Article by Lynne L. Dallas
Historically, U.S. corporation law has legitimized the interests of shareholders in controlling the corporation as owners of the corporation. Various formal legal rules and informal social, political, and economic factors have contributed, however, to a corporate governance system dominated by managers, called managerialism. This system has provided managers with professional opportunities and incentives that encouraged managers to assure the long-term stability and growth of their corporations. Nonshareholder stakeholders, such as employees and consumers, often benefited from these objectives, although these objectives were sometimes pursued at the expense of profits and dividends for shareholders. This Article explores how the tender offer phenomena of the 1980s disrupted this system of corporate governance. Formally, the law changed with many state legislatures passing constituency statutes and courts explicitly recognizing managerial discretion to consider the interests of nonshareholder stakeholders. To managers, the most salient legal change, however, was most likely those cases that in certain tender offer situations constrained rather than broadened managerial discretion and required managers to maximize shareholder value. To maximize stock price was the ultimate legal message to managers. Moreover, this message was reinforced by the felt economic and social power of institutional investors resulting from their increased share ownership and the enhanced mobility of capital in a global economy. This emphasis also resonated with other powerful actors, such as corporate raiders and financial service providers. The result was a cultural change in which the corporate governance system became more emphatically stock-value driven. In this setting, a “new” managerialism has arisen that consists of short-term decision making and window dressing to impress the stock market at the expense of improving underlying corporation values. The irrationality of stock markets has become the new playground for the new managerial economy. As current events have shown at Enron and other U.S. corporations, in this environment, managerial decisions often end up hurting shareholders and nonshareholder stakeholders alike.
The development of the new managerialism has not occurred without some countervailing social and economic pressures. This Article also explores the movement for diversity on corporate boards, which has the potential to counter a corporate environment focused exclusively on stock price. Diversity on corporate boards refers to having diverse perspectives on corporate boards, which popularly translates into having more women, minorities, and nonnationals on corporate boards of directors. Diversity is proposed to bring into the boardroom a focus on the interests of employees, consumers, and an international market place. This Article explores the extensive behavioral literature on decision making by heterogeneous and homogeneous groups and concludes that, on balance, the advantages outweigh the disadvantages in having diverse perspectives represented on corporate boards. Women, minorities, and nonnationals on corporate boards may provide needed diversity in perspectives and may increase attention in the boardroom to the interests of employees, consumers, and the international marketplace. The representation of these latter interests by actual stakeholder representatives (e.g., employee-elected directors), however, would most likely have the greater potential to reign in the stock-price environment that is fostering the new managerialism.
About the Author
Lynne L. Dallas. Professor of Law, University of San Diego School of Law. J.D., Harvard Law School, 1975.
Citation
76 Tul. L. Rev. 1363 (2002)