In his recent paper, Theories and Models of Corporate Governance, Thomas Wuil Joo (incorporated into forthcoming Corporate Governance: A Synthesis of Theory, Research, and Practice (Robert W. Kolb Series), briefly surveys a history of American models of the corporation. On the currently dominant model, contractarianism, he notes that whereas early contractarians insisted that corporate governance consisted of legally enforceable contracts, more recent legal theorists of this vein commonly use “contract” in the nonlegal sense of a voluntary interaction. The contract, so central to theory is no longer.
After decades of model-building based on efficient-market and contractarian theories, the current state of corporate governance theory might be characterized as a ‘model-destroying’ phase,” with pundits from Eugene Fama to Alan Greenspan expressing doubts about market rationality. Joo argues,
By assuming that unregulated markets are efficient, contractarianism conflates the two values of liberty and efficiency, obscuring their independent normative importance and the tension between them. As economic thinking came to pervade political and moral reasoning in recent decades, efficiency (in the sense of greater aggregate social wealth) became increasingly important relative to other values such as promise, consent and equity.
He reminds us that legal concepts draw strength not only from logic but from norms. Since “models often masquerade as proofs of normative positions,” we should build in acknowledgement and examination of such commitments as models are constructed. Joo cites Stephen M. Bainbridge as one theorist whose work is “unusually candid in this regard.”
Theorists should not use abstract models to disguise these unspoken normative visions but to flush them out and clearly define them. Theorists and lawmakers can then apply themselves to debating the wisdom of the law’s choice of normative goals and its success at realizing those goals.