Oct 10, 2025 Charles O'Kelley
Zohar Goshen, Assaf Hamdani, & Dorothy Lund,
Fixing MFW: Fairness and Vision in Controller Self-Dealing, __
Harv. Bus. L. Rev. __ (forthcoming), available at
SSRN (Dec. 17, 2024).
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 MFW 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.
Cite as: Charles O'Kelley,
Understanding The Nature and Role of The Entrepreneur and Entrepreneur-created Value in Theorizing The Business Judgment Rule, JOTWELL
(October 10, 2025) (reviewing Zohar Goshen, Assaf Hamdani, & Dorothy Lund,
Fixing MFW: Fairness and Vision in Controller Self-Dealing, __
Harv. Bus. L. Rev. __ (forthcoming), available at SSRN (Dec. 17, 2024)),
https://corp.jotwell.com/understanding-the-nature-and-role-of-the-entrepreneur-and-entrepreneur-created-value-in-theorizing-the-business-judgment-rule/.
Sep 10, 2025 Tom C.W. Lin
Sergio Alberto Gramitto Ricci, Daniel J.H. Greenwood, & Christina M. Sautter,
The Shareholder Democracy Lie, 78
Fla. L. Rev. __ (forthcoming 2026), available at
SSRN (Feb. 18, 2025).
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.
Cite as: Tom C.W. Lin,
The Shareholder Democracy Promise, JOTWELL
(September 10, 2025) (reviewing Sergio Alberto Gramitto Ricci, Daniel J.H. Greenwood, & Christina M. Sautter,
The Shareholder Democracy Lie, 78
Fla. L. Rev. __ (forthcoming 2026), available at SSRN (Feb. 18, 2025)),
https://corp.jotwell.com/the-shareholder-democracy-promise/.
Jul 30, 2025 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.
Jul 1, 2025 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.
May 28, 2025 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?
May 2, 2025 Brett McDonnell
Ann Lipton,
The Legitimation of Shareholder Primacy,
__ J. Corp. L. __ (forthcoming, 2025), available at
SSRN (Feb. 03, 2025).
The United States is going through a moment of extreme political strife and uncertainty. Delaware’s corporate law ecosystem is going through its own moment of strife and uncertainty, albeit with less stratospheric—but still high—stakes. Significant connections exist between the conflict occurring within these two systems, including but not limited to the techno-king himself, Elon Musk.
Ann Lipton explores some of those connections in The Legitimation of Shareholder Primacy. Lipton argues that the central corporate law norm of shareholder primacy was intended to shield Delaware law from political debate, but internal tensions within the concept combined with the political polarization of our times have battered that shield. The development of that argument features Lipton’s deep knowledge of corporate law and governance, which is tied here to an interesting political story.
Lipton ties shareholder primacy to Delaware’s role as the leading choice of state of incorporation for large public corporations. One of our smallest states crafting the law that governs our most powerful non-state economic actors raises hackles. Delaware needs to legitimate itself and its corporate law. It must tell a convincing story as to how its corporate law helps improve our world. Lipton argues that shareholder primacy plays a big part in that story.
At first glance that seems odd. Shareholder primacy imposes on corporate directors and officers the sole goal of making decisions that increase the wealth generated for shareholders. Why will an exclusive focus on shareholders satisfy those citizens who own few or no shares? Lipton sees a two-step argument. First, shareholder primacy constrains corporate managers more meaningfully than any other plausible legal rule. Second, profit-maximizing will largely be in the best interests of society generally so long as they function within mostly well-functioning markets constrained by regulations that limit externalities (shades of Milton Friedman). Delaware accomplishes the first step (constraining managers); the federal government should do the second. Recent controversies surrounding Delaware courts have called both parts of this argument into question.
Two lines of cases raise doubt as to whether Delaware case law’s protections really help shareholders. The first line concerns the procedural protections the courts have put in place for transactions involving controlling shareholders with a conflicting interest. Kahn v. M & F Worldwide Corp., required minority shareholder buyouts to be conditioned from the start of their negotiation on both approval by independent directors bargaining effectively and by a majority of the non-interested shareholders. In re Match Group, Inc. Deriv. Litig., extended those requirements to all transactions with interested controlling shareholders. Both powerful shareholders and much of the corporate bar have pushed back hard.
