While corporations, at least the largest ones, commonly operate on a
global scale, the laws governing their internal affairs (in other words, the
rights and duties of their owners and managers) are national or subnational.1
In the last few decades, considerable scholarship has focused
on whether these national and sub-national corporate laws are becoming,
like many of the corporations they govern, global—in this case by
converging upon commonly accepted approaches.2 Earlier comparative
corporate law scholarship was to a great extent a technical affair,
occupied with describing differences in specific rules—e.g., whether a
nation’s corporate law provided for a one- or two-tier board of
—and lacked any overarching purpose or direction motivating
its inquiry.4 This changed when scholars began to look at a broader
context, which culminated in the convergence predictions.


The broader inquiry culminating in predictions of convergence has
both descriptive and normative aspects. The descriptive aspect
commonly begins with an observation about the pattern of shareholdings
in the United States and England as contrasted with the pattern found in

most of the rest of the world.5 Specifically, the largest corporations in
the United States and England commonly have widely dispersed
shareholdings in which no shareholder or cohesive group of shareholders
holds enough stock to control the corporation; in contrast, in many other
parts of the world, a relatively few shareholders will hold large enough
blocks of voting shares to possess effective control over even the largest
companies.6 This, as well as other differences between corporations of
different nations, fuels the following normative inquiry: do such
differences produce superior performance for corporations from one
nation versus another (which presumably translates into superior overall
economic performance)?7 Bringing the matter back to law, the
descriptive and normative questions then become whether various
corporate or other legal rules and institutions facilitate dispersed or
concentrated shareholdings (or other differences encountered in
corporations from different nations), and thereby lead to improved
individual corporate and overall economic performance.8

The answers reached to these inquires tend to depend on the decade.
In the 1980s and the beginning of the 1990s, the Japanese and German
economies and companies were outperforming the economy and
companies in the United States. Accordingly, scholarship noted the
advantage of more concentrated shareholdings in disciplining or
otherwise providing better incentives for corporate managers.9 Scholars
also noted the apparent advantage that systems for greater employee
involvement in corporate decisions, as were found in Japan and
Germany, possessed in producing better, and better implemented,
corporate business practices.10 The question became what laws and
institutions were needed in the United States to make our corporations
function more like Japanese and German corporations.11 In the later

1990s, superior economic and corporate performance shifted to the
United States. Accordingly, scholarship presumed the virtues of
dispersed ownership in raising capital, promoting high technology startups,
and facilitating management discipline through the threat of hostile
takeovers12—and also recognized the dark side of more concentrated
ownership as illustrated in the Asian Financial Crisis.13 The question
correspondingly became what laws and institutions other nations should
develop to promote dispersed shareholdings as in the United States.14

These discussions in turn led to an additional question with both
descriptive and normative aspects: if, indeed, a set of corporate practices
and legal rules exist that produce better corporate and overall economic
performance in every nation, will the corporate laws and practices in
various nations not ultimately converge upon these laws and practices to
create a global corporate law?15 The normative implications of an
affirmative answer are that individual national efforts to resist this
convergence are both misguided and futile. Among the scholars reaching
the conclusion that convergence toward superior corporate law and
institutions is occurring, Professors Hansmann and Kraakman may have
been the most provocative in their assertion at the beginning of the new
century that we had reached “The End of History for Corporate Law.”16
Hansmann and Kraakman claimed that corporate law had converged a
century earlier on the essential features of corporations, and now, after a
century of experimentation, had solved the remaining critical issues by
converging on a so-called standard shareholder-oriented model—thereby
rejecting manager-, labor-, or state-oriented models.

The ensuing decade, bookended by major corporate scandals and
corresponding stock- and financial-market collapse, has not treated
kindly the thesis that we have reached the end of history for corporate
law by solving its remaining critical issues. Indeed, Hansmann and
Kraakman’s unfortunate choice of title bears increasing resemblance to
the ill-timed statement of the hapless official who, late in the nineteenth
century, called for closing the patent office on the ground that everything
worthwhile to invent already had been invented.

The purpose of this Article is not to pick further, for the sake of doing
so, at the bones of Hansmann and Kraakman’s or similar theses. Rather,
this Article seeks to use the failure of such theses as a launching point
for a broader consideration of the subject of convergence in corporate
law. Essentially, this Article makes three interrelated claims regarding
convergence in corporate law.

Part I of this Article examines the history of convergence in corporate
law. It develops the argument that the history of corporations and
corporate law has been one of seemingly constant movement toward
convergence. Yet contrary to the linear nature of the convergence theses
typified by the “End of History” article, this seeming corporate law
movement toward convergence never arrives at a final destination. From
its beginning, corporate law was global law, and its history is marked by
promiscuous transplants and copying between nations. Nevertheless,
much like a school of fish, a flock of birds, a swarm of insects, or a herd
of animals, corporate laws have not converged to a single point at which
they stay at rest. Instead, corporate law convergence is incomplete and

Part II of this Article begins to develop a theory to explain why we
observe the phenomenon discussed in Part II. Key to convergence
predictions typified by the “End of History” article17 is the notion that
forces of economic competition will drive corporations and corporate
laws toward an equilibrium point marked by maximum efficiency—a
sort of economic Darwinism. In response, various scholars have pointed
out path dependencies and other forces that might maintain divergence
despite such efficiencies. This Article will leave it to others to debate the
relative strengths of the efficiency-based forces for convergence versus
the forces for divergence. Instead, Part III’s thesis is that forces besides
efficiency produce convergence. This means that convergence
commonly occurs around corporate laws and institutions that have no
particular efficiency or other normative advantage, or that necessarily

represent stable equilibrium points.

Finally, Part III of this Article explores a question arising from Part
I’s conclusion that the movement toward convergence remains perpetual
because it is always incomplete and transitory. Specifically, Part III asks
what are the important corporate laws and institutions by which to
measure the extent of convergence at any one time. Implicit in the
convergence literature lies the assumption that the authors are looking at
the important issues and that the remaining areas of non-convergence are
less worthy of concern. Part III, however, develops the thesis that
convergence—or, more precisely, a stable convergence marking the
“End of History”—is, in fact, least likely for the most important issues.
This is because the most important issues—as measured, in a practical
normative sense, by the difficulties they present to policymakers—are
those in which tensions exist between competing policies and which lack
easy solutions. Such policy tensions and lack of easy solutions make
convergence amounting to anything more than a transitory phenomenon
less likely.


