Challenging the Corporate Wisdom
Robert B. Ahdieh
Vice Dean and Professor of Law
Director, Center on Federalism and Intersystemic Governance
AB, Princeton University, 1994
JD, Yale University, 1997
Scholarly interests: contracts, corporate & securities law, federalism, international trade & finance, Russian law
Widely recognized as a scholar, teacher, presenter, and innovative thinker, Robert B. Ahdieh makes a habit of challenging our conventional assumptions in corporate and securities law. That’s what happens, he suggests, when we ask first questions: Why do we regulate? Given that, how should we do so? And when? Who, finally, should be allowed to regulate — and who should decide who’s allowed?
“As scholars, we have the luxury — and perhaps an obligation — to question the received wisdom, perhaps especially on issues of longstanding debate,” Ahdieh says. “The wisdom, and the utility, of our conventional assumptions may thus turn out to be more complicated than we assume.”
In the study of corporate and securities law, this mindset has taken Ahdieh’s work down two distinct but related paths. Early on, in his articles “Making Markets: Network Effects and the Role of Law in the Creation of Strong Securities Markets” and “Law’s Signal: A Cueing Theory of Law in Market Transition” (Southern California Law Review 2003, 2004), he considered ways in which regulators might significantly impact the design and ultimate success of securities markets — but without resort to familiar tools of command-and-control regulation. As he demonstrated in that work — and in more recent expansions on it — in certain settings we need to acknowledge the critical task of regulation as one of coordination.
In another strand of his work, Ahdieh has explored the allocation of regulatory authority between subnational, national, and international authorities.
Conventionally, we have approached this question with an eye to minimizing overlap in the authority of independent jurisdictions — whether federal and state, state and local, or otherwise. In Ahdieh’s view, however, this approach ignores the potential utility of such overlap — from its “fail-safe” functions to its potential to foster regulatory innovation and salutary integration.
Considering the implications of this approach in corporate law, Ahdieh has explored the widespread embrace of federalism as a tool of efficiency in corporate governance. Challenging this conventional view, Ahdieh’s articles “Trapped in a Metaphor: The Limited Implications of Federalism for Corporate Governance” and “The (Misunderstood) Genius of American Corporate Law” (George Washington Law Review 2009) argue that federalism and resulting state competition have little to do with corporate governance. By asking first questions, he suggests, we can see that federalism actually serves an entirely different function in corporate law.
Institutionalizing this second strand of his scholarship, Ahdieh — together with co-directors William Buzbee and Robert Schapiro — founded Emory Law’s Center on Federalism and Intersystemic Governance. Through the center, the directors hope that a distinct perspective on federalism, and on the benefits of overlapping regulatory authority, can be brought to the table.
“The whole argument that we make, and that I’ve made in my own work in corporate and securities law,” Ahdieh says, “is that our conventional mindset may sometimes be wrong. It may be a good thing to have multiple regulators with authority over a given issue, because they may learn from one another.”
Ahdieh’s honors in recent years include visiting professorships at Columbia, Georgetown, and Princeton — where he spent a year as the Microsoft/lapa Fellow in the Program in Law and Public Affairs. He also has been a visiting scholar at the Institute for Advanced Study and a lecturer at numerous universities overseas, including Bergen University in Norway, Goethe University in Germany, the Interdisciplinary Center in Israel, and Singapore Management University.
Ahdieh hopes his work will help to open new lines of inquiry in corporate and securities law, as well as on the nature and role of law and regulation more generally. “A better understanding of why, how, and when we regulate,” he says, “is likely to have far-reaching implications for our economic, social, and political life.”
- Beyond Individualism in Law and Economics, 91 Boston University Law Review 43 (2011)
- The Visible Hand: Coordination Functions of the Regulatory State, 95 Minnesota Law Review 578 (2010)
- The (Misunderstood) Genius of American Corporate Law, 77 George Washington Law Review 730 (2009)
- Trapped in a Metaphor: The Limited Implications of Federalism for Corporate Governance, 77 George Washington Law Review 255 (2009)
- The Dialectical Regulation of Rule 14a-8: Intersystemic Governance in Corporate Law, 2 Journal of Business and Technology Law 165 (2007) (reprinted in 40 Securities Law Review 408 (2008))
- The Strategy of Boilerplate, 104 Michigan Law Review 1033 (2006)
- From “Federalization” to “Mixed Governance” in Corporate Law: A Defense of Sarbanes-Oxley, 53 Buffalo Law Review 721 (2005) (reprinted in 38 Securities Law Review 293 (2006) and 48 Corporate Practice Commentator 91 (2006))
- Between Dialogue and Decree: International Review of National Courts, 79 New York University Law Review 2029 (2004)
- Law’s Signal: A Cueing Theory of Law in Market Transition, 77 Southern California Law Review 215 (2004)
EXCERPT: “The (Misunderstood) Genius of American Corporate Law”
The study of corporate law is trapped in a metaphor. For thirty years, it has taken its cue from the purported debate between William Cary and Ralph Winter over a “race to the bottom” versus a “race to the top” in corporate governance. As commonly recounted, Cary initiated the debate, condemning the nature of corporate law as state law. Because of the latter, he argued, states have joined in a “race for the bottom” in the protection of shareholders against managerial abuse. Winter’s response is put to service in support of the opposite conclusion: state law offers precisely what shareholders want. Rather than a race to the bottom in the quality of corporate governance, federalism in corporate law — and resulting state competition — fosters a “race to the top.”