Perhaps the most dramatic and political important of these controlling shareholder cases was Tornetta v. Musk, concerning the approval of a truly mind-blowing level of compensation for Musk at Tesla, but conditioned on achieving perhaps even more mind-blowing increases in the stock price. Which he achieved. But the process of approving the shares was suspect in many ways, and so the Chancery Court struck down Musk’s pay package. Shareholders then approved it again. That second approval rather calls into question whether shareholders much care about Delaware’s formalistic protections. Lipton argues that the courts have nonetheless stuck to their guns in part because the procedures demonstrate constraints on management to citizens other than shareholders, serving to help legitimate Delaware’s corporate law, not to mention the power large corporations are allowed to wield.
Lipton tells a similar story for West Palm Beach Firefighters’ Pension Fund v. Moelis, where the Chancery Court struck down a type of shareholder agreement that was rather clearly invalid under Delaware law, but which had grown quite common in Silicon Valley startups. A ruckus ensued, and the Delaware legislature amended the law granting carte blanche to shareholder agreements.
In both cases the court followed formalistic rules designed to protect shareholders, but powerful shareholders and the corporate bar objected. In both cases the Delaware legislature amended the corporate law statute in response to those objections. Why, Lipton asks, are powerful managers and their lawyer lackeys willing to explode rules that serve an important legitimating function not just for Delaware but also for them? She speculates that because of the stalemate in politics at the federal level, rich and powerful shareholders feel emboldened to do as they please without fearing a withdrawal of their social license to operate. And so Delaware must fall in line, or risk a “Dexit” as companies leave for other states willing to be more pliable.
The second part of the argument, that markets and regulations will cause profit-maximizing corporations to act in the public interest, has also come under fire. This argument has always had a pretty obvious weak spot as a means to legitimate Delaware’s corporate law: It relies on regulation elsewhere to constrain corporations where market prices don’t reflect true social costs and benefits. If one thinks markets usually work well so regulation need not be terribly extensive, as Friedman believed, that’s not such a problem. But if markets are less effective than that so external regulation needs to be quite heavy, Delaware becomes very dependent on the federal government functioning effectively. Which is not a very comfortable position to be in. Much of Leo Strine’s writing in recent years struggles with this dilemma.
What’s a little state with a big corporate clientele to do? One tack, as Lipton explores, is to hope that markets can be made to function better. And the growth of ESG investing and activism has created potential hope on that front. If investors, employees, and customers all want to be associated with companies that behave in a socially responsible way, then concern for a good reputation will give corporations a strong economic incentive to behave well. For a while, it looked like that might work pretty well. But in the last few years, ESG has become a highly politicized battlefield, and many institutional investors and operating companies are becoming gun shy. Shareholder primacy was supposed to be non-political, and the business case for social responsibility was meant to maintain that neutrality. But in our current political climate, social responsibility is highly contested. The political maelstrom cannot be so easily avoided.
Another tack is to give weak external regulation a boost through encouraging corporations to put much more attention on ensuring they follow the law. Hence the Caremark duty for boards to monitor corporate compliance. This was initially an extremely weak duty, in the sense that the chances of being held liable for a violation of it were slim. But a blatantly weak duty may undermine the legitimacy of the law. And so recently courts have given Caremark somewhat more bite. But, Lipton argues, this then risks running into the fact that often breaking weakly-enforced laws is actually a profit-maximizing move. Shareholders may well not want their companies to put such a stress on corporate compliance. Doctrinally, this shows up in courts not counting potential profits from lawbreaking when considering harms to shareholders. Practically, Caremark has become a way of doing some of the work of external regulators. But that puts Delaware courts squarely in politicized decision making, which the shareholder primacy turn was supposed to avoid.
Lipton ends with a few questions about where Delaware and its corporations will head next. If Delaware relents on the prosocial directions of Tornetta and Caremark, or if it doesn’t and corporations Dexit to more friendly states, will the pitchforks of angry populists reveal themselves, as Lipton puts it? Or will Musk and company have rationally calculated that they no longer need a legitimating story of restraint on their power to cover their ambitions?
It’s not a conclusive ending. Nor necessarily a happy one. But it’s a story well told.
Apr 3, 2025 Anna Gelpern
Jeremy C. Kress, "
Least-Cost" Resolution, 43
Yale J. on Reg. __ (forthcoming, 2026), available at
SSRN (Sep. 03, 2024).