While scholarship about convergence in corporate law is a relatively
new phenomenon, convergence in corporate law itself is anything but.
Indeed, as developed in detail below, corporate law’s history begins with
global companies established by nations copying corporate forms and
laws from each other, and convergence of corporate laws has been a
continuous process throughout the history of corporate law with
perpetual borrowing and transplants of corporate forms and laws
between nations.
A. The Early Roots of Convergence

Corporate law literally begins as global law because the inception of
what we now refer to as the business corporation is found in European
nations copying from each other in forming trading companies to engage
in international commerce. What we in the United States call a
“corporation” (or, more precisely, a business corporation) has been
traditionally called a stock company or joint-stock company in other
parts of the world.18 The label “corporation” comes from one attribute of
this business form—treatment of the firm as a legal person (“body
corporate”) able to own property and enter into and enforce contracts in

its own right.19 The label “joint-stock company” comes from another
aspect of this business form—ownership of the firm by investors of
capital who receive transferable shares in the firm.20 Today’s
corporations derive from the English and continental European jointstock
companies formed late in the sixteenth and early in the seventeenth
centuries to engage in trade with the Far East.21

The Russia Company, formed in England in 1553 with the goal of
finding a Northeast Passage to Asia, appears to have been the first
English (and arguably the first altogether) joint-stock company.22 The
English East India Company, formed in 1600, furnishes a more famous
and influential example.23 These companies evolved out of an earlier
form of merchant trading company, referred to by historians as
“regulated companies.”24 Regulated companies received an exclusive
franchise by the Crown to conduct trade in a particular foreign territory.
The regulated companies, however, did not conduct operations as
companies. Instead, the merchants, who were members of the company,
conducted operations under the company’s franchise, either individually
or in ad hoc partnerships.25 As trading voyages became longer, the
resulting greater financial demands and risks led to a different approach:
the members of the company subscribed to a common fund that financed
the purchase of a combined or “joint” stock of goods for trading by
agents of the company.26 In the early days of the English East India


Company, the joint stock lasted only for a given voyage; after which
whatever money the voyage made would be distributed among the
investors.27 Over time, the joint stock became a permanent fund for the
continuing operations of the company.28 Investors who did not wish to
wait until completion of the voyage, or indefinitely, for return of their
money began to sell their shares in the joint stock—thus giving birth to
stock markets.29

Not only did these joint-stock trading companies operate globally, but
their structures and organization also resulted from transnational
borrowing, creating a sort of global corporate law or convergence from
the very beginnings of the institution. Some historical evidence exists
that the organizers of the Russia and English East India Companies, in
adopting the joint-stock model, may have been influenced by earlier
financing schemes of Italian banks and merchants, who had developed
the use of pooled investments in common funds with investors holding
transferable shares.30 Not long after the English East India Company
came into existence, various Dutch merchants who traded in the East
Indies came together to form the United (or Dutch) East India Company,
following the joint-stock principle seen in the English company.31 The
Dutch East India Company may have also been influenced by already
existing Portuguese joint-stock companies trading in the East Indies.32
The success of the English and Dutch East India Companies, in turn,
spurred the formation by other European countries of joint-stock
companies for trade in the East Indies.33

Having started in global trade, and with a pattern of international
imitation (or convergence), use of the joint-stock company spread to
other types of businesses34 and to other nations—the transplants resulted
either from imitation (as in the Meiji Restoration in Japan)35 or from
European colonization.36 From the seventeenth to the nineteenth century,
joint-stock companies—at least those arising from official sanction
rather than creative contracting37—came into existence through charters
granted individually by crown or legislature.38 In another great wave of
international imitation (convergence), nations and sub-national
governments developed general incorporation laws that allowed
corporations (joint-stock companies) to come into existence without the
need for a special legislative or royal charter.

France, as a consequence of its revolution, seems to have pioneered
this development—albeit with a retreat, until 1867, to a concession
system requiring government approval for incorporation.39 New York
followed the earlier French general-incorporation approach in 1811,
from which laws gradually spread in the nineteenth century throughout
the United States allowing anyone to incorporate through registration if
the company met certain requirements.40 England, after facilitating

contractually based joint-stock companies by repealing the Bubble Act
in 1825, enacted company laws providing for incorporation by
registration in 1844 (without limited liability for the shareholders) and
1855 (with limited liability).41 In 1829, Spain introduced incorporation
by registration; however, Spain, like France, retreated for a time in the
mid-nineteenth century to a concession system.42 Germany’s stockcompany
law based upon incorporation by registration followed the
unification of the country in 1870 and 1871.43

Not surprisingly, general-incorporation laws spread by imitation and
transplant to the colonies and former colonies of European countries. For
example, various Latin American countries, after achieving
independence from Spain, eventually adopted company laws borrowing
from Spanish or French laws.44 In some instances, this borrowing
entailed copying directly from Spain or France; in other instances the
borrowing was indirect as one country copied the company law from
another country that had copied from Spain or France.45 This sometimes
meant that the transplant, in fact, adopted approaches already abandoned
in Spain or France.46 This also meant gradual movement toward
incorporation upon registration in Latin America, with Chile, for
example, requiring a government decree for incorporation until 1981.47
Japan provides an interesting example of a transplant in a nation that
had not been subject to European colonization. Japan imported the jointstock
company as part of the Meiji Restoration starting in 1870,48 and

adopted Germany’s company law, including incorporation by
registration, in 1898.

B. Continuous Borrowing and Transplants
These global beginnings of corporate law are largely consistent with
Hansmann and Kraakman’s depiction of an earlier convergence in
corporate law, which adopted what they view to be the essential features
of the corporation.50 The story of convergence and global corporate law,
however, is not one of a hiatus after these initial steps, waiting for the
wane of the twentieth century to complete the last step and reach the
“End of History.” Rather, it is a story of continuous imitation and
transplant among national and sub-national corporate laws creating
constant convergence.

1. The General Patterns
At this point, the reader might be puzzled at how constant
convergence can exist, given that corporate law started as global law
with substantial convergence, and that convergence, by its nature,
seemingly implies an end point. The answer is that corporate laws are in
a constant process of convergence and divergence as they move from
one norm to another, and then to another or back again.
A simple example illustrates the pattern: consider the global spread of
prohibitions against corporate insiders trading based on inside
information (“insider trading”), which occurred in the latter part of the
last century.51 In the late 1980s and accelerating in the 1990s, an
increasing number of nations passed laws prohibiting insider trading.52
At first glance, this would appear to be a good illustration of
convergence toward global law. Indeed, this development may be part of
a broader convergence toward laws designed to promote dispersed

shareholdings.53 Taking a longer view, however, the story is more
complicated. Prior to the 1960s, no nation prohibited insider trading.54
Thus, a convergence existed on the legality of insider trading prior to the
1960s—it was not prohibited. The United States adopted the prohibition
in 1962,55 followed by France in 1967, a few more nations in the 1970s,
followed by increasing numbers of nations in the 1980s and 1990s,
reaching the point today where the vast majority of nations with stock
markets prohibit insider trading.56 Hence, what at first glance appears to
be simply a story of convergence actually represents a gradual
movement from one globally followed norm to another. Readers who
carefully observe nature may find this phenomenon brings to mind the
way in which a large flock of birds moves in stages from one perch to

Many of the examples of imitation and transplants to new points of
convergence in corporate law involve micro-issues focusing on specific
rules and structures, like the prohibition of insider trading, the
requirements for independent directors,57 or the mechanisms and
standards for enforcing the duties of corporate directors.58 Other
examples involve larger-scale concerns that implicate numerous rules
and structures, such as the overall philosophy regarding the balance
between regulation and deregulation. Some of the movements to new
convergence points seem fairly unidirectional, at least within the time
horizon of what we know, while others follow a cyclical pattern.
2. Converging on Limited Liability
The spread of limited liability for a corporation’s shareholders offers
an example of a fairly unidirectional convergence. While today we tend

to think of limited liability as an inherent part of corporate law, it was
not the universal rule for much of corporate law’s history. Before
general incorporation laws, the shareholders in individually chartered
corporations (joint-stock companies) may have enjoyed limited liability,
depending on the charter.59 England’s 1844 law allowing general
incorporation did not provide limited liability for the shareholders of the
companies formed under that act; this came after considerable debate in
England’s 1855 act.60 Beginning in the nineteenth century, limited
liability spread from state to state throughout the United States—from
New York’s statute for double liability for manufacturing companies in
1811, to New Hampshire and New Jersey in 1816, to Connecticut in
1818, to Massachusetts in 1830, and finally to California in 1931—and
expanded from partial (double liability) to full limited liability and from
manufacturing corporations to banks (for which double liability only
ended in the Great Depression).61

