by Kent Greenfield. Chicago and London: The University of Chicago Press, 2006. 257pp. Cloth. $45.00/£28.50. ISBN: 9780226306933.

Reviewed by Benedict Sheehy, School of Law, University of Newcastle, New South Wales. Email: Benedict.Sheehy [at]


Kent Greenfield sets out his objective clearly in the introduction to THE FAILURE OF CORPORATE LAW. He observes that Easterbrook and Fischel’s THE ECONOMIC STRUCTURE OF CORPORATE LAW (1991) is likely the most important book on corporate law since Berle and Means’ 1932 work, THE MODERN CORPORATION AND PRIVATE PROPERTY. Easterbrook and Fischel’s work is informed by their neo-classical economics approach in support of a contractarian/nexus of contracts view of the corporation. This approach is premised on a normative ordering in which liberty is the ultimate value, economic growth the sole objective of corporate law, and assumes externalities, distribution of harms and benefits, and all other such matters will be dealt with most fairly by the market. They believe corporate law is simply a matter of people freely choosing to contract as they see fit and that those choices and goods are exclusively private matters, and of course, are best left to an unfettered market. The corporation is seen as the premier institution of the free market and free contract.

Greenfield states: “Though countless scholars have used it both as a starting point or target, there has never been a comprehensive, theoretical response to Easterbrook and Fischel from the stakeholder perspective. This book is intended to fill that gap” (p.4). Greenfield does so in nine chapters, divided into two parts, plus an introduction and a postscript. The first part, “Fundamental Flaws,” contains five chapters examining the problems of corporate law. The second part, “Progressive Possibilities,” has four chapters in which he explicates how his suggestions could be implemented. Greenfield’s work provides a penetrating critique of the contractarian corporation view and presents a well argued, broadly researched, thoughtful set of recommendations and alternatives.

The strengths of Greenfield’s work are many. His thinking about corporate law begins from the fundamental principles of law and jurisprudence. He considers that justice and social benefit are the accepted drivers of law, and that corporate law should be no exception. He examines the implications of this thinking, provides illustrations, and most significantly, tackles head-on the economics of both the status quo and his proposals. He demonstrates convincingly that the economic arguments, dealing with agency costs, efficiency, and broader social costs do not lead to the socially desirable outcomes predicted by neo-classical theory. Indeed, Greenfield demonstrates the opposite by extensive reference to economic and behavioral studies. [*664]

He does the same with the matter of the distributions. Whereas Easterbrook and Fischel, and neo-classicists, generally ignore matters of distribution leaving it to free negotiation, Greenfield demonstrates that this arrangement not only undermines corporate governance success and economic growth, but also contributes to the unraveling of the social fabric necessary to a functioning economy. Greenfield demonstrates, again citing empirical studies and using vivid examples, that the market has not produced the outcomes predicted, and indeed that leaving things to the market is not only a failure of predicted outcomes, but indeed a retrogressive step.

He identifies a number of critical assumptions in free market ideology and unpacks them in the context of corporate law. For example, he notes that the assumption people are free to contract as they choose ignores the extreme inequalities in bargaining power between parties (pp.19ff). Further, he notes that economic rationality is an impediment to actual rational corporate practice (Ch. 9). He draws out the implications of the ideology and examines whether indeed, they are the desired or appropriate framework for corporate law.

Greenfield does not shy away from addressing the arguments of Easterbrook and other neo-classical law and economics scholars. In a critical, thoughtful way he follows the permutations of rebuttals to his critique, and further argues and examines the validity or consequences of the rebuttals. He does not shrink from putting the neo-classicists’ best case forward. By taking this transparent and fair approach to other points of view, Greenfield avoids the apologist’s escape of building a straw man of one’s opponents and then discrediting the straw man instead of the actual arguments. Many of these strengths will be made evident in a thorough review of Chapter One, which will in turn be followed by a broader assessment of the balance of the book.

This first chapter identifies the problems with the currently popular view of the corporation as a contract (“contractarian” view). Greenfield provides an extensive critique of the economic nexus of contracts approach to corporate law by illustrating how it facilitated the September 11, 2001 terrorist attack and the subsequent invasion of Iraq. He argues that the terrorist attacks are an example of how the market failed to provide appropriate safety by its exclusive focus on low costs, by information asymmetries between airlines and passengers, and by failing to provide passengers with real choices concerning safety. He then visits another failure of the nexus of contracts approach, namely that ultimately the shareholders are watching the corporation. Greenfield demonstrates quite clearly that shareholders have neither power nor interest in these matters. In other words, the free market cannot address such issues, is not designed to, and never will. Accordingly, it will be necessary to consider other approaches to corporate modeling.

