Thesis, Antithesis, Dissonance: Compliance in China

Mar 23, 2026 Anna GelpernAdd a Comment

Anna Gelpern

What does a garbled snippet of English commercial boilerplate mean when pasted into a Chinese-law contract between a Chinese policy bank and a parastatal in a low-income country? What work does a seemingly nonsensical promise to keep secured and unsecured debt equal (“pari passu”!) do in the relationship between that bank and, say, the government of Benin? How would an arbitration court in Beijing, apparently vested with authority to enforce these contracts, decide whether the parties complied? As a non-sinologist communing with such contracts, I find these questions endlessly puzzling yet mostly ignored in the legal and policy debates over Chinese overseas investment.

China in Compliance, the special issue of Regulation & Governance edited by Matthew Erie, is a welcome reprieve from the China Good/China Bad back-and-forth that sucks the oxygen out of debates about Chinese overseas investment. Better yet, the issue offers unexpected insights into legal ethics and corporate compliance. The editor’s introduction, Compliance in China, and the first article, Legal Brokers of Chinese Investment in Cambodia: Compliance Between Contract and Culture, co-authored by Erie, Molly Bodurtha, and Sokphea Young, are good places to start for a sense of Erie’s Chinese Law and Development project. Together, the papers contribute to what he calls an ‘ethnographic record of global China.”

The geographic and disciplinary range is impressive. The authors report on Chinese overseas investment in wildly different places. They cover poor (Cambodia, Kyrgyzstan), rich (Singapore, Taiwan), African (Ethiopia), European (Hungary), and Pacific Island (Fiji, Vanuatu) states, and sectors ranging from extraction to education. The research question for the issue as a whole is how Chinese “corporate and investor behavior … conforms to the rules, norms, and law in host states.” The answers engage with sinology, politics, organizational theory, and comparative corporate and international investment law.

Considering compliance without looking to (or from) the North Atlantic pays off, firstly by making the very idea sound dissonant, unmoored. For instance, Cambodian “legal brokers” accompany a Chinese investor every step of the way through building and operating a factory or casino in a special economic zone to ensure compliance with applicable land use, environmental, construction … what, exactly? … laws, norms, and bribe schedules? The answer in most cases is all of the above. It takes judgment and know-how to achieve and maintain “manageable” levels of compliance, which in some cases has meant a 90% building code violation rate. In the Cambodia study and elsewhere, living in the grey zone requires a dynamic mix of formality and informality: procuring just the right forms, paying just the right bribes, cultivating just the right relationships, and abiding by the norms of multiple overlapping communities. Put differently, compliance with unstated rules for violating or circumventing the law under regulatory uncertainty is highly skilled professional work.

Even successful senior Cambodian lawyers who do this work skip accreditation to avoid paying “informal fees” to the national bar association. Bribing one’s way through a public court proceeding seems to be both costly and of limited social use: if you win in court, it would be read as you paid a bigger bribe. Real dispute resolution can only happen in arbitration behind closed doors. When getting a bar license or going to court sends the wrong compliance signal, who are the gatekeepers, and where are the gates?

The foreign investment setting makes such questions more interesting because it implicates at a minimum two sets of legal institutions and cultures, and the relationship between them. China has rapidly developed a large and politically salient compliance industry, in part under Western pressure on China as the investment host, with at-best uneven implementation. The interaction between this compliance industry and “nascent” compliance institutions in the host states, with China in the capital-exporting role, is worth studying as an academic and policy project.

It is tempting to say that the work in the special issue is a fancy way of describing ordinary lawyer-abetted corruption, or excusing it as cultural difference. Regulatory capture and going through the motions are not Chinese or Cambodian inventions. Lawyers in New York and London have been littering their contracts with meaningless boilerplate, artifacts of compliance with unwritten norms and imaginary standards, long before the Chinese banks in my introduction.   Erie’s introduction concludes as much, observing that the difference between compliance in China’s overseas investment practice and that of legacy Western powers is one of degree. Even that distance has been shrinking. Now more than before, the corporate compliance catechism feels like a sham, a meta-fraud on ethics. The embarrassment of an elder statesman exposed as a knave and the fear of delegating decency to the machines feel quaint these days, when lawyer-as-fixer is everywhere and seems to be the norm. With the Foreign Corrupt Practices Act officially mothballed, are we ready to dismiss the vestigial tsk-tsk of compliance as whiny protectionism? Does “adaptive governance” call on us to train a generation of fixers, running faster to stay ahead of the machines?

A stock comparative move is to show that concept A (here, compliance) transposed to place B is not what we thought A was. Fair reminder. Compliance in China and Cambodia is not the same as compliance in the West. We know the ending. But starting points matter, and starting in Beijing and Phnom Penh rather than Houston and Caracas makes the tour of compliance theory and practice more interesting and generative. Here, qualitative methods, and especially ethnography, save the day. Thick description anchors the authors’ questioning of established analytical categories, and at the same time, anchors the reader’s take on international investment and compliance in the particular human experience of despair, creativity, and perseverance.

Stock Exchanges as Strategic Assets

Feb 19, 2026 Caroline BradleyAdd a Comment

Caroline Bradley

States compete with each other to attract business, and this competition often focuses on specific sectors of financial activity. States compete to be centers for asset management, for insurance, for listings, for derivatives markets, or for financial innovation. Private actors also engage in competition: stock exchanges, as for-profit businesses, seek to attract listings and trading activity, competing with other exchanges. Other market operators similarly seek to attract business. Private-sector actors develop standards and documentation to support financial market transactions.

Conventionally, academics and journalists focus on competition between stock exchanges to attract listings, but as Curtis Milhaupt and Wolf-Georg Ringe show in The Political Economy of Global Stock Exchange Competition, this only reflects a part of a much more interesting and important story, which, they argue, calls for “sustained scholarly engagement across law, economics, and international relations.” The paper convincingly shows why this is the case.

The paper makes two main arguments: first, that competition for IPOs is less significant than the conventional accounts assume. Second, that states regard stock exchanges as strategic assets in their competition with each other.

As to the first point, after discussing prominent examples of the conventional story (Shein, Alibaba, and Aramco), the authors note that changes in the markets—in particular, the growth of private capital— mean that IPOs are less significant for exchanges than they used to be. Faced with the increase in the prevalence of private capital, exchanges have collective action problems (e.g. P. 15), although some, such as the LSE, are developing their own private securities markets as a response. The authors argue that the largest exchanges—in particular the NYSE—are benefitting from the decline in public markets, “winning a global competition for the largest slice of a shrinking pie” (P. 16). The attractiveness of the NYSE as a listing venue, they argue, is explained by this phenomenon, rather than the result of regulatory arbitrage. In addition, they note that regulatory competition is not a significant factor for all companies (in particular for smaller companies). But, importantly, for exchanges, revenues from trading, clearing, data, and analytics are much more significant than revenues from listings (P. 11).

