareholders, directors, top managers, middle management and line employees, bondholders and other creditors, customers, government and the surrounding communities must affect the firm's goals, performance and division of its surplus. The market-based theories tend to conceal power relations just as they define away the possibility of inequitable redistributions of wealth. Academic corporate law can use a good dose of insight from political scientists and sociologists who are more attuned than economists to these issues.

Professor Sciulli is a sociologist and his book presents itself as a work of social theory, in the tradition of Talcott Parsons, that sets out to explain corporate law as a pattern maintenance function (p. 15). He contends that his theory will better predict the future decisions of the Delaware Supreme Court than the existing legal theories (pp. 5, 10). He is not, then, engaged in the highly normative enterprise of the law-and-economics scholars, who seek to transform the law, not merely to explain it. His central thesis is that the Delaware courts seek to require Delaware corporations to adopt a "collegial" approach to internal governance, in which directors will take a "disinterested" view of the needs of the corporation and/or its various participants (p. 14). The courts, he says, do this rather than requiring, as the law-and-economists would have them do, that corporations maximize shareholder returns.

Sciulli's concept of "collegiality" is thin. He doesn't mean something like Dorf and Sabel's (1998) argument that successful firms have complex mechanisms for team building, learning and communicating best practices. Nor does he mean the communitarian ideal of a corporation that treats its various non-shareholder constituents as citizens of a mini-polis, worthy of concern and perhaps even a voice. Rather, taking his cue from corporate law-which typically has little to say about corporate operations below the CEO level- Sciulli says virtually nothing about decision-making processes outside the boardroom. In the end, "collegiality" seems to mean that members of the board of directors, in their monthly or quarterly meetings, should discuss matters of concern from a

Page 251 begins here

disinterested perspective rather than simply relying on management's guidance (e.g., pp. 14, 262-3).

This meager form of collegiality, Sciulli claims, is what "republican vigilance" should be directed toward, rather than toward such "liberal complacent" goals such as profit maximization or balancing the interests of various corporate constituencies. Unfortunately, he doesn't explain in any clear fashion WHY we would want courts to make this the center of their regulation. Board level collegiality for its own sake (p. 273), independent of any effect it may have on production, working conditions, the experiences of corporate participants who are not board members or distributions of income or power, seems a peculiar goal-too much like faculty senate meetings for my taste. Sometimes he seems to have in mind something similar to Arendt's (1958) political forum as a place to see and be seen, but he fails to explain why corporate law ought to be driven by the goal of creating such a space for the elite few who will ever be corporate directors. Elsewhere he seems to be proposing "disinterestedness" as comparable to "professionalism" or "statesmanship"-but with no account of why the corporation should be seen as an end in itself, or what this would mean operationally.

Were Sciulli convincing that the experience of republican decision- making is, or should be, a key substantive value of corporate law, surely boardroom collegiality wouldn't be enough. Rather, we'd have to reform the workplace itself, rethinking what it means in our republic to be a "public" corporation that is also "private."

That reform would require radical change in the current legally mandated work-place power structure. It would, for example, require reversing standard Delaware doctrine that the board (elected only by the shares) is the sole principal in a corporation and employees from the CEO down are mere agents with no claim to having their own goals considered as part of the mission of the firm. Similarly, we'd have to change the standard contract law employment-at-will presumption that employees accept the right of the employer to structure the workplace as a condition of employment, foregoing any citizen, craftsman or professional autonomy or control expectations they might otherwise have. Such a revolution in our understanding of private corporations is far beyond anything that Delaware courts acting alone could impose in the name of Delaware law that has no hint of such mandates, upon corporations that, after all, need not volunteer to be governed by Delaware law in any event (not to mention ordinary Full Faith and choice of law norms which would bar Delaware from modifying the contract law of other states or Federal employment law).

Sciulli's key "empirical" claim is that in pursuit of this ideal of collegiality, Delaware courts require corporate officers to be "disinterested" or "independent" with respect to shareholder interests as well as their own positional interests, requiring them to consider stakeholder (i.e., non-shareholder), public and "corporate" interests as well (pp. 11, 14, 19, 21-2, 64, 67, 69, 84, 168, 173-5, 179, 245, 255, 262, 294-5, etc). Were this true, corporate law would be odd indeed: neither stakeholders nor the public have standing to enforce such duties (as Sciulli acknowledges, p. 84) and even shareholders are generally barred from asserting any interests they might have in non-shareholder roles (as pensioners, employees, customers or citizens) (see Greenwood 1996).

