Trapped in a Metaphor: The Limited Implications of Federalism for Corporate Governance

Trapped in a metaphor articulated at the founding of modern corporate law, the study of corporate governance has - for some thirty years - been asking the wrong questions. Rather than a singular race among states, whether to the bottom or the top, the synthesis of William Cary and Ralph Winter’s famous exchange is better understood as two competitions, each serving distinct normative ends. Managerial competition advances the project that has motivated corporate law since Adolf Berle and Gardiner Means - effective regulation of the separation of ownership and control. State competition, by contrast, does not promote a race to either the top or the bottom in shareholder-managerial relations. Rather than the vertical allocation of wealth between shareholders and managers, state competition is directed to its horizontal allocation between the state and the firm as a whole. Even as state competition shifts surplus from state to firm, thus, it is agnostic as to the distribution of that surplus within the firm. Although it may generate effective rules of corporate law, it is not determinative of the substantive quality of corporate governance. Understood as such, the metrics of “efficiency” in corporate governance - and hence the core inquiries of the corporate law literature - must necessarily shift. Prevailing approaches to questions from the potential utility of federal corporate law to the long persistence of state antitakeover statutes must likewise be reconsidered.