In 2010, the U.S. Supreme Court held in Citizens United v. FEC that restrictions on corporate political speech were unconstitutional because of the First Amendment rights granted corporations as a result of their status as “persons” under the law. Following this decision, debate has been rekindled among legal scholars about the meaning of “corporate personhood.” This debate is not new. Over the past two centuries, scholars have considered what corporate personhood means and entails. This debate has resulted in numerous theories about corporate personhood that have come into and out of favor over the years, including the “artificial person” theory, the “contractual” theory, the “real entity” theory, and the “new contractual” theory.
This Article revisits that debate by examining the various functions of corporate personhood including four functions I have identified in previous work: (1) providing continuity and a clear line of succession in property and contract, (2) providing an “identifiable persona” to serve as a central actor in carrying out the business activity, (3) providing a mechanism for separating pools of assets belonging to the corporation from those belonging to the individuals participating in the enterprise, and (4) providing a framework for self-governance of certain business or commercial activity. In this Article, I focus on the historical evolution of the corporate form, and specifically on how and why corporations have tended to develop clearly identifiable corporate personas. This corporate persona function is highly important to today’s corporations and, because of this func-tion, corporations can become more than simply the sum of their parts. This Article suggests that scholars should keep the corporate persona function in mind in evaluating corporate personhood theories, and return to a theory that sees corporations as more than a bundle of contracts.Blair concludes -
In much of my prior work, I have, in one way or another, explored the idea that successful business corporations are, and should be treated by the law as, more than just bundles of assets that belong to shareholders. While the role of shareholders in corporations is not trivial — without financial capital, few business enterprises could get out of the starting block — it is the efforts and vision of the entrepreneurs, managers, and key employees, as well as business practices that cultivate innovation and collaboration in teams, that create corporations whose value greatly exceeds the value of the financial capital that has been put in them. The real entity theory of corporations provided a vocabulary that embraces and acknowledges these self-evident facts. But numerous legal scholars since the 1980s have rejected the real entity view of corporations in favor of a theory that dismisses the idea that a firm is more than the sum of the contracts it embodies.
Legal scholars started down this path by adopting the frameworks that had been developed by economic theorists to provide insight into key relationships within firms and by applying these reductionist models to the law of corporations. Beginning in the 1980s, they produced a substantial literature that starts from three simplifying premises that economists had adopted: (1) that shareholders are the “owners” of corporations, which are simply bundles of assets owned collectively by shareholders; (2) that directors and managers are the agents of shareholders and therefore are supposed to apply themselves to maximizing the value of the shares; and (3) that the best way to achieve higher value for shareholders is to give shareholders more power and control rights so that they can compel managers and directors to maximize share value.
Frank Easterbrook and Daniel Fischel, for example, wrote a series of articles together in which they developed the implications for corporate law of the idea that corporations are essentially a contracting device with no separate existence and embodying no distinct rights and interests apart from the individuals who contracted together through the corporations. They focused especially on what they thought of as the central or most important contract in any corporation, the principal-agent contract between shareholders and directors/managers.
Other legal scholars followed this lead, and within a few years, the legal literature on corporations as contractual devices and managers as agents of shareholders exploded. In an insightful analysis of this transformation of legal thinking about corporations, William Bratton notes that the real entity theory of the corporation was essentially “managerialist” — it accepted and legitimized the large corporation in which a managerial hierarchy exercised control. The new nexus of contracts theory, by contrast, was antimanagerialist, emphasizing that managerial authority is derived from the agency relationship with shareholders and that managers serve at the behest of shareholders. It is beyond the scope of this Article to explore all of the reasons why corporate law scholarship began to tilt so strongly in an antimanagerialist direction in the 1980s, after having been quiescently managerialist for nearly half a century. But the 1980s was a period in which many leading thinkers in the United States believed that the country was in decline and that the decline probably had to do with the failures of the bureaucratic and sclerotic corporations that dominated so many industries. “[I]n the 1980s national economic decline-revival became one of the foremost domestic issues, a new and uncomfortable prospect for Americans,” wrote historian Otis Graham. By the latter half of the decade, vigorous public discussion had melded an impressively broad consensus that the erosion of U.S. economic strength was a reality, that it had not been and would not be stemmed by the Reaganite reforms, and that both relative and in some cases absolute decline had continued through even the remarkable years of expansion in 1983–1990.
Concern about decline manifested itself in a number of ways. The most salient for our purposes was the idea that executives in the corporate sector, on the whole, had become uncreative, unwilling to take risks, self-serving, empire building, and unaccountable. The new antimanagerialist contractual theory of the firm may have been attractive because it offered a framework for thinking about how the law could help to un-seat these executives and bring in new industrial leadership. The new literature on the nexus of contracts theory of the corpora- tion also offered a way to think about the legal and policy issues raised by a phenomenon then sweeping the financial markets — hostile takeo-vers. According to the theory, corporate managers cannot be expected to always work tirelessly to maximize the value of a corporation’s stock because they are merely hired agents with their own preferences that are not necessarily the same as the preferences of their principals, the shareholders. If managers fail to maximize the value of the shares of their company, however, the stock price of the company will be lower than its potential, and there will be an incentive for an outside investor to buy up a controlling position in the corporation, then proceed to fire manage- ment or otherwise compel the company to cut its costs or redirect its as- sets so that they have a higher value.