As to the idea that states (and the EU, in the context of the Capital Markets Union project) see themselves as having strategic interests in the competitive strength of their exchanges (P. 4), the authors identify the state’s interests as direct economic benefits in tax revenues and employment, but also indirect benefits, some of which derive from companies’ and investors’ home bias (some of which derives from regulatory constraints on certain institutional investors or on official encouragement): “given home bias on the part of listing companies and investors, domestic exchanges provide an important mechanism for funding local enterprises and generating returns to domestic savings” (P. 19). Other benefits may also accrue, for example, as firms embedded in domestic markets may be less likely to engage in aggressive tax planning (P. 20).

The EU worries, for example, in the Draghi Report, that firms that move their listings outside the EU will also relocate their economic activity outside the EU, reducing the EU’s economic competitiveness. And the authors argue that more generally states see capital markets “as strategic infrastructure, entwined with national industrial policy, data sovereignty, and global supply chain security” (P. 22). In addition to the example of the EU, the authors also describe China, the US, Singapore, India, and Israel as focusing on exchanges as strategic assets. And jurisdictions use the fact of listing as the basis for imposing regulatory requirements on firms, for example, relating to human rights and sustainability. But states may also focus on exchange activities from a geopolitical perspective in ways that may even harm their economic interests.

The complexity of the story the authors tell in this paper is important and useful, as is their invitation to researchers to engage in work to understand the links between “stock exchanges, financial sovereignty, and the quest for geopolitical advantage” (P. 32).

Institutional Disinterest

Jan 21, 2026 Bill BrattonAdd a Comment

Bill Bratton

It’s been ten years since MFW and Corwin opened a process pathway to business judgment review of cashout mergers, subject to Weinberger, and arm’s length mergers, subject to Revlon. At the time the cases came down, I anticipated smooth sailing for the cases’ two-track cleansing regime, under which the defendant needs independent director approval followed by ratification by a fully informed and uncoerced majority of disinterested shareholders. I figured that we had enough law in place on each of the tracks to make their application a straightforward matter. The components of the board approval leg, director independence and a special committee process, were focal point matters in late twentieth-century corporate governance, and there were plenty of Delaware cases providing guidance. The shareholder approval leg had a sketchier background. We had a well-developed law, mostly federal, on the full information requirement, and we knew coercion when we saw it. We had much less on the table to help us with precise questions respecting majority disinterested shareholder approval, because shareholder ratification had not theretofore been the usual practice recourse respecting conflicted transactions. But how hard could it be to fill in the details?

It turned out to be a lot harder than I thought. MFW and Corwin came down before everybody’s attention turned to the Big Three institutional investors and their growing block of voting shares and the closely related question of portfolio investor incentives, in particular the incentives of “common owners.” Common owner conflicts first popped up on the screen in 2004 with the empty voting allegations triggered by the Mylan-King merger agreement. The problem has been looming larger ever since, implicating not just corporate governance but antitrust.

Corporate law models shareholders as single firm owners whose fortunes rise and fall in lockstep with the fortunes of the corporate stock issuer. The incentives of portfolio investors can differ sharply, as a simple example will show. Target (T) has 1,000,000 shares outstanding and is merging into Acquirer (A), which has 5,000,000 shares outstanding. The merger price is $50 per T share. Unfortunately, the merger process has been impaired by self-dealing at T. It plausibly can be shown that T could have been sold for $60 per share. In fact, Bidder (B) is ready to make such an offer. A sole owner of T shares, knowing all of this, will vote against the merger, looking to improve its yield by $10 per share in a B merger. Compare institutional investor Delta (D), which owns one percent of T (10,000 shares) and five percent of A (250,000 shares). D has every incentive to vote its T shares in favor of the merger, because the $10 per share bargain is worth $10,000,000 to A and hence $500,000 to D, while the $10 per share opportunity cost at T implicates a loss of only $100,000 to D in its position as a one percent owner. D’s economic interest is clearly opposed to that of a sole owner of T stock. But does this incentive skew make D an “interested” voter for Corwin purposes?

Marcel Kahan and Edward B. Rock offer an exhaustive analysis of this problem. Everything is beautifully set up. The base issue is whether we should go into these incentive questions at all, because “interested” can be defined narrowly or broadly. Under the narrow definition (majority of unaffiliated or MOU), only those directly involved in the transaction and their affiliates are disqualified. Under the broad definition (majority of economically disinterested or MOD), a shareholder’s economic incentives are subject to question when set against the sole owner yardstick, making common owner votes vulnerable to challenge. Kahan and Rock, having thus stated the issue, provide us with a neat set of real-world transactional examples to serve as focal points for law-to-fact analysis. Then they summarize Delaware law, which turns out to be even sketchier than I thought, as it vacillates between MOU and MOD.

The big question concerns the specifications of an MOD regime: Which common ownership positions implicate a cognizable incentive skew and which do not? Kahn and Rock really go to town here. They show that the conflict’s severity is a function of (1) the joint gains yielded by the transaction; (2) the amount of the joint gains as a percentage of the value of T; and (3) a variable they call the ownership stake multiplier, which is a function of the common owner’s stakes in T and A.

It’s all algebra at this point, so it’s a good thing Kahan and Rock have four sample transactions ready to be run through their analysis. We get a disturbing result at the end of the line: Except where joint gains are negative and the common owner has a higher stake in T than in A, it is entirely possible that a common owner will vote in favor of a transaction yielding less than the pre-transaction value of T. Here is a shocking example from the paper. A’s pre-merger value is $2 billion, T’s pre-merger value is $1 billion, and a merger of the two will yield a combined company worth $3.1 billion. D owns six percent of T and five percent of A. The merger price is $510 million, which, of course, is $490 million less than the value of T. Yet D will vote in favor of the deal! Here’s why: “The value of the common owner’s combined stake would be $160.1 million if the merger is approved (5% of the $2.59 billion value of Acquirer ($129.5 million) plus 6% of the $510 price paid for Target ($30.6 million)) compared to $160 million if the merger is not approved (5% stake in Acquirer worth $2 billion plus 6% stake in Target worth $1 billion).” (P. 17.)

