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.The29 These theories are also known as group theory and real entity theory respectively.It should be noted here that corporate realism should be distinguished from the realistmovement in general legal theory.30 von Jhering, R.(1913) Der Zweck im Recht (Law as a Means to an End), availableat.31 De Vareilles-Sommières, G.(1919) Les Personnes Morales, Paris: F.Pichon etDurant-Auzias.32 Morawetz, V.(1886) A Treatise on the Law of Corporations, 2nd edition, Boston:Little, Brown, 2.33 Schane, S.(1987) The Corporation is a Person: The Language of a Legal Fiction ,Tulane Law Review, vol.61, 563 at 568.34 See the discussion on economic theories later in this chapter.35 See Phillips, M., above n27, 1066. Corporate Governance Convergence and Corporate Theory 13second important implication stemming from aggregate theory concerns the roleof the state.Since, as stated above, the corporation is formed by contract betweenprivate individuals, the state automatically becomes an outsider with no legitimateinfluence.Thus, nominalist theorists have been opposed to government regulationof corporate activity since that would be contrary to the principle of individualfreedom of contract.Around the end of the nineteenth century the aggregate theory began tolose its normative influence.36 The emergence of the large managerial firm witha constantly fluctuating and fragmented ownership, as well as the reality oflimited liability, did not sit well with the aggregate model.The identification ofthe corporation with its members was increasingly untenable.37 It seemed that ascompanies were getting larger the influence of shareholders was diminishing andthe corporation was acquiring a separate life of its own, this time as a real entity.Moreover, the corporation was losing its contractual nature in a legal sense asthe judiciary confirmed the reality of corporate personality and shareholderswere automatically deemed bound by the articles of association.38 As Hazen andothers have argued, the consent requirement for the creation of a legally bindingcontract could not be realistically fulfilled in the case of large managerial firmswith distant relationships with their shareholders.39 An alternative theory not basedon contractual considerations could accommodate these changes with more ease.Such an alternative was provided by corporate realism.The main advocate of corporate realism was the German scholar Ottovon Gierke, who viewed the corporation as an entity which was completelyindependent from its members.40 The difference from Savigny s assertions wasthat Gierke s entity was not a legal fiction but a real person.The argument was thatin all societies when individuals join together into groups and associations thereis a trade off between individualism and collectivism.That is, in order for a groupto persist, the individual has to make sacrifices.When this happens, the group sinterests can be no longer identified with those of the individual ante association.Instead, the group acquires a will and goals of its own which do not necessarilyfluctuate with membership changes.In fact, the opposite may be the most commonsituation; the individual will usually have to adapt in order to join the association.In this process the prescriptions of the law are irrelevant.Legal recognition is notnecessary for the associated group s real existence to be established.Maitland s36 See Bratton, W., above n3, 1490.37 See Machen, A.(1910 1911) Corporate Personality , Harvard Law Review, vol.24, 253 at 259, who claims and mathematically attempts to prove that any group whosemembership is changing, is necessarily an entity separate and distinct from the constituentmembers.38 Salomon v.Salomon & Co.Ltd.(1896) [1897] A.C.22 (H.L.); and Dignam, A.andLowry, J.(2008) Company Law, Oxford: Oxford University Press, Chapter 8.39 See Hazen, T., above n24, 299 302.40 See Gierke, O., above n27. 14 The Globalization of Corporate Governancedescription of the corporation in his introduction to the translated version ofGierke s work illustrates this:[The corporation is] no fiction, no symbol, no piece of the State s machinery, nocollective name for individuals, but a living organism and a real person, withbody and members and a will of its own.Itself can will, itself can act; it willsand acts by the men who are its organs as a man wills and acts by brain, mouthand hand.41The normative value of these assertions is obvious since corporate realismprovides theoretical legitimacy to managerial power.Being a real entity, thecorporation can have its own interests and duties separately from its members, itcan own property and employ a workforce, but most importantly it cannot itselfbe owned, just as all other real persons cannot.As a result there is a differentiationbetween corporate property and shareholder property.Shareholders cannot beregarded as the owners of the company and so it is not run solely for their benefit.Instead the corporate entity defines its own objectives and uses all its availableinputs to achieve them through its officers.Consequently, the shareholdersupremacy norm advanced by the aggregate theory loses its validity.All this fitswell the managerialist paradigm, and so it is not surprising that corporate realismbecame dominant with the emergence of the managerial firm.42 However, withregard to the role of the state corporate realism is somewhat contradictory.WhileGierke and his followers were prepared to advocate for more regulation in order toascribe a public character to the corporation, others used corporate realism to denyany state involvement in what they saw as strictly private