In reality, Cary and Winter agreed on far more than they disagreed. To date, however, a distorted account of their differences — and the “race” metaphor said to capture their respective positions —continues to provide the starting point for the study of corporate law. The existence, direction, and speed of the supposed race among states in corporate governance thus remain foundational questions of the corporate law literature.
But the discourse of a “race” in corporate governance — like many a misplaced metaphor —turns out to have obscured at least as much as it revealed. At once, it has caused us to overstate the centrality of state competition to efficient corporate governance and to understate the distinct normative ends that state competition promotes.
Rather than the singular dynamic of state competition emphasized by the supposed “race debate,” we do better to understand Cary and Winter as having highlighted two distinct patterns of competition in the operation and regulation of the modern public corporation. The first, of course, is the competition among states to attract corporate charters. A distinct dynamic of competition also plays out among managers, however, for scarce investment capital.
In the corporate literature’s emphasis on a race among states, these two competitions have been merged into one. More significantly, in the standard account of corporate scholars today — i.e., a belief in some movement toward the top, if not necessarily a high-speed race that actually gets there — the distinct normative ends served by state and managerial competition have been collapsed. If states are competing in ways that advance the interests of managers, and managers are competing in ways that advance the interests of shareholders, the standard account implicitly suggests, we can simply drop managers out of the middle. With this bit of New Math, we arrive at the conventional wisdom of the modern literature, in which states compete in ways that advance the interests of shareholders.
When we maintain the distinction between state and managerial competition lost in the prevailing metaphor of a “race,” however, we see a very different picture. If corporate scholars are right to embrace Winter’s account of managerial competition — and the efficient capital markets that stand behind it — state competition’s implications for corporate governance prove quite limited. Federalism, and resulting state competition, should not be expected to generate any enhancement in the substantive quality of corporate governance, beyond that dictated by the operation of efficient capital markets.
To be more precise: If the capital markets work, competition among states should not be expected to alter the balance of power (and resources) between shareholders and managers that is dictated by competition among managers. Federalism cannot, in a sense, get ahead of the market. In fact, it has no reason to do so. Properly understood, state competition is entirely agnostic as to the ends it advances in corporate governance; it can facilitate managerial rent extractions as effectively as it can increase shareholder power. Whatever substantive efficiency is to be found in American corporate governance, then, is properly traced to managerial competition for capital, rather than state competition for corporate charters.
Federalism does not, as such, speak to the allocation of corporate surplus between shareholders and managers — the internal division of the corporate pie. Simply put, it is not about the separation of ownership and control. Rather, it is directed to the distinct possibility of regulatory failure — what might be thought of as the perfect counterpoise to the concerns that famously motivated Berle and Means.
For the majority of corporate law scholars, who see corporate governance as generally efficient — in the sense that it rests on some gradual advance in the direction of the top — this conclusion emphasizes that it is not federalism and state competition that deserve credit for that result, but efficient capital markets and the resulting pressure on managers to compete. State competition may well enhance the facial quality of corporate law — the quality of the rules as rules — but it cannot improve the substantive quality of corporate governance. Implications likewise follow for those scholars who question the quality of modern corporate governance. For such dissenters from the conventional wisdom, the crucial targets for critique are not the standard bogeymen of federalism and state corporate law. Rather, it is the efficiency of the capital markets to which their challenge must primarily run.
More broadly, by attending to distinct patterns of state and managerial competition, the role of federalism in corporate law becomes something worth talking about. In the prevailing account of the literature, deviations from state competition are presumptively suboptimal. There is little need to evaluate the precise contents of the Sarbanes-Oxley Act of 2002, for example. It is enough to know that it was adopted by Congress, rather than the State of Delaware.
Properly understood, however, federalism is no more than an institutional design choice, to be assessed like any other. The choice of federalism and state competition may well be justified in some — and perhaps even most — cases, by comparison with the obvious alternative of national rules. But that choice — like the contrary choice to adopt national rules in a given sphere of corporate law — should enjoy no fixed presumption. It should be evaluated and rationalized within the distinct political economy surrounding any given question of corporate law.
— from Trapped in a Metaphor: The Limited Implications of Federalism for Corporate Governance, 77 George Washington Law Review 255 (2009)List: <- Back to: News Releases