The New Corporate Governance in Theory and Practice Book

Introduction 1

On the Necessity of Models 2

The Basic Dichotomy: Consensus Versus Authority 3

The Separation of Ownership and Control 4

The Central Problem of Corporate Governance 6

The Survival Value of the Separation of Ownership and Control 6

Theories of Corporate Governance 8

The Domain of Director Primacy 12

Is a Unified Field Theory of Corporate Governance Possible? 14

The Plan of the Work 16

1 The Means and Ends of Corporate Governance 23

The Corporation as Person 25

The Corporation as Entity 26

The Corporation as Nexus of Contracts 28

Judicial Acceptance 30

The Hypothetical Bargain Methodology 30

Implications of the Contractarian Model 32

Locating the Nexus 33

The Shareholders' Deal 35

The Bargaining Parties 37

The Bargain over the Means of Corporate Governance 37

On the Necessity of Fiat 38

Fiat by Contract? 45

The Inefficiency of Multiple Constituencies 45

Allocating Control: Why Do Only Shareholders Vote? 50

Why Not Shareholder Primacy? 53

The Bargain over the Ends of Corporate Governance 57

Director Primacy Versus Team Production 60

Incorporating Shareholder Wealth Maximization into Director Primacy 65

The "Problem" of Agency Costs 73

2 Why a Board? 77

Groups and Individuals 78

The Board as Production Team 79

Groups v. Individuals: Experimental Evidence 82

Groups and Bounded Rationality 89

Individual v. Group Decision-Making Biases 94

Agency Costs 100

3 Director Primacy in the Courts 105

The Business Judgment Rule 106

Judicial Review of Operational Decisions 108

First Principles 111

Defending Deference to Board Authority 114

Encouraging Risk-Taking 114

Judges Are Not BusinessExperts 120

Impact on the Board's Internal Dynamics 124

Corporate Decisions Affect Nonshareholder Constituencies, But So What? 126

The Limits of Abstention 127

The Rule of Undivided Loyalty 129

The Presumption in Favor of Authority 130

The Paradigm Conflict of Interest: The Unsolicited Takeover Bid 134

The Academics' Balance(s) 134

Delaware's Balance 136

Why Not Passivity? 141

Summation 153

4 The Shift from Managerialism to Director Primacy 155

The Evolving Role of the Board of Directors 157

The Emergence of the Monitoring Board 160

Boards Today 161

Best Practices 163

Compensation Practices 167

Reputational Concerns 171

Judicial Insistence on Informed Decision Making 173

Judicial Pressure for Director Independence 175

Sarbanes-Oxley and the Board of Directors 176

The Majority Independent Board and Its Committees 177

Is an Independent Board Essential for Director Primacy? 187

The Bottom Line: Are Boards Becoming More Effective? 198

5 The Future of Corporate Governance: Director or Shareholder Primacy 201

Shareholders Are Rationally Apathetic 202

Institutional Passivity 203

Why Are Institutions Passive? 207

Vehicles for Shareholder Activism 209

Exit 209

Proxy Contests 210

Withholding One's Votes in Director Elections 212

Shareholder Proposals 214

Communication 219

Litigation 220

Proposals for Expanding the Shareholder Franchise 222

Reforming the Director Nomination Process 222

Proposals to Reform the Mechanics of the Voting Process 224

Expanding the Substance of Shareholder Voting Rights 225

Should the Shareholder Franchise Be Expanded? 225

Pathologies of Voting 226

The Revealed Preferences of Shareholders 227

Why Not Shareholder Democracy? 228

The Risk of Private Rent Seeking 228

The Case for Preserving the Board of Directors' Authority 233

Index 237