Banks have magic powers: they can conjure money out of thin air, send it across the street or around the world instantly, make your startup dreams come true, and these days, even make you a cappuccino. They are also fragile and toxic: liable to fail suddenly and bring people, firms, other banks, and entire economies down with them. Generations of reformers have tried to make bank failure more orderly, less destructive, and less costly to the public. Judging by the crop of papers inspired by the crop of bank failures in 2023, they have failed again.
Why do we keep failing at bank failure? This article by Jeremy Kress suggests a piece of the puzzle: we mismeasure success.
The U.S. regime for dealing with bank failure promotes a single-minded focus on minimizing costs to the industry-funded federal Deposit Insurance Fund (DIF) managed by the Federal Deposit Insurance Corporation (FDIC). Kress makes a compelling case that protecting the DIF increases the overall social cost of banking and bank failure: it contributes to systemic risk, reduces competition, and distorts incentives. His alternative to the prevailing “least-cost” test is a more holistic social cost assessment, which would require more rigorous oversight of the FDIC, and would be a hard sell in any political climate—but worth the fight in the long run.
To appreciate the broader implications of Kress’s contribution, consider the bank failure process and the FDIC’s role in it.
The FDIC wears many hats: it insures bank deposits up to a generous $250k, regulates and supervises insured banks, and when one fails, the agency serves as receiver to manage its resolution. The FDIC as receiver decides how to dispose of the assets and liabilities that make up the bank receivership. It could sell the bank, wholesale or piecemeal, or liquidate its assets and pay off the liabilities. Unless the FDIC as receiver finds a healthy bank to assume the failed bank’s insured deposits immediately, the FDIC as insurer pays insured depositors out of the DIF, and takes their place in line for the receivership proceeds.
The DIF is the principal pot of money available “to carry out [the FDIC’s] insurance purposes,” meeting its obligations as insurer and receiver. It is funded primarily from regular assessments paid by FDIC member banks. If the FDIC dips into the DIF to resolve a bank, it replenishes the fund with a special assessment on some or all of the remaining member banks. If the DIF runs out of money (as has happened twice since its establishment in 1935), the FDIC has standing authority to borrow from the U.S. Treasury and other sources, backed by the full faith and credit of the United States. This should be comforting to the public, but as Kress and others have pointed out, the FDIC has shunned this authority. Here Kress’s familiarity with the ecosystem pays off: from the agency’s perspective, tapping the Treasury reads as a taxpayer bailout, signals supervisory and actuarial failure, and counts towards the federal public debt limit, all of which invites unwelcome scrutiny.
All else equal, unloading a failed bank as a whole to a single buyer is faster and easier for the FDIC than sifting through, managing, and marketing bank bits and pieces. This is especially so when multiple banks fail at the same time, as they did in the Savings and Loan crisis of the 1980s and 1990s, the financial crisis of 2008-2009, and the would-be crisis of 2023.
Selling the whole bank rescues all its creditors—not just insured depositors—thereby avoiding tweets from furious financiers, front-page stories of shopkeepers struggling to meet payroll, and quite possibly a deeper crisis. It comes at the cost of entrenching expectations of future rescues, more industry concentration, and the associated distortions. Meanwhile, whole-bank sales often call on the FDIC to share in the risk of loss with the buyer. Empirical studies show that whole-bank sales tend to be costly for the DIF.
In 1991, Congress introduced the “least-cost” test to limit the FDIC’s discretion to use whole-bank sales and rescue uninsured creditors. At least in theory, the test should lead the FDIC to choose piecemeal liquidation if it would cost the DIF less than selling the entire bank franchise. For another example, if the failed bank’s closest competitor or a global conglomerate bids a smidgeon more than a community bank two towns over, the FDIC would have to take the competitor’s bid.
What is not to like about this cost-saving approach? Recent scholarship suggests plenty. Kress highlights dramatic cost estimate fluctuations, which make it hard to police compliance with the least-cost test. A valuable new study by Michael Ohlrogge suggests that the FDIC’s post-crisis resolution practice does not come close to fulfilling the statute’s cost-saving mandate. Ohlrogge proposes to reinvigorate the 1991 test by solving the underlying agency and time inconsistency problems.
