Vulnerability and Efficiency (Of What)

In this essay I address the question posed by Bill Klein that formed the basis for the symposium in which this piece appears: What are the criteria for good corporate law? I begin with the presumption that has dominated American thinking about corporations almost from the inception - corporate law should seek to promote efficiency. But there is a second dimension of equal importance that helps to legitimate this first goal. Corporate law should seek to protect those who are vulnerable to the corporation. Efficiency is almost always taken to mean efficiency to the end of wealth maximization. I question this assumption and argue that it is both an undesirable goal from the corporation's perspective as well as an incoherent goal. The proper metric for efficiency is, instead, efficiency in the production of goods and the provision of services. Production of goods and the provision of services is why, after all, we permit corporations to exist. Once the undesirability and incoherence of wealth maximization and the virtues of this new metric become clear, the protection of those vulnerable to the corporation becomes easier to conceptualize and make operational. In the end, however, to be good corporate law, as to be good law generally, we must be honest both about what law is doing and what it is capable of accomplishing. I conclude that law has little if any role to play in creating rules or incentives for corporations to maximize the efficiency of their production of goods and services. The best law can do in this regard is to get out of the way. I further conclude that we have been dishonest in our assertions that corporate law protects shareholders.