Related to this convergence is the gradual spread of laws designed to
make it easier for owners in closely held companies to enjoy limited
liability. Probably the most notable example is Germany’s 1892
invention of the limited liability company, which allowed owners of
companies not issuing tradable stock to enjoy limited liability without
meeting the requirements imposed on companies issuing such shares.62
From Germany, the limited liability company spread throughout the civil
law countries.63 Finally, in the 1990s, the limited liability company
spread throughout the United States, in this instance as a means to enjoy
limited liability without incurring tax disadvantages imposed on
3. Regulations to Protect Non-shareholder Interests
In contrast to the largely unidirectional convergence regarding limited
liability, the overall balance in corporate laws between regulation and
deregulation has followed a more cyclical and complex pattern of
convergence. Discussing corporate regulation versus deregulation
involves two fairly distinct concerns. First, a traditional concern of

corporate law has been the protection of minority shareholders.65 A
second concern involves the protection of persons and interests beyond
the company’s shareholders. These persons and interests include a
company’s creditors, employees, and customers, as well as the welfare
of the broader community and the environment in which the corporation
As recent events illustrate, laws seeking to protect these nonshareholders
from the actions of corporations and their managers follow
a fairly predictable cycle of regulation and deregulation, both in the
United States and in the global community.66 These cycles, however,
generally do not involve changes to corporate law. For example, cycles
involving greater or lesser regulation over the lending practices of banks,
the rights of workers to organize, the safety of products, and the limits
on pollution generally do not address the subjects of corporate law.

Corporate law addresses subjects such as selection of those in charge of
the company, compensation of managers and owners of the corporation,
liability of managers to the corporation and its owners, and other powers
and duties of managers and owners.67
Nevertheless, a long-standing debate in corporate law is the extent to
which the rules governing the subjects it addresses (such as manager
selection) should be designed with an eye toward the impact on
constituents and interests beyond the shareholders and managers.68 This
means that the movement in corporate law to protect such constituents
and interests is not so much about regulation versus deregulation as it is
about the locus of regulation—in other words, should corporate law seek
to protect the interests of those dealing with corporations or should this
be left to other laws?

An example that illustrates this point involves the worry that
individual corporations might grow to obtain excessive economic power.
Early general corporation laws in the United States contained various
rules, such as a prohibition on forming holding companies, which

limited the economic power of a single corporation.69 In an example of
convergence famously labeled a “race to laxity” by Justice Brandeis,70
corporate laws abandoned these restrictions.71 This abandonment,
however, did not mark a unidirectional move toward deregulation
because antitrust laws72 arose to address the concern about excessive
economic power.73 Such laws have themselves seen their own cycles of
regulation and deregulation.74

Hansmann and Kraakman’s “End of History” thesis focuses largely
on this question of using corporate laws to regulate the corporation in its
dealings with non-shareholders.75 For example, Hansmann and
Kraackman invoke the state of law regarding co-determination as an
illustration of purported convergence.76 Co-determination, which
German law pioneered,77 protects the interests of corporate employees
by allowing them to elect some of the corporation’s directors. Some
European nations,78 and more recently China, have imported this
German invention.79 Still, in support of their claim that corporate laws
are converging globally on a shareholder-oriented model, Hansmann and
Kraakman note that there has been no widespread adoption of codetermination.80
On the other hand, the current status of co-determination provides
limited support for Hansmann and Kraakman’s theory of convergence

away from a labor-oriented model. Far from representing a point of
convergence, there seems to be little movement among nations to change
to or from co-determination.81 Citations to academic works by critics of
co-determination82—at the same time ignoring contrary scholarship83—
hardly shows that an intellectual, much less a policymaker, consensus
has emerged rejecting the institution. Moreover, Hansmann and
Kraakman ignore one source of growing employee power in the
boardroom: the increasing ownership of stock by employee pension
plans and the increasing willingness of unions and others operating these
plans to utilize the power that comes with holding large blocks of voting

It is not hard to find counterexamples to the thesis that nations are
converging on the conclusion that the sole role of corporate law is to
protect shareholders. Among such counterexamples are the passage in
many states in the United States of so-called “other constituency
statutes,” which allow directors to consider the interests of stakeholders
other than the shareholders,85 and some provisions in the recent Dodd–
Frank financial regulation reform law that seem to use corporate
governance reform as a tool to protect the public from the collapse of
financial corporations.86
4. Cycles of Regulation and Deregulation in Protecting Shareholders
Largely absent from Hansmann and Kraakman’s “End of History”
thesis is convergence on the appropriate balance between regulation and

deregulation when it comes to shareholder protections. Hansmann and
Kraakman identify the goal of protecting minority shareholders from
expropriation by the majority and mention some currently favored
approaches to protecting the minority. However, they do not address the
balance between mandating protections for minority shareholders and
allowing participants in corporations to make their own arrangements.
This issue has continuously shifted between cycles of increased
regulation and deregulation.

These cycles trace back to the inception of laws allowing
incorporation by registration, which marked a move toward deregulation
by removing the requirement that corporations receive a special charter
from the government.87 In nation after nation, the aftermath of such laws
followed a depressingly similar pattern. A “founders’ boom” of forming
numerous new companies often occurred after the enactment of these
laws.88 When many of these new companies turned out to be illconceived—or
even fraudulent—and later failed, shareholders as well as
creditors lost their money. This led to wider economic dislocations and a
legislative response entailing greater regulation.89 Legislative responses
to corporate busts have shifted over time and have included such fixes
as: returning to the requirement for government approval to form a
corporation;90 restricting small investors from making potentially
improvident stock purchases;91 requiring companies to disclose
numerous facts to investors before selling them stock;92 and mandating

various corporate governance rules designed to give shareholders the
power to protect their interests from actions by corporate management.93
While the legislative approaches have varied, the common denominator
is mandatory protections that do not allow participants in the corporation
to completely contract for their own arrangements.94 Invariably, fading
memories and complaints about regulation push nations toward
deregulation—renewed free incorporation,95 removal of restrictions on
stock sales,96 reduction in the mandatory rules of corporate governance
that protect minority shareholders97—only to be followed by booms,
busts, and new restrictions.98 This cycle has continued all of the way to
this century’s Sarbanes–Oxley99 and Dodd–Frank100 Acts in the United
States, and similar laws in other countries.

In some instances, these cycles did not represent movement or
convergence in global norms, as some nations may have been in periods
of greater regulation at the same time that others were in cycles of
greater deregulation.102 In many cases, however, these cycles
represented a moving global norm, as national and sub-national
corporate laws converged around greater regulation or deregulation.103
Indeed, a common refrain in favor of deregulation from the early days of
general incorporation laws was the assertion that corporations will form
elsewhere—for example, England as opposed to France,104 or New
Jersey and Delaware as opposed to New York105—if the more restrictive
jurisdiction did not change its laws. At the other end of the cycle, the
booms and busts that lead to a push for regulation may not be limited to
one country.106 Moreover, global convergence on corporate regulation
often involved more than just the prevailing philosophy. It also included
imitation and transplant of either particular forms of increased regulation
(as in the spread of laws requiring disclosure upon the sale of stock107)
or of mechanisms allowing deregulation (as in the spread of the German
invention of the limited liability company form with fewer mandatory
requirements for corporations not issuing transferable stock108).
In sum, whether the subject is the micro one of specific corporate
laws and institutions, or the macro one of overall approach and
philosophy, and whether the trend is unidirectional or cyclical, nations
and sub-national jurisdictions are constantly copying each others’
corporate laws and institutions, with the result that such laws and
institutions appear to be in perpetual movement toward convergence at a
point that is continually shifting. Under these circumstances, claims that
corporate law has reached the end of history are likely to be a mirage.