Kress builds on these and other scholars’ insights to reach the opposite conclusion: the least-cost test must go because it targets the wrong costs. Prioritizing costs to the industry-funded DIF does not account for the benefits of competition, reducing systemic risk, and access to financial services, among others. There is plenty of evidence that consolidation and systemic risk have grown dramatically since 1991. Kress’s case studies illustrate how the least-cost test may help exacerbate these trends.
His intuition feels right to me because it reflects the political economy of banking. Deposit insurance should deter runs and protect small(ish) depositors. Bank resolution should allocate losses and limit spillovers from bank failure. Both are fraught with distortions, and entail costs and benefits to the public that are hard to quantify as a snapshot in time.
Like bankruptcy, the bank resolution regime is a complex political bargain. Managing bank failure entails intensely political tradeoffs that must reflect the changing institutional structure of finance, align incentives, and deliver broadly legitimate distribution. There is no obvious reason to think that costs to the DIF in a given case of bank failure are a proxy for any of that, and many reasons to worry that a focus on these costs fosters policy myopia.
This is not an argument against any cost test. The author argues for a far more expansive replacement of the current test, which would call for far more robust oversight of the FDIC’s decisions—and would surely set off a political battle. At least we would be battling over the right things.
Cite as: Anna Gelpern,
A Costly Cost Test, JOTWELL
(April 3, 2025) (reviewing Jeremy C. Kress, "
Least-Cost" Resolution, 43
Yale J. on Reg. __ (forthcoming, 2026), available at SSRN (Sep. 03, 2024)),
https://corp.jotwell.com/a-costly-cost-test/.
Feb 27, 2025 Bill Bratton
Corporate governance and corporate finance operate very differently as legal academic topics. With governance, there’s always some new legal development—a Delaware ruling, a provision in a corporate code, or a new SEC regulation. Failing that, the international corporate governance machine is a reliable generator of new material, whether a new wrinkle on a monitoring process or a substantive initiative falling inside the big tent of corporate purpose. With finance, law and legal theory are more in the back seat while practice takes the lead. Bankruptcy is the one important exception, but even there, practice has been trumping law in recent years as bankruptcy courts have passively turned the reins over to controlling creditors. Not that there aren’t developments in the practice to write about. There are. But this will be more a matter of tracking new wrinkles than accounting for great upheavals.
It is, accordingly, a big deal for legal finance when a whole new mode of financing springs up on the upper part of the right side of corporate balance sheets. The quick rise of private credit in recent years is just such a development. Jared A. Ellias and Elisabeth de Fontenay, The Credit Markets Go Dark, 134 Yale Law Journal 779 (2025), lays out the territory with diligence, clarity, and sophistication.
Private credit is to bonds and notes what private equity is to common stock. A financial intermediary organizes a limited partnership and sells limited partnership interests to institutional investors. Unlike private equity, where the partnership takes over companies, here the partnership lends money to companies, which are mostly medium and small sized. The terms of the loans tend to run three to six years. The loans are direct – no underwriter is involved. The partnership holds the loans to maturity—at least as yet, there is no secondary trading market in the paper. The partnership also jacks up its risk/return profile by borrowing up to one-half of its total capitalization (“back leverage”). The sector’s rapid growth has come mainly at the expense of bank term loan syndications.
Ellias and de Fontenay account for all of this by detailing what’s in it for each of the major players. It is a cogent way to proceed. First come the borrowers. They get speed, flexibility, and enhanced certainty and confidentiality. There’s an extra bonus in a case where the borrower has no publicly traded debt—going the private credit route deflects debt market discipline. Second come the equity investors in the private lender. They use the private credit vehicle as an indirect way of making loans themselves. They are in economic substance lenders, lenders which, instead of originating and monitoring loans through their own departments, outsource lending and monitoring to the private credit firm. These players get higher yields than are available in the bank syndication and junk bond markets. The loans come with tighter covenants and are made in an institutional context insulated from the creditor-on-creditor violence that has turned the syndicated loan market into a financial charnel house. Third and last come the asset managers. They get fees, which can be expected to scale down from the classic private equity two and twenty rip. They also get freedom of action: Because they are unregulated, they get to do things banks can’t do, like take positions in a company up and down its entire capital structure. (Yes, private credit lenders sometimes take stock positions in investee companies, interpolating the equity kicker into the portfolio directly rather than sneaking it in under a convertible security.) They also get favorable accounting treatment: Because they hold the loans to maturity, they can manage their portfolios free of the markdowns triggered by market price declines.
