Corporate Governance and the Coase’s Legacy: A Reply to Henry Manne

Abstract

This paper is a comment on Henry G. Manne (2010), “Corporate Governance – Getting Back to Market Basics.” Professor Manne authoritatively contends that regulation should not tamper with corporate governance, because in so doing regulation undermines the efficiency of stock markets and of the contractual choices operated therein. Taking stock of the problem of contractual incompleteness in corporate governance, this reply emphasizes that corporate law (and regulation of corporate governance in general) has a more daunting task than simply minimizing transaction costs through an appropriate set of default rules. On the one hand, it needs to provide the parties (management and shareholders) with a sufficiently broad set of entitlements to contract upon. On the other hand, it has to tackle the problem of opportunistic renegotiations of the corporate contract, which can lead to expropriation of non-controlling shareholders.This paper reviews Professor Manne’s advocacy of a freedom-of-contract approach to corporate governance in a Coasian framework. Important implications are derived from the need to balance discretion and accountability in a world of high transaction costs. Those implications are discussed with regard to three important topics in the governance of publicly held companies: boards, takeovers, and insider trading. Because of the limitations of the contractual technology, these mechanisms need some sort of legal intervention: enabling rules to facilitate efficient choice ex-ante; and mandatory rules to support commitment ex-post. A more general approach to the debate on mandatory vs. default rules in corporate governance is sketched out on this basis.