This history, in turn, raises the question as to why corporate laws and
institutions behave in this manner.

A. The Efficiency Hypothesis
1. Economic Darwinism and Corporate Laws
Biologists presumably have theories to explain convergence in the
movement of flocks of birds, schools of fish, swarms of insects, or herds
of animals. Why, however, do corporate (as well as many other) laws
behave in a manner that creates a perpetual movement toward a neverlasting
convergence? Underlying the corporate law convergence thesis,
as exemplified by the “End of History” article, is a very Western view of
human history as linear tale of progress. Under this narrative, nations
move to convergence on corporate law and institutions when, after a
period of divergent experimentation, a consensus is reached which
recognizes the best approach.

The argument for this view of corporate law convergence lies in a sort
of economic Darwinism. Corporations are in constant competition with
each other and, in a global economy, this means competition with
corporations from other countries. Corporations operating with less
efficient corporate laws and structures will be at a disadvantage in this
competition. At an extreme, this can mean the failure of firms operating
under inefficient laws and institutions, and the survival of firms
operating under an efficient system.109

Of course, this stark scenario may assume far more significance for
legal rules and institutions than they have in the real world. For example,
in a world where different nations possess comparative advantages in
different industries—the traditional rationale for world trade—firms
organized under less efficient corporate laws and institutions can
nevertheless survive when operating in an industry in which their
country has a comparative advantage.110 Moreover, companies operating
under less efficient corporate laws and institutions might actually grow
more than their rivals if these corporate laws and institutions allow or

even encourage managers to sacrifice profit maximization for corporate
empire building.111

Hence, proponents of the efficiency-driven convergence thesis often
make more subtle claims. Instead of positing that corporations in nations
with less efficient corporate laws and institutions will go bankrupt before
the onslaught of companies from nations with more efficient laws and
institutions, the common argument is that capital will gravitate toward
companies organized under more efficient laws and institutions.112 This
means that more new, or more vibrant and growing, companies will be
formed under efficient laws and institutions, gradually replacing or
rendering less relevant the aging or smaller companies that were formed
under less efficient laws and institutions.113 Also, the greater tax base
provided by companies formed under more efficient laws and
institutions will lead governments to change less efficient laws and
institutions.114 Along similar lines, the greater interests of those who
profit more from corporations operating under efficient laws and
institutions will eventually place more pressure on governments to adopt
such laws and institutions than the pressure governments feel from those
groups who profit, but less in the aggregate, from inefficient laws and
2. Forces for Divergence

Critics have challenged various links in the efficiency-driven
convergence thesis, even in its more subtle variations. For example, they
have questioned the empirical support for the proposition that
corporations must operate under the most efficient rules and institutions
in order to attract investment in globalized financial markets.116 They
have also argued that political forces are as likely, if not more likely, to
preserve divergence as they are to promote convergence in corporate
The leading work dealing with the impact of political forces on
convergence of corporate laws comes from Mark Roe (sometimes joined

with others).118 Roe argues that the persistence of different national
patterns of dispersed versus concentrated shareholdings reflects path
dependence.119 Specifically, the historic hostility toward large banks in
the United States made banks and large financial institutions in the
United States unable or reluctant to take potentially controlling interests
in corporations, with the result that large corporations in the United
States ended up with dispersed shareholders.120 By contrast, other
countries with less political aversion to large banks ended up with
corporate control by holders of large blocks of voting shares.121 Once
they started down their respective routes, nations then adopted laws,
institutions, and practices that supported and made it difficult to change
the norm of either dispersed or concentrated shareholders.122

Of course, this discussion of convergence to a single most efficient set
of corporate laws and institutions assumes that there is one set that has
greater efficiency than other sets—or at least sufficiently greater to
actually matter. This may not be true to the extent that there are tradeoffs
between various laws and institutions and the results they might
promote—i.e., dispersed versus concentrated shareholdings—which
leaves the advantages more or less evenly balanced.123
In any event, existing scholarship has given due attention to the
question of whether path dependence and other possible barriers to
convergence will block the forces pushing convergence toward
efficiency. A question that has received little attention is whether there
are other forces that push convergence toward inefficient or less
normatively desirable outcomes.

B. Inefficient Convergence
1. Fads and Fashions
It used to be said in jest about male law professors that you could tell
when they left the practice of law to enter teaching by the width of the
neckties they wore—because they stopped buying new ties upon leaving
practice and the width of ties constantly changes. If one thinks about this

saying, the interesting question is not what it says about male law
professors, but rather what it says about male lawyers (or males in many
other professions): why do (or did) so many men buy new ties and stop
wearing their older ties as the fashionable width changes? Indeed, why
does anyone wear as non-functional an item of clothing as a necktie?

The answer, of course, is that the forces for convergence in human
behavior are not necessarily based upon efficiency.
Returning to the discussion of corporate laws and institutions, there
are at least three reasons why such laws and institutions may converge at
points that fail to have any particular efficiency or other normative
advantage. The first of these reasons, in fact, is the one illustrated by
clothing—this being the tendency in human behavior to follow fads and
fashions for their own sake. A body of comparative law scholarship
studies the precise motivations and mechanisms causing migration of
legal rules between nations, looking for such influences as overseas
studies by persons pushing law reform, communication between legal
elites from different nations, or the persuasiveness of “other nations do
this” arguments.124 Later portions of this Article will consider two more
specific motivations for importation of corporate laws—the endogenous
variables problem that confuses correlation and causation, and rentseeking
by those favored by another nation’s law. For now, however, it
is not necessary to consider the precise mechanisms causing one nation
to imitate corporate laws simply because other nations have adopted
those laws—just as it is not necessary to understand the precise
mechanisms and motives for the influence of clothing fashions in order
to appreciate that people follow clothing fashions for the sake of being in
fashion. Rather, it is simply necessary to recognize the existence of this

The global spread of the prohibition on insider trading, discussed
earlier,125 may be a phenomenon best explained in terms of fads and
fashions. Curiously, this prohibition spread around the world at the same
time that academic commentary in the nation of its origin, the United
States, increasingly questioned the utility of the prohibition.126 The claim

that the prohibition encourages investment by small shareholders,
dispersed shareholdings, and a lower cost of capital—its efficiency
justifications—rests either upon faith, or upon extremely subtle and only
later-produced evidence.127 Therefore, it would not seem to explain why
the doctrine spread in the late 1980s and 1990s. Rather, the prohibition
seems to have spread based upon the issue catching the public
imagination128—particularly insofar as the acceleration in the
prohibition’s worldwide spread followed high profile insider trading
prosecutions in the United States129 and, in the case of Japan, a high
profile insider trading scandal.130