Now, I would have thought that a turn to hold-to-maturity lending under strict covenants would be a cause for celebration. But Ellias and de Fontenay see some problems. While the removal of market discipline might be nice for the borrowers and asset managers, there is a net loss of public information about the borrower. Jumping across the private-public divide (ahem), Ellias and de Fontenay term this “de-democratization.” They also identify a problem of growing intermediary power—the private lending firms overlap to some extent with the private equity firms. In effect, Blackstone, et al., are moving under the cover of darkness to get hold of the entire capital structures of large numbers of companies and nobody does anything to impose transparency or otherwise hold them in check. Even where the players are new (and not active on the private equity side), as they gain market share they displace markets as intermediaries, exposing the economy to institutional failure even as they shield it from market failure. Finally, once the private credit borrowers get into financial distress in large numbers (and they will), we are going to see a significant change in the chapter 11 fact pattern. Ellias and de Fontenay predict that private credit lenders will be more likely to accord slack to troubled companies, with potentially negative consequences for corporate performance. In addition, private credit lenders, as compared to the banks, will be looking to end up as the owners of reorganized companies. Lastly, the absence of market pricing will enhance the burden imposed on bankruptcy judges reviewing asset sales and reorganization plans.
I will close with a note regarding the study’s empirical basis. Because private credit is private, we don’t know as much about it as we know about regulated sectors like banking. Ellias and de Fontenay get high marks for doing what they can to surmount this barrier by gathering information on the portfolios of business development companies (BDCs). BDCs are regulated closed-end investment companies that raise capital from retail investors to make debt and equity investments in smaller companies. They report their portfolio holdings to the SEC. Private lenders raise about 10 percent of their capital through BDCs. The BDCs’ SEC filings thus offer an empirical, albeit indirect, picture of the private credit sector. Ellias and de Fontenay survey this data, yielding hard pictures of dollars loaned over time (up), numbers of loans (up), portfolio value (up), and lender debt-equity ratios (down).
Cite as: Bill Bratton,
Private Credit, JOTWELL
(February 27, 2025) (reviewing Jared A. Ellias & Elisabeth de Fontenay,
The Credit Markets Go Dark, 134
Yale L.J. 779 (2025)),
https://corp.jotwell.com/private-credit/.
Jan 31, 2025 Charles O'Kelley
Kyle Edward Williams, Taming the Octopus: The Long Battle For The Soul of The Corporation (2024).
In Taming the Octopus, historian Kyle Edward Williams focuses on the evolution of the modern corporation from its birth in the early days of the twentieth century to the present. This work deftly synthesizes a vast array of historical and legal research with the author’s own archival research. The result is a fast-moving, comprehensive, and captivating story of the people and events that have shaped scholarly and political debate about, and understanding of, the corporation and its place in society as the United States gradually assumed its place as world hegemon. This is a book intended for the informed citizen but should be of special interest to teachers of Corporations and related subjects, for here the reader will encounter the giants who have affected what we think and believe about what the corporation is and how it should be governed, as well as the debates that have raged throughout the life of the modern corporation.
The book begins and ends with the imagery of the modern corporation as an imaginary sea creature, an octopus as terrifying and as untamable as the giant squid in Jules Verne’s Twenty Thousand Leagues Under the Sea. That imagery had been used in books and editorial cartoons in the first decade of the twentieth century to caricature the might of emerging business behemoths, including the Standard Oil Trust, whose tentacles reached into every aspect of American life and controlled the politicians who acted counter to the public interest as the mighty creature demanded. The public indignation and resolve to combat this evil creature is an underlying theme throughout the book, which Williams identifies with three continuing tensions in the political and cultural life of the modern corporation.
The first tension concerns efforts to tame the octopus via a corporatist partnership between the modern corporation and the federal government. As Williams details, this effort was spearheaded by Teddy Roosevelt, who, before his presidency, had signaled a commitment not to destroy the corporation but “to make them subserve the public good.” After the financial crisis of 1907, Roosevelt backed legislation that offered exemptions from antitrust laws to corporations that chose to voluntarily register with the federal agreement, thereby agreeing to full financial transparency and a regime of close consultation and cooperation with government officials. Corporations uniformly opposed this first foray into corporatism, and the bill died in committee.
