Margaret M. Blair

Specific Investment and Corporate Law

At the close of the twentieth century, U.S. corporate scholarship was dominated by a principal-agent paradigm that assumed that shareholders were the principals or sole residual claimants in public corporations, and also assumed that corporate directors were the shareholders’ agents. This approach led many corporate scholars to assume that the proper purpose of the corporation was to maximize shareholder wealth and that the chief economic problem of interest in corporate law was the “agency cost” problem of getting corporate directors to focus on this goal.There are basic aspects of U.S. corporate law, however, that the principal-agent model cannot explain. These include directors’ extensive and sui generis legal powers; the fact that directors control dividends; the device of legal personality; and the open-ended rules of corporate purpose. These corporate law “anomalies” have prompted contemporary economic and legal scholars to begin to move beyond a focus on agency costs and to pay attention to a second economic problem that arises in public corporations: the problem of protecting specific investment. When corporate production requires more than one individual or group to make specific investments, problems of intrafirm opportunism arise if shareholders try to exploit each other’s specific investments or try to exploit the specific investments of creditors, employees, customers, and other groups. Board governance, while worsening agency costs, may provide a second-best solution to such intrafirm rent-seeking. This perspective explains many important corporate law “anomalies” that cannot be explained by the principal-agent model.It also suggests a pressing need to revisit conventional notions of corporate purpose. Focusing on the problem of specific investment suggests that the proper purpose of the public corporation is not maximizing shareholder wealth, but promoting long-term, value-creating economic production under conditions of complexity and uncertainty, in a fashion that provides surplus benefits not only to shareholders but to other groups that make specific investments in corporations as well. This corporate objective is difficult to measure, much less maximize. Nevertheless, it may provide a better gauge of good corporate governance than the simplistic rubric of shareholder wealth.

Making Money: Leverage and Private Sector Money Creation

In the wake of the financial crisis of 2008-2009, practitioners and theorists in law, finance, and economics are rethinking our theories about how the financial sector influences the real economy. In particular, they are reexamining the linkages among financial innovation, supply of credit and money, monetary policy, bubbles, financial stability, and economic growth. One of the key issues that is being reconsidered is the dynamics of how banks and other financial institutions drive credit creation and credit allocation, and how these factors, in turn affect the performance of the macroeconomy. In this article, I argue that, by providing an alternative to “money” (as traditionally defined), credit acts like money in stimulating the economy. When financial institutions that provide credit to the real economy borrow too much and become over-leveraged, the effect is like an uncontrolled expansion of the money supply, increasing the risk of dangerous asset bubbles and making financial markets unstable. Excessive leverage in the financial sector can set the stage for sudden and catastrophic contractions when multiple financial institutions all try to deleverage quickly and at the same time. This is because when financial institutions collectively withdraw credit from the market, this depresses aggregate economic growth, I further argue that the tendency of financial institutions to use too much leverage will not be self-correcting because leverage has helped to drive up profits and incomes over time in the financial sector. Thus, because of the substantial negative social externalities of excessive leverage, financial market regulations must be deployed to prevent financial institutions from using too much leverage.

Comment on 'The New Economy Business Model and the Crisis of U.S. Capitalism' (by William Lazonick)

This paper is a comment on The New Economy Business Model and the Crisis of U.S. Capitalism by William Lazonick which can be found at: http://ssrn.com/abstract=2209322.

Corporate Law and the Team Production Problem

For much of the last three decades, the dominant perspective in corporate law scholarship and policy debates about corporate governance has adopted the view that the sole purpose of the corporation is maximizing share value for corporate shareholders. But the corporate scandals of 2001 and 2002, followed by the disastrous performance of financial markets in 2007-2009, has left many observers uneasy about this prescription. Prominent advocates of shareholder primacy such as Michael Jensen, Jack Welch, and Harvard’s Lucian Bebchuk have backed away from the idea that maximizing share value has the effect of maximizing the total social value of the firm, noting that shareholders may often have incentives to take on too much risk, thereby increasing the value they capture by imposing costs on creditors, employees, taxpayers, and the economy as a whole. In response to the dramatic demonstration of the problems with shareholder primacy, some scholars and practitioners have considered the “team production” framework for understanding the social and economic role of corporations and corporate law (Blair & Stout, 1999) as a viable alternative. Whereas the principal-agent framework provided a strong justification for the focus on share value, the team production framework can be seen as a generalization of the principal-agent problem that is symmetric: all of the participants in a common enterprise have reason to want all of the other participants to cooperate fully. A team production analysis thus starts with a broader assumption that all of the participants hope to benefit from their involvement in the corporate enterprise, and that all have an interest in finding a governance arrangement that is effective at eliciting support and cooperation from all of the participants whose contributions are important to the success of the joint enterprise. Insights from a team production analysis provide a rationale for a number of features of corporate law that are problematic under a principal-agent framework.

Ownership and Control: Rethinking Corporate Governance for the Twenty-First Century

This book is a guide through the historical, legal and institutional background of corporate governance debates. It explains the three broad views on the relationship among the governance, performance, and competitiveness of corporations. Blair argues that the suspicion that financial interests may be at odds with social goals lurks behind some of the more heated debates, particularly those surrounding anti-takeover laws, executive compensation schemes, and the growing activism of financial institutions.