More recently, the worldwide spread of requirements for boards to
contain so-called independent directors has outstripped the mixed
evidence supporting the utility of the institution—suggesting again fad
or fashion is at work. Interestingly, the notion of independent directors
harkens back to the German invention of the two-tier board in which a
supervisory board of directors, who are forbidden to be executives of the
company, monitor a board of senior executives who actually run the
company.131 From there it is but a short jump to Melvin Eisenberg’s
influential notion of the monitoring board—specifically, the idea that
boards cannot run or make broad policy for the large firm, but rather can
only serve a useful function by monitoring the senior executives who
actually make policy and run the firm.132 Moreover, such monitoring
must be done by directors who are not the executives being monitored.
The idea of independent directors expands upon the notion that the
monitoring directors should not be executives, by adding that monitoring
directors should also not have dealings that would subject them to

influence by the corporation’s executives.133

One problem, however, is that gains achieved by independent
directors in terms of objectivity may be offset by the loss of firm specific
expertise among the directors—as the board contains fewer people with
inside knowledge of the company.134 Whether it is for this reason or the
hopelessness of the whole institution of the corporate board, various
efforts to study the impact of independent directors have failed to
demonstrate unequivocally improved performance.135 Still, this has not
stopped nations from jumping on the bandwagon.136 For example, China
adopted an independent directors requirement even though there was no
evidence of improved performance in Chinese companies already having
independent directors.137 Moreover, China took this action despite the
fact that it had already adopted the German supervisory board model and
therefore already had non-executive directors monitoring the
performance of executives. To top it off, in a milestone of the
redundancy that can occur when a nation simply copies institutions from
other nations, China left in place the requirement for supervisory

An examination of the history of corporate law transplants could
endlessly multiply the examples of imitations reflecting fads and
fashions as opposed to any particular efficiency advantage. Amusingly,

in an earlier era of slower change, the reflexive copying of corporate
laws from one nation to another might have been sufficiently gradual
that later imitators only arrived at the initial approaches well after the
nations at the beginning of the chain had already abandoned them.139

2. The Endogenous Variables Problem
A second explanation for convergence around corporate laws and
institutions that lack any particular efficiency or other normative
advantage lies in the endogenous variables problem. In less
mathematical language, it is human nature to draw confused conclusions
regarding causation when policy makers deal with bundled rules and
institutions. Specifically, when looking at an apparently successful
model—whether this is an individual company or the overall economy
of a nation—policymakers face a difficult challenge in determining
which of the many features of this model (such as laws) are responsible
for its apparent success. Under these circumstances it is tempting to copy
features that may have had little influence in the model’s success.

The literature surrounding the relationship between corporate laws
and dispersed shareholders provides a recent example of this
endogenous variables problem. A series of studies by financial
economists La Porta, Lopez-de-Silanes, Shleifer, and Vishny (LLSV)140
began by noting the worldwide split, discussed earlier, in the
shareholding patterns for the largest corporations between the dispersed
pattern found in the United States and England, and the more
concentrated ownership found in most other countries. LLSV then
sought to determine the causes for this divide. They did this by looking
for statistical correlations between various laws and legal institutions
and the pattern of shareholdings.141 So, for example, LLSV found a
patent correlation between common law countries (England and the
United States) and dispersed shareholders, as opposed to civil law
countries (Continental Europe, Latin America, most of Asia) and
concentrated shareholdings.142 Focusing more specifically on corporate

laws, LLSV speculated that laws protecting minority shareholders
should logically lead to greater dispersion of shares, and, sure enough,
found a correlation between jurisdictions whose corporate laws followed
LLSV’s list of minority shareholder protections and greater dispersion of

Policy prescriptions resulting from LLSV’s work regarding minority
shareholder protections soon followed. If, as appeared to be the case in
the 1990s when this work was published, dispersed shareholders
produced better corporate and overall economic performance, and if, as
seemingly demonstrated by the correlation studies, minority shareholder
protections led to dispersed shareholdings, then nations should adopt
minority shareholder protections. This certainly seemed persuasive to
the World Bank, as it advised developing nations on the rules they
should adopt.144

Other scholars have pointed out serious holes in LLSV’s work about
minority shareholder protections. To begin with, there is a rather
fundamental timing flaw in LLSV’s effort to draw a causal link from a
static correlation study. Specifically, the dispersal of shareholdings in
the United States and England predated adoption of many of the
minority shareholder protections LLSV depended upon in drawing a
correlation between minority shareholder protections and dispersed
shareholdings.145 The implication of this history is that rather than
minority shareholder protections leading to dispersed shareholdings,
dispersed shareholdings created a demand for minority shareholder

Moreover, LLSV’s list of minority shareholder protections contains
numerous laws of questionable significance. For example, they list
cumulative voting among the minority shareholder protections found in
the United States.147 Cumulative voting, however, is not the prevailing
rule in the United States148 and, in any event, only aids shareholders
controlling substantial blocks of stock—meaning that it lacks much

impact in corporations with dispersed shareholdings.149 This illustrates
that nations adopting LLSV’s minority shareholder protection laws in
order to encourage dispersed shareholdings will end up adopting a
number of laws that achieve little in this regard—even though such laws
may appear to correlate with the sought after goal.150

It is nothing new for nations to adopt pointless or inefficient corporate
laws and institutions because they are part of a package that correlates
with seemingly better corporate or economic performance. Consider the
worldwide adoption of the norm that a board of directors, normally
elected by the shareholders, has the ultimate authority over management
of the corporation. Of course, delegated management would appear to be
a practical necessity in a firm with widely dispersed and constantly
trading ownership shares. Still, it is less clear why ultimate authority
should reside in an elected board operating as peers as opposed to an
elected or even unelected chief executive officer, manager, or
managers—as is common in unincorporated firms such as limited
partnerships151 and also corresponds to reality in publicly held

In fact, the corporate board of directors seems to be a fairly
dysfunctional institution in search of a purpose for its existence. Various
studies in the United States,153 Japan,154 France,155 and Germany

document how corporate boards are commonly passive pawns of
management and have no real role in running the corporation or
disciplining those who do. Claims of improvement in the institution in
recent years have proven ephemeral.157 The history of the institution
documents that this state of affairs is nothing new.158

So why then did the corporate board of directors develop as the
governing institution for corporations, and why did this model of
governance spread from nation to nation and become the worldwide
norm? The answer to the first question is historical accident. Elected
boards (along with a governor) constituted the governing institution for
the regulated companies from which the early joint-stock companies
derived.159 This mode of governance reflected medieval European
political theories under which decisions impacting a society—be it a
kingdom, a town, or a merchant guild—required the members’ consent,
either directly or through elected representatives.160 These theories fit
naturally into regulated companies in which the members conducted
their own trading and the role of the elected board was largely to make

rules for the members.161 When the regulated company evolved into the
joint-stock company, the board governance model continued without
anyone asking whether an institution providing consent in making rules
for a merchant society was also the best way to run a business in which
the voting members were now passive investors.162

As non-European nations adopted the joint-stock company
(corporate) form of business, they simply copied all the features of the
institution, including the board, without asking what was really
necessary or useful. The Japanese experience is highly illustrative.
Central to the Meiji Restoration was the importation of Western
institutions that the Japanese believed would develop their country.163
This included the joint-stock company, which the Japanese saw as the
organization building railroads and industries in the United States,
England, and Europe.164 Because the Japanese observed that joint-stock
companies (or corporations) in the United States, England, and
elsewhere were apparently run by boards of directors, they abandoned, at
least formally, their traditional modes of business governance in favor of
board governance.165 One irony is that in the earliest Japanese jointstock
companies, the Japanese seem to have been unclear what the
directors were supposed to do.166 Not surprisingly, the directors
eventually figured out that their job was to let the officers run the
company and not do much of anything.167 This in turn led to the ultimate
irony in endogenous reasoning: Japanese observers criticized their
directors for such passivity in writings that assumed directors in the
United States and England were behaving differently168—at the same
time directors in the United States and England were passively watching
management of railroads and other companies defraud the