Corporatism again entered the playing field during the Great Depression and the early days of the Roosevelt Administration. Now, it was business leaders like Gerald Swope and Owen Young, as well as Roosevelt brain-truster Adolf Berle, who sought a corporatist partnership rather than federal direction of the economy under some American version of the communist regime evolving in Russia. They achieved initial, but short-lived, success with the soon-to-be-held-unconstitutional National Recovery Act. Nonetheless, a corporatist partnership emerged as the Securities Act of 1933, and the Securities and Exchange Act of 1934 adopted a disclosure rather than substantive regulatory approach to perceived problems with the stock market component of the modern corporation.
As Williams cogently recounts, the corporatist partnership and accompanying heyday of the manager continued through the 1960s, only crumbling when America’s years of unprecedented prosperity encountered the strong headwinds of international competition, the Arab oil embargo, and the collapse of the gold standard as the 1970s began.
Williams concludes his account of America’s corporatist dance with a concluding chapter titled “Larry Fink, President of the World.” In reading that chapter we are forced to consider: is America now entering a new form of corporatist partnership where the key actors are the modern corporation and the handful of institutional investors, primarily Blackrock and Vanguard, who in twenty years likely will own half of the shares in American corporations?
The second tension Williams identifies concerns efforts to have the federal government adopt a regime of federal chartering, thereby preventing the so-called race to the bottom that reformers attribute to the regime of state chartering. The desire for federal chartering had strong support by some members of Roosevelt’s inner circle from the beginning of the New Deal to near the end of the 1930s, but legislative efforts faltered as more pragmatic members of the inner circle and Roosevelt-confidant Felix Frankfurter supported the corporatist compromises.
A serious interest in federal chartering emerged again with the Vietnam War, and the Civil Rights struggle of the 1960s, which combined with the collapse of post-World War II prosperity to change public perception of the corporation. For a brief period running from around 1965 to 1980, the modern corporation came under attack for its role in the Vietnam War, its failure to advance social goals, and its irresponsibility in making unsafe products. Responding to Ralph Nader and his youthful disciples, Congress entertained a renewed effort to adopt federal chartering. That effort died as the 1970s closed and the Reagan Revolution and the Law and Economics revolution took power in politics and academic theorizing about the corporation.
The final theme identified and described by Williams is the use of the annual shareholders meeting as a forum not only to discuss shareholder economic interests but as a political conversation about the role of the corporation as a national and international citizen. Williams begins his treatment of this theme with the story of James Peck’s and Bayard Rustin’s efforts to use federal proxy rules and physical attendance at annual meetings to force the Greyhound Bus Line to desegregate seating in buses traveling in southern states. Along the way, Williams introduces the reader to serious “gadflies” like Wilma Soss, who championed the role of women stockholders, and independently wealthy Lewis Gilbert, who attended and prepared a report on hundreds of corporate meetings and resolutions from 1939 to 1979.
As Williams recounts, the role of socially and economically motivated shareholders continues to evolve with the emerging role of the institutional investor. The push and pull of the resulting conversations between corporate managers, shareholders, and the larger society plays a central role in forming a more socially responsible corporation.
Taming the Octopus is not a dry recounting of these themes. Rather, it is illustrated by the stories of actors who dominated each episode. The book references not only the usual suspects but also brings to life persons who might otherwise fade from memory. My favorite example is Henry Manne.
By now, we all know the role of Lewis Powell, his memo, and his influence on the Supreme Court in changing the course of corporation law history. Likewise, we remember the Milton Friedman article in the New York Times trashing the notion of corporate social responsibility and the so-called Chicago School of Law and Economics that achieved intellectual dominance in legal scholarship in the 1980s. Moreover, the scholarly work of economists Alchian, Demsetz, Meckling, and Jensen is still strongly remembered for their role in deconstructing the corporation as an institution and the elevation of the nexus of contracts theory of the firms. Williams gives each of these actors proper attention.
Delightfully, however, Williams gives much more attention to Henry Manne, his career, and his impact—attention woefully missing in many accounts of recent history. Over twenty years Manne’s summer Law and Economics Institutions provided a free education in basic microeconomic theory to more than six hundred law professors, and more than half of the then members of the federal judiciary, including Ruth Bader Ginsberg and Clarence Thomas. These scholars and judges went back to their day jobs with a new understanding of the economic purpose of the common law and new tools for understanding legislation affecting the corporation. Thus, It was Manne who brought to life through his students the teachings of law and economics. In twenty years, there may no longer be any judge or academic alive who attended Manne’s summer institutes. Perhaps Williams’ thoughtful recounting of Manne and his role will keep alive Manne’s important, if controversial, contributions to the evolution of the modern corporation and our understanding of its shortcomings and strengths.