This story line made the investors who were actively bidding for control of numerous corporations in the 1980s into heroes who were adding value, rather than greedy raiders (as corporate executives initially tried to portray them) who were opportunistically stripping value out of the corporations by ending employee pension plans, renegotiating contracts with unions, or closing plants and shipping production overseas — all while paying themselves large bonuses. Not surprisingly, the image of financiers as the heroes rather than the villains was congenial to corporate finance practitioners and scholars, and scholarship exploring and testing these ideas soon dominated the finance literature as well as the corporate law literature. The nexus of contracts/principal-agent model has thus formed the framework for a large part of the theoretical and empirical scholarship of both finance and corporate law over the last three decades.
This literature includes arguments that corporate boards and man- agers should be required to be passive in the face of hostile offers so that shareholders could take advantage of the opportunity to sell their shares at a higher price. Similar reasoning has been applied to consideration of a long list of takeover defenses, which generated a large body of literature during the 1980s arguing that takeover defenses reduced the value of corporate shares and that they should therefore be disallowed or con- strained. Arguments were also made that managers and directors should be paid in stock options or other equity claims so that their interests would be more closely aligned with the interests of shareholders. The corporate bar initially defended corporate directors and managers on the question of takeover defenses. But over time, as managers and directors increasingly adopted compensation packages based on stock options, these had the predicted effect of focusing the attention of directors and managers at firms across the economy — so that most directors and managers now say that their primary duty is to maximize the value of the equity shares of the corporations they run.
The view of corporations as simply contracting devices has also permeated corporate finance, with practitioners and scholars learning to use the corporate form of organization in a whole new way, as a pure asset-partitioning device that does not implicate any of the other three functions of corporate personhood (continuity in property and contract; self-governance; and the development of intangible assets attached to a corporate persona). So called “special purpose vehicles” (SPVs), or sometimes “special purpose entities” (SPEs) or “structured investment vehicles” (SIVs), are corporations that have no employees, no operations, and no products. Their sole purpose is to facilitate “securitization” of financial assets by allowing the sponsoring corporation to isolate a bundle of financial assets, such as mortgages, car loans, other consumer debt, or commercial debt instruments, and issue debt securities that are claims to the cash flow solely from those assets. By creating a separate corporation to hold the assets and liabilities of the SPE, the sponsoring financial firm that creates the entity attempts to protect itself from default or bankruptcy if the assets behind the securities fail to generate the projected amounts of cash flow. These entities thus resemble pure nexuses of contracts for the purpose of partitioning assets into entities that have none of the elements that we have identified as part of a corporation’s persona. But it turns out that, without a persona component, the value of these entities nearly collapsed during the financial crisis when the assets that had been isolated in them lost value. In response, many of the financial firms that created these entities stepped up and took responsibility for making good on the debt securities that had been issued by them, although the terms of the contracts that had created them did not require this. Why? Because the sponsoring firms had something to lose, which the individual SPVs did not have, a corporate persona with substantial reputational value at risk. In other words, some of the value that those entities had was due to an asset of the sponsoring firm that was not listed on the balance sheet of either the sponsoring firm or the SPE. That asset could have been badly damaged if the sponsoring firm had, in fact, allowed the SPEs to fail. Theories that try to explain value creating corporations in pure contract terms, without acknowledging the role of reputational and other noncontractual relationship assets that contribute to value and that are tied to the corporate persona, may fail to explain aspects of corporations that matter most.
The dominant theory of corporations in the last few decades in finance and in law has been a reductionist, finance inspired approach that regards corporations as mere contractual devices, with no truly separate existence, for which it is misleading and even foolish to speak of such things as the goal, reputation, will, or moral duties of the corporation apart from its contracting agents. The effort by financial market players in recent years to create value by simply repackaging the assets and liabilities of corporations without regard to the impact of such maneuvers on reputation and trust in the entity as a whole, let alone on the financial markets as a whole, it seems to me, is one expression of this mentality.
But while legal and financial scholars seem to have no use for corporations that have any personality, some of the most successful value creating entrepreneurs of the last decade — Larry Page, Sergey Brin, and Eric Schmidt at Google, and Mark Zuckerberg at Facebook, among others — have emphasized the importance of such factors as “culture” and “reputation” and “innovativeness” in the value creating process at their corporations, and have expressed concern that financial markets excessively discount the importance such factors. Perhaps it is time for financial and legal economics to rethink the contractarian theories and models that have been guiding much corporate law scholarship in recent years and reconsider the view that corporations are, or can be, substantially more than the sum of their contractual parts. The idea that corporations can have a separate persona would be a useful part of that inquiry.