3. Rent-Seeking

A third reason for convergence around corporate laws and institutions
that lack any particular efficiency or other normative advantage is
interest group rent-seeking. Hansmann and Kraakman recognized this
force for inefficient convergence in their “End of History” article.170 As
one example, they point to convergence around limited liability for
corporate shareholders.171 It is not surprising that Hansmann and
Kraakman should point to limited liability as an inefficient convergence,
because some years earlier they had achieved considerable scholarly
notoriety for an article advocating significant curtailment of the

In fact, a controversial article by Hansmann and Kraakman is not the
only thing that can cause one to question the efficiency of the
convergence favoring limited liability. The excessive risk taking by
financial corporations culminating in the 2008 financial crisis illustrates
once again the moral hazard created by limited liability.173 A common
justification for allowing this moral hazard is the critical role that limited
liability plays in facilitating dispersal of shareholdings and development
of stock markets.174 However, historical evidence from nineteenth
century England—in which different approaches to limited liability
allow for empirical observation of the extent to which dispersed
shareholdings and stock markets arise with or without limited liability—
raises strong questions as to the accuracy of this rationalization.175
Closer to home and time, the fact that California’s economy was able to
function without limited liability for corporate shareholders until 1931

would seem to say something.176

Moreover, the rationale for shareholders in public corporations to
enjoy limited liability hardly explains the extent and direction of the
convergence in favor of the doctrine. As mentioned above,177 the 1892
German invention of the limited liability company—which is expressly
designed to make it easier to have limited liability for controlling owners
in closely held firms—spread like wildfire in the 1990s throughout the
United States, despite the fact that in closely held firms the moral hazard
created by limited liability is high and the utility of this doctrine is
low.178 If this was not enough limited liability for controlling owners of
businesses, the limited liability partnership—creating limited liability for
ordinary partners by the magic of merely filing a piece of paper—also
spread throughout the United States in the 1990s.179

Hansmann and Kraakman theorize that this spread of limited liability
resulted from the fact that shareholders (whom the doctrine favors) are
more organized in pursuing their interests than prospective unpaid
creditors of corporations (whom the doctrine disfavors)—especially
unpaid creditors like future tort victims, who do not even realize their
interest in the issue until later.180 Of course, one might suspect that a
similar interest group dynamic could be at work in the periodic
convergence toward deregulation that removes mandatory protections
for minority shareholders. Corporate managers who face limits on their
power and potential liability at the behest of minority shareholders
presumably favor such deregulation.181 And indeed, throughout the
history of corporate laws, corporate managers have used the threat of
incorporating in another jurisdiction to encourage removal of restrictive
corporate laws.182
Deregulation with respect to shareholder protection, however, does
not produce a permanent convergence because busts produce a backlash

by disgruntled shareholders.183 By contrast, the boom and bust cycle
seems to have had a ratcheting effect that favors limited liability. During
booms, corporate creditors presumably are less concerned with limited
liability. It has been during busts, however, that many extensions of
limited liability have occurred—such as California’s change in 1931,184
the creation of limited liability partnerships in the United States to
protect professional firms being sued for malpractice following the
savings and loan crisis in the early 1990s,185 as well as earlier examples
in England186 and elsewhere. Such busts make the issue of limited
liability even more salient to shareholders, who then recognize the
danger from unlimited liability and are able to catch more sympathy than
creditors. 187

In sum, the debate over whether Darwinian evolution will force
convergence of corporate law into efficient forms or be stymied by path
dependence or other barriers overlooks much (if not most) of the action
when it comes to corporate law convergence. Between mindless
following of fads and fashions in corporate law, erroneous assumptions
that corporate forms or rules correlating with successful performance
produced that performance, and opportunistic rent-seeking by groups
pushing for importation of forms and rules that favor their interests,
much of corporate law convergence has little to do with efficiency.


A. The Assumptions of Academics
Even the most diehard believer in the convergence of corporate laws
and institutions expects that some residual differences will remain
between the corporate laws and institutions of various nations.188 At the
same time, even the greatest skeptic of convergence recognizes the
existing similarities among the corporate laws and institutions of various
countries.189 Hence, any discussion of convergence must embody some
value judgments by which to decide the relative significance of the areas

of similarity versus the areas of difference.

If we accept the Darwinian evolution toward efficiency model, we
might reach the rather circular conclusion that convergence itself proves
the importance of the corporate law or institution upon which nations
have converged—less important issues being ones where inefficient
divergence can survive.190 The prior part of this article, however, gives
us reasons to pause before assuming that efficiency, rather than other
forces, drives convergence. If we cannot rely on convergence itself, how
else can we assess the importance of areas of convergence versus

Unfortunately, too much of the literature on convergence seems to
rely on the authors’ personal interest in a rule or institution or on the
presence of academic literature addressing the particular rule or
institution, rather than carefully examining the importance of the
corporate rule or institution in the practical workings of corporate law.

Hansmann and Kraakman’s “End of the History” article provides a good
illustration. It speaks of adoption of the “standard shareholder-oriented
model” as marking the point of convergence on the ostensibly remaining
critical issues facing corporate law—these being, according to
Hansmann and Kraakman, the accommodation of non-shareholder
interests as well as the protection of minority shareholders from
expropriation by the majority.191 This standard shareholder-oriented
model encompasses a mélange of notions, some of which consist of the
components of the model and others which consist of contrasts drawn
with other models. This model, however, is largely irrelevant to
corporate law, is relatively unimportant in the practical workings of
corporate law, or fails to display the convergence that Hansmann and
Kraakman proclaim.

The other models against which Hansmann and Kraakman contrast
the standard shareholder-oriented model are the manager, labor, and
state-oriented models. The state-oriented model, as Hansmann and
Kraakman largely concede, has little to do with corporate law—at least
since general incorporation laws replaced individually granted corporate
charters bestowed upon those who asserted some public advantage from
the proposed enterprise. State ownership of corporate enterprises, which
existed in many parts of the world throughout the twentieth century,
constitutes the most dramatic example of a state-oriented model. Since

the fall of the “Iron Curtain,” however, the prevailing consensus has
generally disfavored state ownership of corporations192—albeit, state
ownership, at least of many large banks, came close to making a
comeback in 2008.193 This, however, is an issue about economic
structure on the most macro level, rather than the subject of corporate
law.194 About the best Hansmann and Kraakman can do is speculate that
states might use their role in enforcing corporate laws to further a
government industrial policy. Such actions, however, seem to be pretty
small potatoes in the arsenal available to a government determined to
implement such a policy, and there is no sign of a convergence that
would make enforcement of corporate laws an entirely private affair.195

The labor-oriented model, which was pioneered in Germany, involves
the ability of employees to elect some members of the board of directors
(co-determination). Regardless of whether co-determination is all that
significant in the practical workings of corporate law, Hansmann and
Kraakman’s thesis runs into a problem in claiming that there is
convergence on rejecting this institution. Rather, as discussed above,196
there does not seem to be much movement either way by nations on this