Kahan and Rock go on to give us a hard-nosed and well-informed discussion of the institutional implications of their findings. They want nothing to do with MOU. They also reject an approach suggested by Lawrence Hamermesh and Henry Hu (in a paper available here) under which unaffiliated voters would be presumed to be disinterested, with the plaintiff bearing the burden of proof to show otherwise. Kahan and Rock make an old school objection to this, insisting that the burden to qualify the transaction stay firmly on the conflicted fiduciary. That said, Kahan and Rock admit that an MOD regime would create much uncertainty in the market for mergers and acquisitions. Nor, as it turns out, is Kahan and Rock’s incentive test easy of real-world application: institutional holdings are not transparent, and there’s no verifiable joint gains number with which to anchor the test. Kahan and Rock close with a rule proposal that looks for tractability even as it would cut back on MFW and Corwin—they recommend that there be no cleansing effect accorded to a vote in the event of a “material” level of negative votes and “widespread” common ownership.

A companion piece, Explicit and Implicit Bundling in Shareholder Voting on Cleansing Acts, available here, is also recommended.

A Time Traveler’s Guide to Business Organizations: Barry Hawk’s Journey From Assur to Amsterdam

Dec 9, 2025 Sergio Alberto Gramitto RicciAdd a Comment

Sergio Alberto Gramitto Ricci

What if you could embark on a journey through time and space, witnessing the birth and evolution of business organizations across civilizations? Barry Hawk’s remarkable new book, Family, Partnerships and Companies: From Assur to Amsterdam, offers precisely such an adventure—a sweeping historical panorama that traces the development of business associations from ancient Mesopotamian merchants to the Dutch trading houses that would eventually reshape global commerce.

Hawk’s achievement is nothing short of extraordinary. Rather than confining himself to the familiar terrain of English common law or European commercial development, he excavates the deep historical roots of business organization across nine distinct societies and cultures. From the Old Assyrian naruqqum of the early second millennium BCE to the joint stock companies of Renaissance Europe, Hawk demonstrates that the human impulse to pool capital, share risk, and organize commerce transcends geographical and temporal boundaries. His methodological approach represents a significant departure from traditional corporate law scholarship, which too often treats business organizations as products of modern legal evolution rather than as institutions with deep historical roots.

The book’s scope is breathtaking. Hawk guides readers through the merchant oligarchy of ancient Assur, where traders developed the naruqqum—what he aptly describes as a “joint stock fund”—to finance their lucrative caravan trade with Anatolia (Pp. 37-41). We witness the pragmatic innovations of Roman law, with its sophisticated societas publicanorum that enabled public contracting on a massive scale (Pp. 76-93). The journey continues through the Islamic world’s partnership traditions, the merchant associations of medieval India, the Tang lineage trusts of China, and ultimately arrives at the bustling commercial centers of medieval and early modern Europe.

What makes this work particularly valuable is Hawk’s careful attention to the economic, political, and social contexts that shaped each society’s approach to business organization. He avoids the teleological trap of viewing ancient forms merely as primitive precursors to modern corporations. Instead, each organizational innovation emerges as a thoughtful response to specific commercial needs and constraints. The Old Assyrian naruqqum, for instance, was not a failed attempt at creating a modern corporation, but rather a naruqqum (P.93). This methodological sophistication distinguishes Hawk’s work from earlier scholarship that often imposed modern analytical frameworks on historical institutions without adequate attention to their specific contexts.

While I have argued elsewhere that Ancient Rome deserves credit for creating the corporate form and establishing the foundations of business corporations (Sergio Alberto Gramitto Ricci, Archeology, Language, and Nature of Business Corporations, 89 Miss. L. J. 43, 74-79 (2019)), Hawk’s work offers an invaluable complement to this perspective. His archaeological approach to business organizations reveals the rich tapestry of experimentation that preceded Roman innovations.

Hawk illustrates how similar economic pressures tend to produce similar organizational solutions across time and space. His insights provide crucial theoretical grounding for modern comparative corporate law scholarship and resonate with my own work on the fundamental importance of asset partitioning and separation of ownership and control in corporate entities (Gramitto Ricci, Archeology, Language, and Nature, Pp. 72-74).

The book masterfully documents diverse historical threads, identifying common patterns while respecting the uniqueness of each society’s contributions. Hawk’s analysis of how legal personality, asset partitioning, and contractual flexibility drive entity choice provides a conceptual framework that illuminates both historical and contemporary business organization. This work represents one of the most sophisticated attempts to date to identify the fundamental drivers of organizational innovation across legal systems and historical periods.

One minor criticism: the book’s focus on successful innovations might benefit from more attention to organizational forms that failed or were abandoned, which could provide important insights into the limits of institutional adaptation. This quibble aside, Family, Partnerships and Companies is a tour de force that will be indispensable for anyone seeking to understand the deep historical foundations of modern business law. Hawk has given us a work of remarkable scholarship that treats business organizations not as dry legal technicalities but as human institutions that reflect the ingenuity, creativity, and adaptability of commercial societies across the ages. The book’s interdisciplinary approach, combining legal analysis with insights from economic history, anthropology, and comparative law, establishes a new standard for historical scholarship in corporate law.

For corporate law scholars, the book offers a fresh perspective on foundational questions about the nature and purpose of business organizations, challenging received wisdom about the origins of key concepts. For historians, it provides a masterful synthesis of commercial development across civilizations that will undoubtedly influence future scholarship on the relationship between law and economic organization. For practitioners, it offers valuable context for understanding why certain organizational forms persist while others fade into historical curiosity, insights that may prove useful in designing new business structures for contemporary challenges.

In an era when corporate purpose and governance face renewed scrutiny, Hawk’s historical lens reminds us that business organizations have always been tools shaped by human needs and social values. As Martin Gelter notes in his epilogue, “Barry Hawk’s successors in centuries to come will look back at a complex landscape of legal forms that may be as strange to them as the Assyrian naruqqum is to us” (P. 245). This book ensures that our understanding of that landscape will be far richer for Hawk’s extraordinary scholarly journey.

Saying Yes, But Meaning No—Rethinking Coercion in Debt Reorganizations

Nov 11, 2025 Matteo GattiAdd a Comment

Matteo Gatti

In Getting to Yes: The Role of Coercion in Debt Renegotiations, Professors Vincent Buccola and Marcel Kahan offer a deep and clarifying intervention in a murky but critical corner of modern corporate finance. Despite the surge in controversial out-of-court restructurings—where debtors use increasingly aggressive tactics to sidestep unanimity and rewrite deal terms—the legal framework for evaluating such moves remains surprisingly underdeveloped. Judges tend to treat these fights as disputes among sophisticated players and very rarely imply covenants or override textual language. Buccola and Kahan step into this vacuum with an elegant conceptual framework for understanding coercion in debt alteration and, crucially, when courts should push back.

