Can Culture Constrain the Economic Model of Corporate Law?

Abstract

With a few simple “moves,” we can see where the economic model of corporate law could bump up against cultural limits. Or, better put, the economic model works well in the United States because little until now impedes Coasian re-bargaining among shareholders and managers. Begin with the economic model without limit: Takeovers persisted in the face of anti-takeover law in the 1990s, one can argue, because many managers were paid to stop from strongly opposing most takeovers. But managers’ pay cannot be varied everywhere in the world as easily as it was raised in the Untied States. (The recent scandals show how wide that latitude has been here.). Where it cannot be so easily var ied, re-splitting the corporate pie in managers’ favor is harder. More generally, culture could affect the economic model if it affects the relative cost of institutional substitutes, by, say, degrading one form of organization but not others. Basic structures of corporate law—indeed, one could imagine even the public firm with diffuse ownership—could be affected by the degree to which local culture allows parties to vary their deals smoothly. When local norms make key variations costly, boundaries to the economic model of a type seldom thus far confining the American corporation appear. I sketch out, with the help of a Symposium’s papers, where those boundaries can be glimpsed. * Mark Roe is the Berg Professor of Law at Harvard Law School and wishes to thank the John M. Olin Center for Law, Economics, and Business for their support.