Page 252 begins here

However, the empirical "collegiality" thesis is simply unsupported. Delaware law has virtually nothing to say about how corporations organize routine (non-board) decisionmaking. Board decisionmaking must be collegial in form--ordinarily, directors must meet, consider and vote--but needn't be in substance. Disinterestedness as a general principle was discarded a century ago at the dawn of the modern corporate law era. (The old trust rule--barring self-dealing even where it might be in the beneficiary's self- interest--does not apply to corporate directors. Rather, when directors have a direct conflict of interest, the courts will look somewhat more closely, applying an "entire fairness" test). In the hostile takeover context, the cases are driven by disclosure and conflict of interest rules, not court- mandated abstraction from shareholder positional interests.

Sciulli cites no case to support his novel reading of the law. He seems to have misunderstood cases holding that boards are sometimes PERMITTED to consider non-shareholder interests as standing for his far more radical proposition that they MUST do so. Although process is king and Sciulli is quite correct that no court has made short-term shareholder gain maximization into a legal duty, Delaware courts never condemn boards that act in the interests of shares without considering any other interests at all--indeed, since normally the other interests have no standing, it hard to see how the case would come up in the first place.

The bulk of the book is taken up with Sciulli's discussion of the corporate law debates of the 1980s. Here, Sciulli's outsider stance seems to obscure rather than clarify the academic debates. His habit of referring to all the participants--from Chicago-school free-marketers to communitarian touchy-feelies, apologists to reformers--as suffering from "liberal complacency" is endearing but not helpful. "Liberal" already refers to advocates of classic laissez-faire, social contract rights talk, New Deal administrative regulation, inconsistent reform of any variety ("Love me, I'm a liberal") and, of course, all-around left-of-Reagan Radical-lib bad-guys. Why not add to the confusion by using "complacent" to refer to critics?

Within the "liberal complacency" group, Sciulli classifies academics as "contractarians" or "traditionalists". As to "contractarians," I was puzzled by his lumping together the quite different "agency cost" and "nexus of contracts" analyses, particularly in the context of debates over managerial autonomy. The agency-cost analysis suggests that managers, as mere agents, are "in a position in which the thought of self is to be renounced, however hard the abnegation" (Cardozo, J. in MEINHARD v. SALMON 1928). "[H]eld to something stricter than the morals of the market place," (id.) managers ought to work only to further the interests of their principals--imaginary undiversified shareholder owners who need the protection of corporate law as the sole residual claimants unprotected by contract. Nexus of contracts points in quite a different direction: if a corporation is simply shorthand for a series of bilateral contracts, share-centeredness is mere ideological claptrap. In a capitalist market, it is entirely appropriate for contracting parties to look out for their own interests first; accordingly, managers (and presumably all other corporate participants) should have whatever rights they can win for themselves in the market (see Greenwood 1996; Blair and Stout forthcoming, arguing that all corporate participants can be understood as residual claimants). Bill Bratton's (1989) classic

Page 253 begins here

review, though now dated, remains a better account of the law-and-economics debate.

Sciulli then creates a rump category, "traditionalists," for everyone who doesn't use a distinctively economic vocabulary regardless of their model or conclusions--conservatives, radicals, mushy-middle roaders, doctrinalists, "radical legal scholars" from CLS, Communitarians, shareholder rights activists (e.g., p. 90). Usually, I find lumpers more illuminating than splitters, but this lumping is too crude, and too disconnected from Sciulli's apparent purposes, to be of much use to me.