This is an important piece, both for its ambition and its pragmatism. Its core insight is that many renegotiation techniques may induce “consent” from creditors while leaving them collectively worse off. Buccola and Kahan offer a systematic account for understanding how this happens, identifying four key structural features—ranking, conditionality, exclusivity, and voting variability—that shape the coerciveness of any consent solicitation. They then show how these features combine in real-world practices such as exchange offers, exit consents, dual conditionalities, ballot stuffing, and exclusive uptiers, many of which have gained prominence in recent years. Some of these strategies resemble classic coordination problems or even prisoner’s dilemmas, in which individual creditors are pressured to accept a deal that, in aggregate, harms the group. By rigorously mapping the mechanics and incentives at play, the authors create a typology of coercive tactics that can push transactions over the finish line even when they diminish overall creditor value. This roadmap will be essential not only for academics but for practitioners and judges navigating these increasingly frequent and complex contests.

What makes their paper timely is the growing dissonance between market practice and the absence of a theoretical or doctrinal compass. As the authors note, litigation over debt restructuring mechanics has proliferated—but often without a common vocabulary or framework for assessing what’s at stake. The problem isn’t just doctrinal uncertainty—it’s that we lack a broader legal theory for how to think about coercive debt renegotiation. Courts often resolve these disputes ad hoc, without clearly articulating what makes a transaction problematic beyond vague intuitions about fairness or overreach. Buccola and Kahan premiere a shared grammar.

They also strike the right tone. Their paper resists taking sides. Instead, it adopts a measured middle ground: everyone at the table—private equity sponsors, institutional investors, their lawyers—understands the trade-offs between stronger contractual protection and pricing. The contracts may be incomplete, but the parties are not naïve. Thus, the question isn’t how to rescue unsophisticated investors but how to design rules that deter destructive rent-seeking on either side, while still allowing for value-enhancing adjustments when circumstances change.

This last point is among the paper’s most poignant contributions: the authors wrestle directly with the tension between market failure and surplus maximization. Coercion isn’t always bad; sometimes it’s the price of overcoming holdout problems and unlocking value. But some tactics—particularly those involving exclusivity, like uptier exchanges or selective inducements—seem more like grabs than governance. The trick, as always, lies in distinguishing between the two.

The authors’ proposed interpretive presumption—essentially a version of contra proferentem for coercive solicitation methods—offers a workable doctrinal nudge. Where contracts are silent or ambiguous, courts should lean against coercion. But Buccola and Kahan stop short of endorsing sweeping bans or mandatory terms. They recognize the complexity of the terrain, the variability of contracting practices across markets, and the risk of choking off innovation with overly rigid rules.

Still, the institutional realities loom large. As the authors acknowledge, these decisions are made by judges who are likely to be more sympathetic to debtors—especially when the alternative is a value-destructive bankruptcy that risks layoffs and other spillover costs. Institutional investors, by contrast, may be perceived as sophisticated repeat players who had every opportunity to protect themselves. That background bias, however defensible, means courts may hesitate to police coercion even when the legal or economic case for intervention is strong.

This raises a broader policy question, only implicit in the paper but hard to ignore: Are we witnessing a quiet blurring of the boundary between bankruptcy and contract law? Buccola and Kahan describe a landscape where private restructuring techniques—uptiers, ballot stuffing, exclusive exchange offers—achieve results that resemble bankruptcy outcomes but without judicial oversight, creditor committees, or statutory protections. In effect, these are reorganizations through contract rather than court. That drift invites debate about whether debt workouts should remain primarily a matter of private contracting, or whether some of these practices warrant a policy response. While the authors refrain from normative pronouncements, their description lays the foundation for precisely that debate.

So where should the conversation go next? First, as the authors themselves hint, we need more empirical work tracking the actual impact of different solicitation structures on bond pricing, default outcomes, and cost of capital. What market signals exist to distinguish coercion that is merely aggressive bargaining from coercion that is genuinely value-destroying? Second, more normative clarity is needed about the role of courts. Should judges aim to maximize aggregate creditor value? Police consent quality? Preserve contracting incentives? Buccola and Kahan point us in these directions without prescribing a single theory.

Finally, the bigger institutional question deserves sustained attention: If out-of-court restructurings now do much of what Chapter 11 once did, should we rethink the legal boundaries between bankruptcy and debt contracting? Buccola and Kahan don’t push that far, but they’ve shown us how to start thinking seriously about it.

And for that, this piece will be indispensable reading for anyone who thinks seriously about debt, contracts, and the institutions that hold them together—or let them be unwound.

Understanding The Nature and Role of The Entrepreneur and Entrepreneur-created Value in Theorizing The Business Judgment Rule

Oct 10, 2025 Charles O'KelleyAdd a Comment

Charles O'Kelley

In the past 24 months, Delaware’s place as state-corporation-law hegemon has undergone sustained hurricane-force blowback from Court of Chancery and Supreme Court decisions and subsequent legislation, which have shattered the long-standing belief that for most publicly-traded firms, the benefits of incorporating in Delaware exceed the costs, including the costs and risks of stockholder litigation. At the center of Delaware’s existential crisis are the Court of Chancery decision in the Tornetta litigation rescinding Elon Musk’s $57 billion compensation package, the Supreme Court decision in the Match litigation extending MFW¹ to all controlling-shareholder-conflicted transactions, and the Delaware legislature’s February 2025 enactment of Senate Bill 21 in reaction to those and related judicial decisions. Fundamental to a meaningful critique of these cases and Senate Bill 21 is an under-the-radar question: how should entrepreneur-influenced or entrepreneur-controlled transactions and decisions fit in a value-optimizing theory of the business judgment rule? Focus on this question, and the nature and role of the entrepreneur have largely been missing from scholarly commentary. A much-needed antidote is now available in a provocative forthcoming article, Zohar Goshen, Assaf Hamdani, and Dorothy Lund, Fixing MFW: Fairness and Vision in Controller Self-Dealing (hereinafter “Fixing MFW”), available at SSRN and forthcoming in the Harvard Business Law Review.

While Fixing MFW’s title suggests a focus only on controller self-dealing, its actual focus is much broader, including, as its poster child, Elon Musk, a quintessential entrepreneur whose stockholding would not treat him as a controlling stockholder under the safe harbor provided by Senate Bill 21. In other words, a central concern of Fixing MFW is how the business judgment rule should apply whenever a powerful entrepreneur, whether a controlling stockholder or not, receives non-ratable benefits in a transaction with the corporation. Such transactions would include the compensation package Musk received from Tesla, or the merger of Musk’s energy company, SolarCity, into Tesla. As Fixing MFW convincingly demonstrates, these transactions should be analyzed similarly, whether Musk falls within the governing understanding of a controlling stockholder or not, because they both involve the insolvable problem of what the authors call “idiosyncratic value.”

