The following post comes to us from Margaret M. Blair
, Professor of Law at Vanderbilt University.
In the paper, Corporate Law and the Team Production Problem, which was recently made publicly available on SSRN, I discuss an alternative framework to the principal-agent model for understanding corporate law. For much of the last three decades, the dominant perspective in corporate law scholarship and policy debates about corporate governance has adopted the view that the sole purpose of the corporation is maximizing share value for corporate shareholders. But the corporate scandals of 2001 and 2002, followed by the disastrous performance of financial markets in 2007-2009, have left many observers uneasy about this prescription. Prominent advocates of shareholder primacy such as Michael Jensen, Jack Welch, and Harvard’s Lucian Bebchuk have backed away from the idea that maximizing share value always and everywhere has the effect of maximizing the total social value of the firm. Shareholders, they concede, may often have incentives to take on too much risk, thereby increasing the share of firm value they capture by imposing costs on creditors, employees, taxpayers, and the economy as a whole.
In response to the problems with shareholder primacy revealed by corporate and financial market crises in recent years, some scholars and practitioners have considered the “team production” framework for understanding the social and economic role of corporations and corporate law (Blair and Stout, 1999) as a viable alternative. Whereas the principal-agent framework provided a strong justification for the focus on share value, the team production framework can be seen as a generalization of the principal-agent problem that is symmetric: all of the participants in a common enterprise have reasons to want all of the other participants to cooperate fully. A team production analysis thus starts with a broader assumption that all of the participants hope to benefit from their involvement in the corporate enterprise, and that all have an interest in finding a governance arrangement that is effective at eliciting support and cooperation from all of the participants whose contributions are important to the success of the joint enterprise. A team production-based analysis of corporate law then points to a number of features of corporate law and the corporate form that do not seem consistent with shareholder primacy but that may provide a workable solution to the team production problem.
…continue reading: Corporate Law and the Team Production Problem