As noted, the contractarian theory is based on the assumption that all participation in the corporation is [*665] voluntary, and hence there are no negative consequences of corporate action—i.e. externalities. Greenfield challenges this theory, pressing further the September 11, 2001 example. He observes that many people on the ground were profoundly affected by airline decisions about low levels of investment in security. Corporate law concentrates decision making in the hands of managers who are only accountable to the shareholders and ignore all other parties or stakeholders. As Greenfield puts it: “By centralizing power in management, limiting the involvement of other stakeholders in corporate decisions making, and imposing a requirement that firms’ management care about making money first and foremost, the law has created an entity that is guaranteed to throw off as many costs and risks onto others as it can” (p.17).

These issues, such as who is involved in decision making and the identification and management of externalities, are matters of corporate governance. This analysis leads Greenfield to identify yet another fundamental flaw of corporate law. He writes: “Instead of creating a governance system that would help internalize the concerns of customers, employees, or society in general, the system of corporate governance in the United States sets up shareholder interests as supreme and centralizes decision making so that those interests are served. Other stakeholders are left to depend on mechanisms outside corporate law, primarily in the form of express contracts or government regulation, both seriously imperfect, to protect their interests” (p.17).

Greenfield uses this basis for the critique that follows. As he observes, corporate law, “like other areas of the law, could choose to advance public virtues—such as dignity or fairness or compassion or equality or autonomy—in addition to utility” (p.18). The decision to do otherwise simply serves to re-enforce inequalities in bargaining power in the corporate organization. He examines the distance between the free market ideology and practice, noting among other things the anti-free market stance of business, and most interestingly, that the main support for free market ideology comes from the academy, including corporate law scholars, rather than business.

The second chapter, “Corporate Law as Public Law,” addresses the issue of whether the arrangements within the corporation are matters of private or public law. He observes that the basis for the current model is the notion that the corporation deals only with private, contractually formed rights and obligations. As such, there is a significant hurdle to be mounted before one can justify interfering in such orderings. However, Greenfield notes that the free market is not an unbiased baseline but a political decision, and the rights created and distributed by the law have the same basis. Further, he observes that in many instances, government regulations of corporate activity, such as the imposition of minimum wages, are not generally considered interfering with private contract. Rather, they are seen as legitimate parameters ensuring fairer distributions and more socially desirable outcomes. He writes: “corporate law, [*666] just like every other area of common and statutory law, is predicated upon our collective political decisions about what we want our society to look like” (p.37).

He draws from this summary a particularly powerful insight – that social utility of the corporate form is most unlikely to be achieved by a shareholder focus. He argues convincingly, as a matter of regulatory theory, that a loosening and re-orientation of managerial duties would likely serve social utility objectives. He observes that managers have considerably greater knowledge about problems and potential control of such problems than government or external regulators. Accordingly, Greenfield sees an optimal arrangement of responsibilities by granting managers authority to address some issues, but making them accountable to parties with direct interests in them. These issues he rightly identifies as matters of regulatory theory.

The third chapter draws out further implications of his critique. Greenfield provides a most enlightening analysis of the main arguments for shareholder primacy—ownership, agency costs, residual claims, and contract and efficiency. He does so by testing the arguments put forward by shareholder primacy theorists against the same arguments applied to workers. The effect is eye opening. One sees both the weaknesses of shareholder primacy arguments and that, if the concerns raised by shareholder primacy theorists are indeed the true concerns, those arguments apply equally if not more so to employees and other parties involved in the corporation.

The fourth chapter “Corporations and the Duty to Follow the Law” examines critically the claim that breach of the law may be an appropriate and acceptable part of corporate practice. With a challenging examination of the ultra vires doctrine, Greenfield argues that corporate law does have as a basic premise that corporate activity will be controlled to follow prescribed interests. He then examines this argument in the broader interests and context other corporate actors including shareholders, creditors and others, and suggests how an appropriate understanding and use of the ultra vires doctrine would serve well the interests it was created to protect.

The fifth chapter, “Democracy and the Dominance of Delaware,” challenges the dominance of that tiny state in corporate law. As it is the state where the corporation is domiciled that sets the law controlling the governance of the corporation, Greenfield raises the question whether a state with 830,000 people, home to 300,000 corporations which in turn employ 15,000,000 people, is indeed an expression of democracy. He questions the internal affairs doctrine of corporate law, observing: “At some level, politics is about constructing a community. The rules of the community should, according to democratic theory, be put in place either by the community itself or by representatives of the community who are subject to community oversight” (p.120).