As Frank Knight convincingly explained in his seminal opus, Risk, Uncertainty, and Profit (1917), still the leading account of the nature and role of the entrepreneur, the entrepreneur exists to combat the real-world problem of uncertainty – which essentially includes all future contingencies that involve uninsurable risk. It is the role of the entrepreneur in the real world to create and execute a vision for a business enterprise, product, or service that not only does not currently exist, but will be profitable. That is, the envisioned enterprise, product, or service must promise to those who invest in the venture – the corporation’s non-employee shareholders and employees with equity-based compensation – that they will be rewarded with “profit”, with profit being understood as a return on their investment of human or money capital that substantially exceeds what would be returned in an investment facing little or no uncertainty. What Knight calls “profit” or “pure profit”, is what Fixing MFW calls the result of accomplishing an entrepreneur’s “idiosyncratic vision.” In other words, the entrepreneur’s “profit” in Knightian terminology is in the rubric of Fixing MFW, “idiosyncratic value.” Boiled down to its essence, the central claim of Fixing MFW is that Delaware’s judiciary and legislature err in assuming that idiosyncratic value is capable of proof, and compound that error by the standards of review and safe-harbor opportunities that they impose on or make available to a controller attempting to accomplish a transaction in which stockholders do not participate ratably in both the value and type of consideration received.

Fixing MFW begins with a quick recounting of the massive uncertainty that existed at the time of Musk’s compensation award as to the possibility of Musk meeting even one of the vesting milestones. Key experts termed the award a publicity stunt and advised of Tesla’s looming bankruptcy. Likewise, the stock market was flashing serious warning signs as to Tesla’s value. A key passage demands quotation:

When Tesla designed the compensation plan, its outlook was grim. It had recently reported record losses and struggled to meet production targets for its new Model 3 car. By October 2018, several months after Tesla announced Musk’s compensation plan, Tesla’s share price plummeted to below $17, prompting hedge fund manager David Einhorn to alert his investors that Tesla bore a grim resemblance to Lehman Brothers before its 2008 bankruptcy (a collapse that Einhorn had foreseen months before it occurred). By June 2019, Tesla’s shares had plunged further, dropping below $12—a 48% decrease from the date of the plan’s announcement. It was not until December 2019 that the stock price finally rebounded to its initial level of $23.51, where it had stood two years earlier when the plan was introduced. (Pp. 579-580.)

This pithy but compelling description of the massive uncertainty surrounding Musk’s bet on himself, which bet was joined in by Tesla’s directors and authorized by the vote of a majority of its disinterested stockholders, has powerful implications for evaluating SB 21 and the continuing application of cleansing mechanisms to police controller self-dealing in which idiosyncratic vision must be valued, such as non-freezeout mergers and CEO compensation. As Fixing MFW demonstrates, such vision is impossible to value under the typical valuation metrics used by courts and financial experts because it depends on future outcomes that are not subject to current risk assessments in an insurable sense. Such idiosyncratic vision predicts above-market returns that cannot be extrapolated from the current values of the human and money capital to be deployed in pursuit of the vision, because that capital is being deployed not in anticipation of maintaining its current values through the receipt of average market returns, but in the belief that substantially above-market returns will be achieved.

After explaining how MFW was understood prior to SB 21, Fixing MFW explores how Delaware judges recently exhibited differing approaches to the valuation of the idiosyncratic-vision problem and to the role of the entrepreneur. The court in Tornetta, after determining that Musk was a controller, applied existing Delaware jurisprudence and placed on Musk and defendant directors the burden of proving the entire fairness of the compensation award. Asserting that the board should have approached the Musk award with strict arm’s length bargaining and with the aid of traditional compensation analyses comparing the grant to those of comparable CEOs, the court concluded that the director approval process was not entirely fair. The failure to inform stockholders of this deficient process meant that the stockholder vote was not fully informed. The court showed no awareness of the unique role of the entrepreneur or the fact that directors and most stockholders believed in Musk’s vision. In its ruling, the court found nothing to legitimate the presumptions of the business judgment rule, preferring its subjective analysis of how the directors and stockholders should have acted and been treated. Asserting that the Musk award was “unfathomable,” the court found that the defendants had failed to carry their burden of proving that the price, process, or disclosures to stockholders had been entirely fair.

In contrast, in the earlier SolarCity litigation, in which a company Musk controlled was merged into Tesla, the court avoided deciding whether Musk was a controlling stockholder, acknowledged the difficulty of valuation, but found that the process and consideration offered by Tesla to SolarCity and its minority stockholders was entirely fair. It did so by avoiding the Tornetta trap of ignoring the unique role of an entrepreneur, the idiosyncratic nature of an entrepreneur’s vision, and the support of that vision by Tesla’s stockholders. Rather, the court considered a variety of factors, including disinterested stockholder approval and the staggering increase in Tesla’s post-merger stock market valuation, as key indicators of fair price and fair process.

This contrast in approach taken by two judges on the Court of Chancery to transactions involving Elon Musk, who at no time owned more than a quarter of Tesla’s stock, illustrates the shortcomings of current Delaware jurisprudence concerning idiosyncratic valuation issues, particularly when the idiosyncratic vision is substantial, as in the Musk cases. This shortcoming is partially addressed by SB 21, as Fixing MFW succinctly describes and examines.

Fixing MFW critiques Delaware’s approach to control and controller transactions both before and after SB 21. It proposes three detailed sets of reforms. The first set addresses the MFW cleansing regime; the second set examines the safe harbor provisions of new section 144; and the third set challenges how entire fairness review addresses the impossible problem of proving the value of an entrepreneur’s idiosyncratic vision.

The first two sets are provocative, sweeping, and defy accurate summarization or the excessive quotation needed to do them justice in this type of review. Importantly, they advocate greater reliance on disinterested stockholder decision-making as long as financial aspects of a controller transaction are fairly disclosed, and structural reforms that incentivize the use of exemplary special committee processes.

The third set of reform proposals address the circumstance in which, as in Tornetta or Solar City, entire fairness is the standard of review. The most interesting aspect of these proposals is how entire fairness review should be conducted when an entrepreneur’s idiosyncratic vision must be valued.

Where no cleansing mechanism is used, the court lacks assurance that an independent decision-maker has validated the controller’s vision or its price. In such cases, the burden should be on the defendant to show that the price was appropriate relative to the average value of comparable assets or transactions. (P. 588.)

