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When used in conjunction with corporations, the term “public” is misleading. Anyone can purchase shares of stock, but public corporations themselves are uninhibited by a sense of societal obligation or strict public oversight. In fact, managers of most large firms are prohibited by law from taking into account the interests of the public in decision making, if doing so hurts shareholders. But this has not always been the case, as until the beginning of the twentieth century, public corporations were deemed to have important civic responsibilities. With The Failure of Corporate Law, Kent Greenfield hopes to return corporate law to a system in which the public has a greater say in how firms are governed. Greenfield maintains that the laws controlling firms should be much more protective of the public interest and of the corporation’s various stakeholders, such as employees. Only when the law of corporations is evaluated as a branch of public law—as with constitutional law or environmental law—will it be clear what types of changes can be made in corporate governance to improve the common good. Greenfield proposes changes in corporate governance that would enable corporations to meet the progressive goal of creating wealth for society as a whole rather than merely for shareholders and executives. (20061031)
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the failure of cor p or ate l aw The Failure of Corporate Law fundamental flaws & pro g ressive p ossibilities ken t g reen fie ld the university of chicago press chicago & london kent greenfield is professor of law at Boston College Law School. The University of Chicago Press, Chicago 60637 The University of Chicago Press, Ltd., London © 2006 by The University of Chicago All rights reserved. Published 2006 Printed in the United States of America 15 14 13 12 11 10 09 08 07 06 1 2 3 4 5 isbn-13: 978-0-226-30693-3 (cloth : alk. paper) isbn-10: 0-226-30693-3 (cloth : alk. paper) Library of Congress Cataloging-in-Publication Data Greenfield, Kent. The failure of corporate law : fundamental flaws and progressive possibilities / Kent Greenfield. p. cm. Includes bibliographical references and index. 1. Corporation law—United States. 2. Corporate governance—United States. 3. Industrial management—United States. I. Title. kf1416.g74 2006 346.73'066—dc22 2006018111 The paper used in this publication meets the minimum requirements of the American National Standard for Information Sciences—Permanence of Paper for Printed Library Materials, ansi z39.48-1992. for my parents contents Acknowledgments ix part one 1 2 3 4 5 Fundamental Flaws 7 September 11 and Corporate Law 9 Corporate Law as Public Law 29 Workers, Shareholders, and the Purpose of Corporations 41 Corporations and the Duty to Obey the Law 73 Democracy and the Dominance of Delaware 107 part two 6 7 8 9 Introduction 1 Progressive Possibilities 123 New Principles, New Policies 125 Corporate Governance as a Public Policy Tool 153 Workers and Corporate Fraud 187 Irrationality and the Business Judgment Rule 217 Postscript: Getting Real about New Possibilities 241 Notes 245 Index 277 ack n ow l e d g me n ts This book is the product of more than a decade of teaching and writing in the area of corporate law. Throughout this time, I have been a member of the faculty of the Boston College Law School. I could not have completed this work without the support and good counsel of my colleagues, many of whom have dedicated numerous hours assisting me in thinking through the issues discussed here. I am proud to be associated with such a fine institution and with such an incredible group of colleagues. I also want to acknowledge Boston College Law School Dean John Garvey, former Law Dean Aviam Soifer, and forme