Chapter Six follows a short section marking the start of Part Two. In it Greenfield sets out the basis and agenda [*667] for corporate law reform, and he identifies the appropriate principles for corporate law, just the same as for any other area of law. The first three principles should be uncontroversial: 1) The Ultimate Purpose of Corporations Should be to Serve the Interests of Society as a Whole. 2) Corporations are Distinctively Able to Contribute to the Society Good by Creating Financial Prosperity, 3) Corporate Law Should Further Principles 1 and 2. The next two principles are certain to unsettle a few. They are: 4) A Corporation’s Wealth Should be Shared Fairly Among Those Who Contribute to its Creation, and 5) Participatory, Democratic Corporate Governance Is the Best Way to Ensure the Sustainable Creation and Equitable Distribution of Corporate Wealth. This chapter is another of Greenfield’s significant contributions to corporate law.

The two controversial principles are dealt with in depth and with care. In an even-handed, critical manner Greenfield unfolds his argument, setting out propositions, with examples, analysing the various approaches or attacks that could be launched in opposition. He is not reticent to acknowledge problems but finds that the status quo is a greater problem than the alternatives he presents. One need simply propose the alternative to understand the problem with the status quo. Consider the principle: “A Corporation’s Wealth Should be Shared Unfairly Among Those Who Contribute to its Creation.” The second principle, although seemingly controversial has considerable current descriptive power. Greenfield argues that once the first four principles are accepted, the fifth follows logically. He notes that indeed corporate managers in practice do follow these principles to some extent, yet are constrained by overly conservative, anachronistic corporate law. These principles are then explicated in greater detail in the subsequent three chapters.

Chapter Seven examines the potential effects of, and arguments for and against, relaxation of the profit norm, the inclusion of workers in directors’ fiduciary duties, and the representation of workers on boards of directors. The chapter, titled, “Corporate Governance as a Public Policy Tool,” launches a very interesting discussion about the direction of changes to the role and power of the state in the current climate of increased corporate power and reach, and the decline of the state. He does so by exploring the examples of stagnant wages and income inequality in the USA. Relying on skilful analysis of extensive social scientific study, Greenfield mounts a strong argument for cooperation and sharing as beneficial from economic, as well as social perspectives. Drawing from a wider range of literature is a valuable and noteworthy contribution of Greenfield’s work.

In Chapter Eight, Greenfield examines the arguments for an against the requirement that directors tell workers the truth about corporate activities and decisions. Although not a startling proposition, as directors are required to tell the truth to financial markets, as Greenfield discusses it, the duty would have significant consequences in terms of fairness for workers. He presents a [*668] similar analysis and argument by analogy that he used effectively in Chapter Two concerning workers and shareholders. Through a careful cost-benefit analysis, Greenfield concludes that the appropriate solution to truth in the labour market is some form of federal legislation. As an initial step, he provides a small portion of his proposed draft law.

Greenfield examines corporate decision making literature and philosophy in his last chapter, where he turns his mind to the Business Judgement Rule. He notes the contradictions in the rule: it allows managers to deflect from irrationally narrow utility interests, to draw in the experience of decision making that suggests a broader set of criteria and analysis serve the interests at stake more rationally and hence effectively.

Greenfield’s work is refreshing. Instead of the standard approach in which many corporate law doctrines are taken as given, or in which a few are analysed within the accepted framework, Greenfield commences with a reconsideration of the basic and generally accepted purposes and norms of law. The result is as startling as it is enlightening.

The work is well written. He keeps his prose short, his rhetoric under control, allowing his penetrating arguments to do their work. The writing is crisp, with short sentence structures, accessible vocabulary, and clear illustrations. Perhaps the only drawback is that the referencing could be more complete. In certain instances, Greenfield makes a point and fails to provide a reference or cites a single reference, where a reader would like to know what studies have been done, or a broader, more critical review of the literature would be useful. In addition, the work would have been improved by a more complete table of contents, indicating the many and useful subheadings Greenfield uses.
Still, these are minor criticisms of a seminal piece of writing that evidences dominance of a vast range of ideas, research and critical thinking, and puts it into a coherent, well argued, accessible whole in a mere 243 pages. It merits a place alongside Berle and Means, Easterbrook and Fischel, and indeed, one can but hope that it becomes the touchstone for further corporate law reform globally.

Berle, Adolf A., and Gardiner C. Means. 1932. THE MODERN CORPORATION AND PRIVATE PROPERTY. New York: Macmillan.

Easterbrook, Frank, and Daniel R. Fischel. 1991. THE ECONOMIC STRUCTURE OF CORPORATE LAW. Cambridge: Harvard University Press.

© Copyright 2007 by the author, Benedict Sheehy.