Since there can be no appropriate comparable assets or transactions, a controller who has used neither MFW cleansing mechanism would almost always be unable to prove entire fairness when idiosyncratic value is a substantial factor. As such, the proposal is a draconian penalty (or process-forcing) default rule that, in circumstances where entire fairness is the standard of review and idiosyncratic value is a substantial factor, would almost certainly ensure a controller’s careful use of the authors’ preferred solo–cleansing-mechanism – the vote of a majority of the disinterested stockholders.

It is unlikely that a majority of readers will be in total agreement with every detail of Fixing MFW’s sweeping proposals. But I suspect that the authors’ goal is not to persuade that their proposals are “just right” in the fantasy world of Goldilocks. Rather, they are presenting pragmatic solutions that are within the realm of real-world political or judicial adoption. In other words, they write as Berle-like legal intellectuals to show a feasible path to a better corporation law regime.

Fixing MFW is legal scholarship at its best. It walks a fine line between telling a story accessible to those not expert in corporate law while accurately covering every important nuance of the relevant legal material and introducing the reader to the essence of the entrepreneur and her vision. The result is a paper that could easily be used to wrap up an introductory corporation class, be a centerpiece of an advanced corporation seminar, or serve to educate legislators and State Bar corporation law committees in Delaware or elsewhere. The authors’ reform proposals serve as a clarion call for legal scholarship and reforms grounded in an understanding of the unique role of the entrepreneur and her idiosyncratic vision, and the importance of not disincentivizing entrepreneurism in our corporations, whether private or publicly-held. As debate continues to rage and important appeals remain undecided by the Delaware Supreme Court, Fixing MFW should be read, considered, and debated not only in Delaware, but wherever and whenever corporate law intellectuals and actors congregate to mull the future of American corporation law.

1. Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014).

The Shareholder Democracy Promise

Sep 10, 2025 Tom C.W. LinAdd a Comment

Tom C.W. Lin

Governance is hard; democratic self-governance is even harder. The governance of our political institutions and corporations is replete with evidence of such difficulties. Yet, the alternatives to democratic self-governance, while administratively easier, are filled with their own dangers. As such, appeals to democracy and conceptions of democracy have long been used in law, business, and politics throughout history to justify policies and actions of varying democratic ends.

In The Shareholder Democracy Lie, Professors Sergio Gramitto Ricci, Daniel Greenwood, and Christina Sautter offer a deeply researched and rigorously reasoned critique of one of corporate law’s most enduring metaphors and misleading myths: shareholder democracy. The authors argue that the noble rhetoric of shareholder democracy does not reflect legal, institutional, and historical realities—and that this rhetorical distortion carries real consequences for corporate governance, political legitimacy, and social progress.

At the heart of the article is a simple but powerful insight: corporations are not democracies, and shareholders are not citizens:

The shareholder democracy rhetoric implies that shareholders control corporations in a democratic fashion, including by voting, rights to expression and dissent, and minority protections to prevent incumbents from using their power to entrench themselves or to impose winner-take-all norms. Moreover, shareholder control, if it is to merit the description “democratic,” inherently requires widespread popular access to and ownership of shares because only shareholders have a voice in corporate elections. None of these standard aspects of democracy are present in corporate law. (P. 3.)

The authors trace the history of the term “shareholder democracy” in America, chronicling its emergence in the 1920s as a public relations strategy to attract retail investors while insulating corporate elites from government regulation and labor demands. In this history, the authors find not democratic aspiration but ideological appropriation—a corporate mythology meant to rebrand managerial control as popular empowerment.

Yet the article does more than unmask the hollow rhetoric of corporate democracy. It marshals detailed evidence and powerful examples—from the structure of proxy voting, to the concentration of share ownership, to the role of proxy advisory firms—to highlight that shareholder ownership and power are largely undemocratic, as the term is often used and understood politically and colloquially. The conventional “one share, one vote” rule in corporate law logically privileges wealth over personhood, shareholders over non-shareholders. And the decades-long exclusion of marginalized communities from meaningful stock ownership, exacerbated by barriers to employment and access to capital, reveals the historical structural inequities that make investment participation in the contemporary corporate-economic system difficult for many people.  Furthermore, contemporary shareholder power is not only limited in terms of ordinary people and individual shareholders but largely outsourced, intermediated, and concentrated among a few powerful institutions that have outsized ownership stakes and thus outsized influence.

In an age where the language and idea of democracy are frequently co-opted to justify undemocratic ends, this article offers a clarifying, timely, and thought-provoking perspective. What makes The Shareholder Democracy Lie especially instructive is that it connects legal history and doctrinal analysis with broader theories and real-world practices of political economy. The authors demonstrate that the rhetoric of shareholder democracy, far from being innocuous, helps legitimize and entrench corporate power in ways that distort democratic governance and public policymaking. Their article calls not merely for doctrinal clarification, but for conceptual honesty that can lead to meaningful reforms in corporate governance. In uncloaking the myth of shareholder democracy, they urge scholars, regulators, and the wider public to candidly confront the mismatch between the stories we tell ourselves about corporations and the realities we live with on a daily basis.

Democratic self-governance, however theoretically alluring and promising, often falls short of its high ideals because humans fall short. The myth of shareholder democracy, highlighted by Professors Sergio Gramitto Ricci, Daniel Greenwood, and Christina Sautter, is fundamentally about where corporate law and corporate governance have fallen short in a democratic society. That said, like many myths, the shareholder democracy lie holds an unfilled promise and a deeper truth about what can be possible when we look behind the myth. During a time when many democratic institutions appear to be faltering and failing, looking behind the myth, as this article astutely does, can help us see what can be better in law, business, and society—and more importantly, how we can perhaps get there.

When Business is a Cult

Jul 30, 2025 Ann LiptonAdd a Comment

Ann Lipton

Recent high-profile business implosions such as FTX and WeWork introduced the world to the notion of the business cult. In these firms, a charismatic founder created pressure-cooker working conditions where dissent was stifled and a grandiose business philosophy – such as the “We” in WeWork and the effective altruism of FTX – fueled employee devotion.

In her book, Little Bosses Everywhere: How the Pyramid Scheme Shaped America, New York magazine reporter Bridget Read excavates a much older, and much larger business cult: the cult of multilevel marketing. Multilevel marketing is a model whereby a network of independent “sellers” buy products from a manufacturer, for the ostensible purpose of reselling to end-users at a profit, but sellers also earn commissions based on the purchases of new sellers who they bring into the network. Beginning with its origins with the Nutrilite Company and tracing through to its modern form in companies like Mary Kay, Amway, and Herbalife, Read convincingly demonstrates that the model is, fundamentally, a pyramid scheme: sales to actual customers are negligible and rarely even tracked; profits accrue only to those very few members (in the vicinity of 1% or less) who have built a large “downline” of new recruits who kickback commissions when they make their own purchases.