The manager-oriented model gets us into the heart of corporate law
by addressing the balancing of discretion given to (versus checks
imposed on) those in charge of the corporation. Hansmann and
Kraakman, however, sidetrack this into a largely abstract academic
debate. Specifically, they focus on the public interest rationale for
granting managers substantial discretion in running the corporation. This
rationale supports giving managers substantial discretion based upon the
argument that managers will use their discretion to run the corporation in

a way that advances the interest of the general public197 or the interests
of all the stakeholders in the corporation, including employees, creditors,
customers, and the like.198 Hansmann and Kraakman come down on the
side of what is generally labeled “shareholder primacy.” In this
shareholder-oriented model, “the managers of the corporation should be
charged with the obligation to manage the corporation in the interests of
its shareholders; [while] other corporate constituencies, such as
creditors, employees, suppliers, and customers, should have their
interests protected by contractual and regulatory means . . . .”199

While the debate about whether corporate managers should prioritize
the interests of the shareholders over the interests of other constituencies
or should have discretion to balance interests as they see fit has occupied
copious quantities of academic literature,200 its impact on the practical
workings of corporate law has been remarkably small. Even the
strongest legal pronouncements of a shareholder primacy norm
immediately defang the obligation by granting managers wide discretion
to balance interests as they see fit.201 All that is required is that someone
(including, if necessary, the court) conjure up an imaginative theory
under which, in the long, long run, the shareholders will be better off by
virtue of the immediate favoring of other interests.202 Conversely,
outside the context of creditor protection in corporations facing
insolvency, one would be hard pressed to find in any nation—except the
Netherlands203 —a judicial decision holding that directors breached a
legal duty by favoring shareholders over other stakeholders in the

Hansmann and Kraakman are hardly alone in failing to focus on the
objectively important—as opposed to the academically interesting—in
addressing convergence. As discussed earlier,205 LLSV picked a number
of laws, presumably based upon their reading of legal scholarship, in
order to test whether so-called minority shareholder protections impact
the distribution of stock in large corporations. Yet careful analysis would
suggest that many of the laws they picked, such as cumulative voting, do
little to protect minority shareholders in public corporations.206

B. The Tough Policy Issues

Whether based upon an economic model that treats the corporation as
a species of the principal-agent problem requiring the control of agency
costs,207 or whether based upon the history of corporations since the
South Sea Bubble of the early 1700s208 constituting a string of scandals
in which those in charge of corporations fleeced their shareholders,209
theory and history establish that a major concern of corporate law is to
protect shareholders from those in control of the corporation. This
concern with protecting shareholders is far more central to corporate law
than the goal of protecting others impacted by corporate managers. For
one thing, laws seeking to protect non-shareholders typically do not
involve corporate law or may only involve corporate laws of limited
geographic reach (as with co-determination). Also, such laws may deal
with only narrow aspects of corporate law (as with laws designed to
protect creditors210). Finally, concerns about protecting non-shareholders

through corporate law are commonly more theoretical than practical in
their impact (as with the debate over shareholder primacy and directors’
duties). By contrast, laws seeking to protect shareholders are universal
among jurisdictions and significantly impact most aspects of corporate

Yet it is not merely the pervasiveness of shareholder protection in
corporate law that renders shareholder protection an appropriate focus
for a discussion of convergence. The very difficulty in crafting effective
protections for shareholders necessitates comparative law analysis—
after all, there is no sense in spending much time comparing how various
nations handle the easy issues with obvious answers. Unfortunately,
devising effective means of protecting shareholders has proven to be an
intractable challenge—meaning that the end of history for corporate law
will probably be the day before the Messiah arrives or the universe ends.
In the meantime, we should not expect a stable convergence around the
two fundamental questions that must be answered in addressing the
protection of shareholders from those controlling the corporation.

1. Mandatory Versus Permissive Corporate Law
As discussed earlier,212 one of the enduring cycles in corporate law is
the moving convergence on the balance between regulation and
deregulation in the protection of minority shareholders. Hence, one does
not need familiarity with the voluminous academic literature addressing
the topic213 to recognize the critical importance of the debate over
whether corporate law protections of minority shareholders should be
mandatory or left for the participants to work out.
The competing tensions here are ideological, political, and practical.
The ideological disagreements over mandatory versus permissive

corporate law rules reflect differing factual assumptions about the
rationality of individuals, i.e., whether people act as rational wealthmaximizing
individuals or whether they act on irrational behavioral
impulses.214 The ideological disagreements also reflect different
assumptions about the efficiency of markets215 and the capability of
government to avoid inefficient rent-seeking by public officials and
other interest groups.216 Finally, they reflect a philosophical
disagreement about the intrinsic value of individual autonomy.217

The earlier discussion about cycles of regulation and deregulation
illustrates the political tensions that prevent stable convergence
regarding mandatory versus permissive corporate law.218 Corporate
managers, for obvious reasons, are generally resistant to regulation that
would limit their autonomy. Furthermore, unless a crisis looms, there
may be little push by shareholders for mandatory protections because
shareholders may underestimate the danger and overestimate their ability
to protect themselves.219 The prospect of regulatory arbitrage—forming
the corporation under more relaxed laws—creates special pressure for
deregulation in the corporate arena.220

The increasing numbers of American and foreign limited liability
companies organizing under Delaware law while operating largely or
exclusively outside of Delaware221 highlight the political forces behind
deregulation. The Delaware limited liability company statute expressly
sets forth a policy maximizing freedom of contract and allowing
elimination of every fiduciary and other duty except the basic duty of

good faith and fair dealing.222 This law has been one of the main drivers
of decisions by out-of-state limited liability companies to organize under
Delaware law.223

Another and earlier example comes from the 1980s. In response to a
highly controversial Delaware Supreme Court decision finding that
directors had breached their duty of care,224 Delaware enacted a striking
example of permissive legislation in corporate law. The legislature
amended Delaware’s corporate statute to allow provisions in certificates
of incorporation that waive monetary liability for directors who breach
their duty of care.225 Demonstrating convergence in action, this scene
later replayed itself in Japan in the 1990s. Following a huge damage
award against directors of a Japanese bank who breached their duty of
care, the Japanese legislature enacted a provision allowing corporate
charters to limit the amount of damages for which directors can be

As explained earlier, however, these political winds can blow in both
directions, thereby preventing a permanent convergence in favor of
deregulation. Ever since the South Sea Bubble, waves of corporate
scandal and crisis have caused large losses for shareholders and
triggered broader economic dislocation. The result—from the English
Bubble Act’s attempt to prevent joint-stock companies without official
charter, from issuing transferable shares,227 to the mandatory corporate
governance provisions in the Sarbanes–Oxley228 and Dodd–Frank229
Acts—is a political backlash against deregulation and an adoption of
mandatory shareholder protections.
Finally, what frustrates permanent convergence is the simple fact that
both regulation through mandatory protections and deregulation through
contractual freedom have merits and flaws. Practically speaking, finding

the “Goldilocks” balance between bust-producing deregulation230 and
growth-stifling regulation231 has not been an easy undertaking.

