The (Misunderstood) Genius of American Corporate Law

Abstract

In standard rhetoric of corporate literature, federalism is the genius of American corporate law - an engine of efficiency, motivating a (or at least a leisurely walk) to top. Some have dissented, suggesting that prevailing wisdom is wrong as to either direction or vitality of promised race. But latter critiques are too forgiving. The standard account misunderstands basic question; its answer, as such, is not even wrong. Rather than weighing in on race debate, thus, I challenge fundamentally flawed discourse behind it. I offer a distinct framework for evaluating role of federalism in American corporate governance, which points to distinct measures of efficiency and a reinvigorated study of institutional design in corporate law. To begin, I challenge literature's merger of two distinct competitions - state and managerial - into one. More critically, I decry resulting linkage between corporate law's central goal-efficient regulation of separation of ownership and control - and central element of its institutional design - federalism. That rhetorical linkage has led us astray in important respects: First, it has bootstrapped a role for federalism in advancing not merely quality of corporate law, but also substantive quality of corporate governance. Second, it has essentialized role of federalism, casting it as indispensable to production of good law. Dominant as these conceptions are in discourse of corporate law, neither is true. I suggest an alternative account of federalism's contribution to American corporate governance. Federalism is not directed to traditional goal of corporate - regulation of vertical separation of ownership and control within firm. Rather, it advances a distinct, horizontal goal of regulating relationship of firm as a whole with state regulators external to it. Given as much, a federal regime is not dictated by a commitment to efficiency in corporate law. Rather, it is an institutional design choice, to be evaluated for its efficacy and utility - as well as its limitations - in one area of corporate versus another.