The recruitment and retention tactics Read describes will be recognized by anyone who has ever studied cult behavior, from careful grooming with flattery and friendship, to revival-like meetings where members are celebrated and doubts are discouraged. Recruits are taught that success and wealth are entirely traceable to a positive mindset that excludes all negative thoughts – a philosophy that conveniently leads members to shut down their own critical faculties and thus ties them closer to the enterprise. Many turn over their entire lives to these organizations, eventually driving away friends and family in their pursuit of sales (or new recruits).

Yet despite the predatory nature of these firms, they often function out in the open, building out successful political and lobbying arms that protect them from government regulation. As Read tells it, the FTC and the industry created a set of standards that would be used to distinguish “legitimate” multilevel marketing organizations from illegitimate ones, which include promises that products would be sold to real consumers. However, Read demonstrates how loosely these requirements are policed, and how the multilevel form – ever adaptable – responded by creating offshoot products of instructional and motivational tools, supposedly necessary for success in the business, sold to members who might then resell them further down the chain.

In Read’s telling, multilevel marketing organizations blend religiosity, prosperity gospel, and an American-style work ethic, where financial success is treated as proof of merit – and the lack of success can only be attributed to individual failures rather than a systemically flawed business model. In that way, there is a close connection to the industry and a radically deregulatory form of conservatism that is deeply hostile both to the social safety net and to consumer and employee protections. Read argues that the false dream of individual entrepreneurship sold by these firms has ultimately penetrated the political system, undergirding much of what we see in government today.

The book is ultimately an enraging, and damning, account of our legal system, where to achieve “respectability” within the regulatory establishment, whether as an expert witness, a court, or a politician, one must at least accept as a basic factual premise the highly contestable claim that some multilevel marketing represents a legitimate business model, so that the task of a judge or a regulator is to distinguish the good from the bad. But that requires a buy-in to the fundamental philosophy at the heart of the industry: that individual failures must be traceable to lack of effort and skill, rather than a rigged game.

Stakeholder Enforcement of International Law: A Potentially Significant Adjunct to Traditional Enforcement Efforts

Jul 1, 2025 Joan MacLeod HeminwayAdd a Comment

Joan MacLeod Heminway

Many business law scholars in the United States are attracted to research projects focused on domestic—and more particularly Delaware—corporate legal doctrine and enforcement. Rightly so, given Delaware’s historic prominence as a home for publicly traded and multijurisdictional corporations. Yet even in the throes of tariff wars being waged at the time this post was authored, business—corporate business—is international and often global.

Legal enforcement against corporations in a transnational context proves to be complex. Typically, it is undertaken through traditional approaches ordained by international law—legal actions brought in courts and governmental regulatory processes. These avenues of enforcement are most frequently seen as exclusive and distinct. However, in her article Corporate Governance & International Law, Kishanthi (“Kish”) Parella encourages inspection of a potential third enforcement option that can work with the others: stakeholder enforcement of international law. Her insights inform a fresh look at global corporate legal enforcement mechanisms in an era that tends to value, if not embrace, a more holistic participation of stakeholders in corporate governance.

Parella includes a broad swath of corporate constituencies in her definition of corporate stakeholders. Her conceptualization of stakeholders includes “individuals and groups who affect the success of a corporation and, in turn, are affected by that corporation. Familiar examples include not only shareholders but also consumers, employees, suppliers, and local communities, among others.” (P. 421.)

What can these stakeholders do to enforce law transnationally? Parella identifies and defines four categories of stakeholder enforcement—predicative, amplification, facilitative, and direct—and describes how each may be used in sequential patterns of enforcement that may reduce detrimental stakeholder conflict and lower collective action costs. Among other things, “stakeholder enforcement by one individual or organization,” she writes, “can change the willingness of other stakeholders to enforce by highlighting the benefits of enforcing a rule or highlighting the risks that occur when a rule is transgressed.” (P. 423.)

The stakeholder enforcement recognized by Parella looks and feels different from what we may commonly recognize as legal enforcement. In this regard, Parella explains that stakeholder enforcement does not derive its power from traditional judicial or regulatory remedies. Rather, its enforcement capacity derives from its ability to acquire significant information and convey it to market actors who can cost-effectively mete out punishment to those who transgress international aw rules and norms. Moreover, Parella notes, stakeholder enforcement initiatives have the capacity to perform expressive functions, influencing the creation and evolution of both corporate and stakeholder norms.

Having established the potential value of stakeholder enforcement in transnational legal enforcement, Parella then undertakes, through comparative institutional analysis, to identify the circumstances in which reliance on stakeholder enforcement of international law may be warranted—not exclusively, but as an adjunct to traditional enforcement efforts. She contends that the analysis hinges on the “three objectives of international law enforcement: deterrence, punishment, and reparations” and that different types of enforcement may have value in serving the three objectives, with stakeholder enforcement operating better as a tool for deterrence than as a means of punishment or as an avenue for securing reparations. (P. 424.) Specifically, Parella observes that

[s]takeholder mechanisms are particularly valuable for deterrence because they can help to institutionalize corporations to comply with international law. Many corporate violations of international law arise because of business decisions made regarding supply-chain management, corporate governance, and business models. These practices need to change in order to ensure that corporations do not repeat their violations or commit new ones. (P. 460.)

She expressly notes reservations about whether traditional court or governmental enforcement efforts can effectively alter corporate decision-making processes or outcomes to better ensure more efficacious compliance with international law. Id. In other words, Parella offers, stakeholder enforcement may have more capacity to influence the actions of corporate management—boards of directors and officers—toward compliance.

Parella’s work is compelling at the current moment given U.S. and global uncertainties regarding judicial and governmental enforcement. In addition to the earlier mentioned tariff wars, armed conflicts between Russia and Ukraine and in Gaza represent potentially large destabilizing forces in international political and economic relations that may impact the existence or effectiveness of traditional adjudicative and regulatory enforcement. Parella’s work suggests that stakeholder governance may provide a pragmatic and valuable way forward to better ensure corporate compliance with international law and, as a result, transnational corporate financial and operational sustainability.

Don’t be Seduced by Agency Cost Theory and its Tales of Managers and their Temptations

May 28, 2025 Robert RosenAdd a Comment

Robert Rosen

This article explores “normative” agency cost theory. It does so by examining its most discussed prescriptions for making healthy corporations (empowered shareholders, monitoring boards, pay-for-performance, and the market for corporate control). Presenting very impressive evidence, the article concludes that the remedies prescribed don’t work either to minimize managerial self-dealing or increase returns to shareholders. Yet despite the evidence, these remedies are still being prescribed. Professor Tingle’s confrontation with that fact is a singular contribution. Until I read this article, I believed the response “agency cost theory is good, it just has been poorly implemented; the dosages just need adjusting.” Professor Tingle offers a different response, the incontestability of agency theory’s “seductive simplicity” (P. 60).