2. Authority Versus Accountability for Corporate Managers
Drawing on the organizational theories of Kenneth Arrow,232 Stephen
Bainbridge has crystallized a second fundamental tension in corporate
law: the tension between the authority and accountability of those in
charge of the corporation.233 Specifically, in order for any organization
to function, members of the organization must be given some authority
to act; if no one has authority to do anything, nothing gets done. The
problem—which economists call the “principal-agent” or “agency cost”
problem234—is that those with authority to act often misuse their
authority. They may engage in disloyal conduct to enrich themselves at
the expense of the organization or they may act honestly but
misguidedly out of carelessness, bad judgment, or various biases and
emotions. As expressed in an old cliché instead of the language of
economics, because humans are inherently fallible, “power corrupts.”

Hence, there is need for mechanisms of accountability, lest authority
devolve into the corruption that results from absolute power.
The tension begins with the fact that mechanisms of accountability
necessarily impinge on authority. This fact is particularly evident when
the mechanism involves a requirement of advance approval. Even when
the mechanism involves only after-the-fact consequences, however, the
fear of such consequences can reduce the willingness to exercise
authority. This may deter desirable as well as undesirable acts.235 The
real problem, however, is not simply that accountability limits authority;
it is that mechanisms of accountability generally are not self-executing.
Instead, fallible human beings carry out the accountability mechanisms,
whether this involves selecting those who will have authority, approving
specific actions, or deciding if authority has been misused. Hence,
accountability mechanisms essentially transfer authority from one
person to another person or group. These transferees, however, may

themselves have poor motives or act misguidedly. Of course, one could
have other persons impose accountability upon the persons who impose
accountability, but then, given this logic, one must repeat this process

At this point, one could throw up one’s hands and decide that the
whole enterprise of imposing accountability is pointless. Corporate law,
however, is built on the notion of finding some balance. The difficulties
and disagreements inherent in finding the appropriate balance suggest
that this will be an area of divergence or constantly shifting

We can find examples of these disagreements in the various
mechanisms of accountability, including selection, approval, and
consequences. Recently in the United States, disagreements about
accountability through selection have played out in the controversy over
“proxy access,” which refers to the right of shareholders in public
companies to demand that shareholder nominees for board positions
appear on the proxy form distributed by the corporation to its
shareholders. While this would seem to be an elementary exercise in
democratic governance, critics of proxy access have highlighted
conflicts of interest and misguided motives among shareholders
demanding proxy access.236 In other words, critics have pointed to the
fallible nature of those who would monitor others through the
mechanism of selection.237

Actually, proxy battles for control of publicly traded companies are
not major drivers of accountability because they rarely occur.238 Of far
more significance is the threat of a change in management following a
corporate takeover.239 Corporate laws in different nations diverge in the
manner they govern such acquisitions and management’s efforts to
thwart them. Indeed, an attempt to harmonize corporate takeover laws in
Europe provoked so much controversy that the resulting European
Union harmonizing directive allows member nations to opt out of key

provisions.240 This is yet another example of the difficulties of balancing
authority and accountability between managers (who have an interest in
preserving their positions)241 and shareholders (who face collective
action problems in deciding whether to sell).242

The dilemma of how to balance authority and accountability also has
produced disagreement among nations about requirements for
shareholder approval of management actions and shareholder ability to
command management actions.243 Shareholders in many nations possess
more power in these areas than they do the United States.244

There is also marked divergence in approaches to achieving
accountability by imposing liability on managers for disloyal or illadvised
decisions. In some instances, this divergence is subtle and even
concealed under an apparent convergence. For example, the doctrine
known as the “business judgment rule,” which apparently originated in
the United States,245 has spread worldwide.246 This doctrine calls for
restraint in imposing liability upon directors for disinterested decisions
that turn out badly or with which some shareholders may disagree.247
Hence, at first glance, this would appear to represent an important
example of convergence on the fundamental question of balancing
authority and accountability through judicial review of business

A closer examination of case law, however, reveals that a rule calling
for restraint in second-guessing board decisions may be applied very
differently in different legal cultures. For example, a few years ago,
Delaware judges applied the business judgment rule in a highly
deferential manner to exonerate directors who had approved payment of
$130 million to the fired former president of a company after a one-year
term in which he accomplished very little.248 At around the same time,

German judges found a breach of duty, despite applying the business
judgment rule, by nitpicking at the decision of the directors of a German
company to award a bonus of $17 million to the outgoing CEO, whose
actions had played an important role in gaining over $50 billion for the
company’s shareholders.249

Such differences in attitudes may both reflect and reinforce important
societal differences whose significance would be masked if one only
paid attention to the apparent convergence marked by both courts’
purported decision to apply the business judgment rule. There is a wide
gulf between executive compensation levels in the United States and in
the rest of the world, whether measured in absolute terms or in terms of
comparison with the ordinary workers of the company.250 Executive
compensation levels in the United States have grown dramatically in the
last thirty years and contribute to the growing income gap in the United
States between the top one percent of earners and everyone else.251
Unless there is convergence in broader national attitudes regarding the
importance of equality in wealth distribution,252 one cannot expect
convergence in the application of even nominally similar corporate laws

addressing the balance of authority versus accountability in executive

Finding the balance between authority and accountability becomes
even more difficult when one considers the process for enforcing
liability upon corporate managers. The problem is that the concept of
authority calls for managers to decide if the corporation should enforce
claims against the managers themselves. Accountability is only
achieved, however, if someone else makes enforcement decisions. Yet
any other decision maker faces potential problems of suspect motives or
significant costs (often paid by the corporation) in order to determine
whether liability (or even further investigation) is warranted.253
Interestingly, there has been a growing convergence in this area.

Many civil law nations have begun to recognize derivative suits brought
by shareholders on the corporation’s behalf against its directors while
also subjecting such suits to minimum shareholding requirements for
standing and perhaps to judicial preclearance of the merits of the
action.254 At the same time, the United States, which apparently
pioneered the derivative suit,255 has seen various efforts to curb such
litigation, especially by turning the requirement that the plaintiff make a
pre-suit demand upon the board into a judicial preclearance of the merits

of the suit.256 Still, this convergence may simply reflect unsatisfactory
compromise in the face of intractable problems with the mechanisms for
enforcing liability upon corporate managers.

In the end, the balancing of authority and accountability, like the
balancing of permissive and mandatory protections for shareholders,
defies stable and complete convergence. This is the expected result in
areas in which there are significant policy tensions and no easy

Whether expressly stated or left implicit, a normative agenda
underlies the predictions of convergence: if convergence is going to
happen anyway because of efficiency, then nations should embrace
convergence.257 Depending upon the nation of the writer, this translates
into support of legal exports (you should adopt my nation’s corporate
laws) or of legal imports (we should adopt another nation’s corporate

The theses developed here are intended to prevent an unexamined
acceptance of such arguments. Convergence through imitation and
transplant is constantly occurring in corporate law, but the points upon
which corporate laws converge commonly represent only temporary way
stations from which divergence will reappear until there is convergence
again at a new point of temporary consensus. Corporate laws do not
necessarily converge to more efficient or otherwise normatively superior
points, but are influenced by fads and fashions, erroneous assumptions
about correlation and causation, and rent-seeking by those favored by
the particular points of convergence. This lack of permanent
convergence is particularly likely in the difficult contexts of balancing
regulation and deregulation or authority and accountability with respect
to shareholder protection.

This is not to say that observing other nations’ corporate laws is
useless or unwise. If nothing else, we will learn that there are alternate
approaches which may be as effective as our own. We may also learn,
however, that when it comes to the really tough issues, no nation has a
good solution—which is why these are the really tough issues in.




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