This book should be on the recommended reading list of students looking to better understand the history of the corporation. For teachers, it would serve as a syllabus framework for a course in corporate social responsibility. For corporation law scholars, generally, this is not a book with new ideas to cite–rather, it is an engaging and quick read that will stimulate new ways of synthesizing your own ideas and research. In that regard, it forms a bookend of sorts with Adam Winkler’s, We The Corporations: How American Businesses Won Their Civil Rights (2018), which I reviewed in a previous Jot.
Jan 6, 2025 Gina-Gail Fletcher
In the wake of the extrajudicial murders of George Floyd and Breonna Taylor, millions protested across the U.S. and worldwide against the racial and social injustices that persist within society. The 2020 “racial reckoning” protests were the largest racial justice demonstrations in the U.S. since the Civil Rights movement of the 1950s and witnessed a broad spectrum of society coming together to demand redress for pervasive inequities across race, gender, and socioeconomic lines. Even companies, that had traditionally preferred to stand on the sidelines with respect to racial justice issues, stepped into the fray, publicly declaring their support for racial justice and promising to do their part to combat racial inequities. As part of these efforts, hundreds of companies since 2020 have voluntarily pledged to increase people of color within their ranks, specifying numerical targets and timelines for achieving these goals.
In her new paper, Racial Targets, published in Northwestern Law Review, Professor Atinuke Adediran tackles the thorny question: are corporate racial targets legally permissible? Adediran joins in conversation with several scholars who have been considering how the 2020 “racial reckoning” has impacted corporate behavior. To do so, she examines voluntary racial goals (i.e., racial targets) that companies have publicly established for themselves in response to shareholder, investor, and employee pressures to support racial equity. Adediran argues that racial targets are meaningfully distinct from racial quotas and, as such, despite the constitutional illegality of the latter, the former are within the boundaries of the law.
Before diving into the question of legality, Adediran first details the prevalence, contours, and features of racial targets. Using a rich dataset, she does both a quantitative and qualitative analysis of racial targets as disclosed in companies’ ESG and diversity reports between 2018 and 2023. Based on her analysis, Adediran categorizes racial targets into two groups: closed-end and open-end targets. The primary difference between the groups is that the former specifies a timeframe within which the company hopes to achieve its stated target, and the latter does not. Her empirical analysis provides details on the growing use, language used, and groups specified in racial targets, and sets the stage for the legal analysis on the permissibility of racial targets.
Adediran’s examination of voluntary racial targets is particularly timely in light of the current backlash against them. Critics of racial targets cast them as being the same as racial quotas and, with the recent successful challenges to race-conscious university admissions, there is concern that voluntary corporate racial goals may be next. Adediran asserts that “[a]lthough the post-2020 racial reckoning’s increase in racial targets appears new, there is a historical background for the… development of these targets….” This historical background, which Adediran richly provides, demonstrates that “companies are inclined to establish racial targets, carefully orchestrating them to comply with [both] Title VII and judicial precedents that made racial quotas illegal.
Adediran argues that racial targets differ from racial quotas in three meaningfully distinct ways that are key to the legality of targets. First, targets are private and voluntary pledges that companies choose to undertake. Second, targets do not apply to specific occupations and jobs but instead apply to the institution as a whole. Third, targets are non-binding, aspirational goals. These features, Adediran asserts, mean that racial targets ought to be analyzed under a standard that prioritizes corporate discretion, thereby allowing companies to create plans for their workforce that meet their needs and address their shortcomings.
Racial Targets is as thoughtful as it is timely, and it engages well with the thorny questions surrounding the legality of private, voluntary race-conscious goal setting in the workplace. Adediran provides a thoughtful empirical analysis of racial targets today and grounds our understanding of these corporate goals in their historical context, thereby painting a full picture of the ways in which courts have consistently viewed these private corporate decisions as legally permissible. In today’s fraught and polarizing environment, in which race-conscious decision-making is under attack, Adediran highlights the importance of looking back to understand what lies ahead.