Tingle reveals that normative agency theory’s continuing power derives from it telling a tale of temptation and seduction that “seems uncontroversial” (P. 15). It provides an account of how self-interested and unrestrained agents would act if given the opportunity to cheat. Without evidence, it assumes that “managers are systematically disloyal” (P. 59). And this assumption is not testable. If corporations were run by monks, the successes of their corporations would confirm the theory, and if their corporations were unsuccessful, the monks would be revealed to be disloyal by how they were selected or by their ignorance (Pp. 10-11).

Tales of temptation and seduction are universal. But they do not need to become normative. Chastity belts and chaperones can sometimes reduce disloyalty. When couples’ interests are aligned, that too can sometimes reduce disloyalty. But these need not become best practices. In fact, there are other sources for loyalty and attention to them will better determine long-term success. And, presuming disloyalty may itself induce it. It is a question of fact for each relationship how to promote loyalty (in the face of many possibilities for disloyalty). That is why there are so many different tales of temptation and seduction in literature. In this sense, agency theory has a genre. However, the empirical evidence reveals that the drama of corporate life is much more particularized.

Saying that a theory has legs is to refer idiomatically to its strength. Agency theory has long legs in part because of its many carriers. Agency theory legitimated monitoring and bonding costs. Furnishing them became the task for corporate governance, employing many. There is a “governance industry” of fund managers, fund advisors, proxy advisors, corporate consultants, regulators and legislators (P. 16). This is not to suggest venality. After all, even “corporate managers themselves” diagnose governance deficiencies and have their corporations take the prescribed remedies (P. 58). Furthermore, in some cases, “the market believes the agency cost theory story, but the market is wrong,” as with the undervaluation of dual-class stock companies (P. 27) and the mispricing of acquisitions (P. 45).

The governance industry thrives because agency theory is simplistic in another sense. The “best practices” so prized in corporate governance are easily implemented, no idiosyncratic, insider knowledge is required (P. 7). Governance inputs neither calibrate markets, prescribe competitive strategy, nor otherwise contribute to the business plan.

In part because of the governance industry, good governance has become an end in itself. No one demands proof of its effectiveness. “Outside of some rhetorical flourishes” (P. 61), governance industries do not stake their rewards on demonstrating the competitive advantage of their remedies. Hence, they are not undone when remedies, such as “shareholder activism,” turn out to have no empirical correlation with “business improvement” (P. 23). Despite agency theory’s justifications for its prescribed remedies having been “contradicted by all available evidence” (P. 36), there has been “no impact on the behavior of institutional shareholders, regulators, proxy advisors, or governance experts” (P. 32). Not agency theory but its prescriptions are normative. We apply its remedies even though they neither reduce agency costs (by firing shirking CEO’s) nor increase shareholder returns. We desire pay-for-performance plans without any demonstration that they improve shareholder returns. We approve of increases in shareholder power not because we actually subscribe to the precepts of agency theory but because agency theory has flourished in a context in which shareholders are understood to be “owners.” The sociology of these normative beliefs includes agency theory but is not determined by it. As Tingle notes, “Increasing shareholder power” may be justified because it “will lead to better corporate outcomes” (P. 15, emphasis deleted). However, the normative thrust of agency theory is only to sanction “increasing power relative to managers” (P. 13), not to give shareholders leadership, let alone control. What is being worked out by the governance industry are norms that are not of proper control but of ownership.

One reason that agency theory survives is that it takes a theory to beat a theory. Agency cost theory displaced managerial theories about the benefits of agents, theories whose simplistic optimism no one misses. Agency theory’s simplifying foundational assumption of “unfaithful agents” (P. 55), on the other hand, commands attention. Agency theory is part of a general attack on bureaucracies, as Oliver Williamson demonstrated. Michael Jensen wrote that without pay-for-performance, corporate leaders are “like bureaucrats” (P. 40). When “bureaucrat” is a term of opprobrium, agency cost theories reign. For a counterweight to agency theory, most observers look to stakeholder theory, which does add the common weal to the criteria of being a faithful agent. But it makes no attempt to beat agency theory’s account of agent motivation. Professionalism once was an alternative theory, but is no longer on the active list. How can it be revived when expertise is understood as undemocratic and largely a means for opportunism?

Despite its simplicity, agency theory is praised for going beyond corporate law’s “black box” understanding of the firm (Pp. 5, 55). But it does not go very far. It does not add to the classic actors of corporate law: shareholders, boards, and a poorly defined group of officers and managers. It opens the black box only to make assumptions about the actors’ motivations, tracing complications arising therefrom.

Agency theory, to the extent that it is “the most important theory in corporate law,” also distorts our responses to the evidence., including the evidence about its failed predictions. Consider its recommendations for independent directors. First, the evidence demonstrates that the rise of independent directors has increased agency costs, at least as judged by executive compensation. Second, the evidence demonstrates inside directors can be cost-beneficial: While they impose costs when monitoring themselves as board members, they often bring benefits, especially in complex or innovating environments. It follows that the prescribed best practice doesn’t work. Yet this result is not taken to contradict the theory. It only adds a caveat that requires better dosing. The theory, as Tingle emphasizes, renders these facts as “idiosyncrasies.” They do not perturb agency theory’s remedy of getting the proper mix of independent and inside directors.

Actually, the research Tingle reviews demonstrates that agency theory asks the wrong question and that “knowledge” is the important mediating variable. “Independent” and “inside” are weak surrogates for knowledge. If we were not limited by agency theory, we might look beyond board composition to better respond to the knowledge problem. For example, we might increase reporting lines to the board, such as the Chief Compliance Officer enjoys. Or we might engage workers, even creating a new monitoring board. Or, we could establish a powerful “Secretary to the Board” to loosen executives’ controls on what the board knows. Agency cost theory limits inquiry into the improvement of board governance. But it is strengthened by confining itself to the box already known to corporate law.

As Tingle puts it, agency cost theory creates “the invisibility of countervailing considerations” (P. 9). It misdirects by creating a search for a “Holy Grail,” “a technique” that perfectly aligns the interests of managers and shareholders (P. 10). And, it seduces us with a tale of undisciplined temptation. Fortunately, as Tingle concludes, “corporate actors’ attention and anxiety” are not on the temptations ascribed to them by agency theory, but “are focused on the firm’s competitive activities” (P. 61). They are not seduced by agency cost theory, despite their positive responses to the governance industry. Why should we be?