Unstable Coalitions: Corporate Governance as a Multi-Player Game

This is an article written in honor of Professor Donald Schwartz, a leading figure in academic corporate law for over two decades, but also a man nearly unique in his willingness to move beyond corporate law to the general study of corporate behavior. In this light, this article will not explore the latest wrinkle in the law – the most recent case, latest SEC ruling, or newest takeover defense tactic – but will instead ask if there are new ways in which we should try to talk about corporate law and corporate behavior. These were questions that Don Schwartz repeatedly asked himself and others, and this article is a modest attempt to respond by suggesting a different framework within which we can better understand institutional bargaining inside the corporation. Let me begin by describing the prevailing orthodoxy. Scholars of both law and economics have tended to view corporate governance as largely a principal/agent relationship. Under this view, shareholders are the principals; management, the agents. While standard economic theory today describes the corporation as a series of bargains or nexus of contracts in which additional interest groups – creditors, employees, suppliers, etc. – also participate, it still assumes that these other actors will not seek to participate in governance decisions. Under the neoclassical view, efficiency dictates that only the firm\u27s residual claimants – its shareholders – should have voting rights. As a result, corporate governance (although not the broader topic of corporate contracting) essentially boils down to the principal/agent relationship between shareholders and managers. So viewed, the law\u27s role becomes that of reducing the agency costs that shareholders must incur to hold management faithful to their interests. The thesis of this article is that this bilateral model of corporate governance oversimplifies, basically because it leaves out an essential third player: stakeholders. Although stakeholders have not in the past sought to participate in corporate governance, this pattern is changing – only recently, to be sure, but very rapidly in some sectors of the economy. In some cases, the motor force driving this change may be the failure of an earlier system of implicit contracting; in other cases, it may be an exogenous change (such as the development of junk bonds) that revealed the inadequacy of existing contractual protections and left stakeholders exposed to new risks. In response, new contractual protections have been designed to protect some stakeholders, but other stakeholders have sought instead to participate in governance decisions. The key transition, however, is the formation of coalitions – sometimes between management and stakeholders to resist shareholder pressures and sometimes between stakeholders and shareholders to oust management. The central concern of this article will be where this transition is leading. Arguably, the public corporation should be viewed less as a series of bargains than as a series of coalitions. Compared to bargains, coalitions are less stable, less enforceable, and less predictable. While the nexus of contracts paradigm conveys, at least rhetorically, the view that the relationships among those interacting within the corporation are fixed and enforceable, the reality may be that these relationships are more fluid and transitional, with outcomes determined less on the basis of legal rights than through coalition politics