This book is not suitable for students. Its descriptions of both the law and the economics of corporations would confuse anyone not already familiar with the area and may infuriate those who are. To cite just a handful of places where I found myself scratching my head, Sciulli seems to confuse primary and secondary markets for stocks and bonds (pp. 32, 33), and could be read to claim that a drop in the value of a corporation's bonds (in the secondary market) could cause it to default (p. 50). His explanation of the risk held by diversified investors seems innocent of the central thesis of portfolio theory that a collection of risky investments may be less risky than any of its components (pp. 141). He confusingly claims that takeovers were rare prior to 1970 because tender offers were (p. 33), but merger booms have not always involved tender offers.

On the law, Sciulli repeatedly claims that Delaware has asserted that corporate officers have legally enforceable fiduciary duties to (non- shareholder) stakeholders or the general public, and that the courts will require them to be "independent" from shareholder interests (pp. 11, 14, 19, 21-2, 64, 67, 69, 84, 168, 173-5, 179, 194, 245 etc.). However, he cites no case (and I know of none) where a court has rejected a board action on the ground that it was in the interests of (only) shareholders. His account of corporate agency is similarly confusing (pp. 164-6, 173) in part because it combines two entirely separate senses of agency indiscriminately. Nor would his account of the Business Judgment Rule (pp. 175-76) convey to a student the central point that Delaware courts review board decisions with extraordinary deference, or that the so-called "constituency statutes" in virtually every case impose no affirmative duties on the board at all, merely increasing its ability to choose the course it prefers (p. 179).

Students might also come away with the serious misapprehension that Delaware corporate law governs far more than it does. Sciulli doesn't make clear that most potential exercises of corporate power are regulated not by Delaware but by the contract, tort, environmental, regulatory, civil rights, workplace safety, consumer protection, pension and union laws of the Federal government and the states in which the corporation operates. (Delaware corporate law does, of course, affect those other areas even outside Delaware to the extent that it determines the circumstances under which the corporation alone, not its "owners" or creditors, is responsible for its actions, or that it influences the attitude that corporate managers take to such regulatory law). Even his chapter describing the half-dozen Delaware cases that inform his analysis (again citing only secondary accounts, not the cases themselves) restricts itself to a collection of merger and acquisition cases with limited applicability to more ordinary circumstances and thus would be seriously misleading as an account of Delaware corporate law generally.

Page 254 begins here

Scholars able to get beyond gnashing of teeth at Sciulli's imprecision, or his idiosyncratic classifications of corporate law scholars, may find his collegiality thesis interesting. Extended beyond the boardroom, and backed up with a more careful defense of the relationship between the workplace and republican institutions generally, it could require a major rethinking of the limited goals corporate law has set itself. Extending "constitutional rights to any number of corporate constituents" (p. 180)-today disenfranchised and legally deemed means, not ends, of the firm-would (internally) be a change as great as the shift from the ancient polis to modern universal citizenship and (externally) might require shifting corporations from the private to the public side of the great public/private divide (see Greenwood 1998). Similarly, the sociological implications of the great shift to risk-taking within the firm (pp. 137-43) demand fuller exploration. (see Greenwood 1996). I found myself wishing that Sciulli had omitted most of his discussion of other scholars and instead developed his own idea more fully. That would have been a shorter and more satisfying book.

REFERENCES:

Arendt, Hannah. 1958. ORIGINS OF TOTALITARIANISM. Cleveland: World Publishing Co.

Blair Margaret and Lynn Stout. forthcoming. "Director Accountability and the Mediating Role of the Corporate Board," WASHINGTON UNIVERSITY. LAW. QUARTERLY.

Bratton, William W 1989. "The 'Nexus of Contracts' Corporation: A Critical Appraisal," 74 CORNELL LAW REVIEW 74: 407.

Dorf, Michael C. and Charles F. Sabel. 1998. "A Constitution of Democratic Experimentalism," COLUMBIA. LAW. REVIEW 98: 267.

Greenwood, Daniel J. H. 1996. "Fictional Shareholders: 'For Whom is the Corporation Managed,' Revisited," SOUTHERN. CALIFORNIA. LAW. REVIEW. 69: 1021-1104.

------. 1998. "Essential Speech: Why Corporate Speech Is Not Free," IOWA LAW REVIEW 83: 995-1070.

CASE REFERENCE:

MEINHARD v. SALMON, 249 N.Y. 458 (1928).


Copyright 2001 by the author, Daniel J. H. Greenwood.