bodies.43The theory has two major flaws.The first is that, although it offers plausiblearguments about the existence of the firm as a real entity, it stops short of attemptingto define the nature of the corporate entity s interests.This is, in fact, one of theaggregate theory s strengths since it precisely defines the corporate interests byidentifying them with those of the shareholders.Realism convincingly refutes thisassertion, but it does so by creating an uncertainty.In effect there is a shift of thetheoretical uncertainty from the company s nature to the company s interest.The second flaw derives from the realist assumption that the corporate personis similar to the human person, in that they both seek to achieve their objectiveswithout any internal tensions or conflicts of interest.In other words, officers suchas managers and other employees, being the company s organs, are treated asan integral part of the corporate entity and have no will, interests or objectives41 Ibid., xxvi.In the original text as translated by Maitland, Gierke uses the term German Fellowship.42 See Bratton, W., above n3, 1490 1493.43 Hager, M.(1989) Bodies Politic: The Progressive History of Organizational RealEntity Theory , University of Pittsburgh Law Review, vol.50, 575 at 630 632.See alsoDodd s approach below, n45. Corporate Governance Convergence and Corporate Theory 15of their own [ Pobierz caÅ‚ość w formacie PDF ]
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.The29 These theories are also known as group theory and real entity theory respectively.It should be noted here that corporate realism should be distinguished from the realistmovement in general legal theory.30 von Jhering, R.(1913) Der Zweck im Recht (Law as a Means to an End), availableat.31 De Vareilles-Sommières, G.(1919) Les Personnes Morales, Paris: F.Pichon etDurant-Auzias.32 Morawetz, V.(1886) A Treatise on the Law of Corporations, 2nd edition, Boston:Little, Brown, 2.33 Schane, S.(1987) The Corporation is a Person: The Language of a Legal Fiction ,Tulane Law Review, vol.61, 563 at 568.34 See the discussion on economic theories later in this chapter.35 See Phillips, M., above n27, 1066. Corporate Governance Convergence and Corporate Theory 13second important implication stemming from aggregate theory concerns the roleof the state.Since, as stated above, the corporation is formed by contract betweenprivate individuals, the state automatically becomes an outsider with no legitimateinfluence.Thus, nominalist theorists have been opposed to government regulationof corporate activity since that would be contrary to the principle of individualfreedom of contract.Around the end of the nineteenth century the aggregate theory began tolose its normative influence.36 The emergence of the large managerial firm witha constantly fluctuating and fragmented ownership, as well as the reality oflimited liability, did not sit well with the aggregate model.The identification ofthe corporation with its members was increasingly untenable.37 It seemed that ascompanies were getting larger the influence of shareholders was diminishing andthe corporation was acquiring a separate life of its own, this time as a real entity.Moreover, the corporation was losing its contractual nature in a legal sense asthe judiciary confirmed the reality of corporate personality and shareholderswere automatically deemed bound by the articles of association.38 As Hazen andothers have argued, the consent requirement for the creation of a legally bindingcontract could not be realistically fulfilled in the case of large managerial firmswith distant relationships with their shareholders.39 An alternative theory not basedon contractual considerations could accommodate these changes with more ease.Such an alternative was provided by corporate realism.The main advocate of corporate realism was the German scholar Ottovon Gierke, who viewed the corporation as an entity which was completelyindependent from its members.40 The difference from Savigny s assertions wasthat Gierke s entity was not a legal fiction but a real person.The argument was thatin all societies when individuals join together into groups and associations thereis a trade off between individualism and collectivism.That is, in order for a groupto persist, the individual has to make sacrifices.When this happens, the group sinterests can be no longer identified with those of the individual ante association.Instead, the group acquires a will and goals of its own which do not necessarilyfluctuate with membership changes.In fact, the opposite may be the most commonsituation; the individual will usually have to adapt in order to join the association.In this process the prescriptions of the law are irrelevant.Legal recognition is notnecessary for the associated group s real existence to be established.Maitland s36 See Bratton, W., above n3, 1490.37 See Machen, A.(1910 1911) Corporate Personality , Harvard Law Review, vol.24, 253 at 259, who claims and mathematically attempts to prove that any group whosemembership is changing, is necessarily an entity separate and distinct from the constituentmembers.38 Salomon v.Salomon & Co.Ltd.(1896) [1897] A.C.22 (H.L.); and Dignam, A.andLowry, J.(2008) Company Law, Oxford: Oxford University Press, Chapter 8.39 See Hazen, T., above n24, 299 302.40 See Gierke, O., above n27. 14 The Globalization of Corporate Governancedescription of the corporation in his introduction to the translated version ofGierke s work illustrates this:[The corporation is] no fiction, no symbol, no piece of the State s machinery, nocollective name for individuals, but a living organism and a real person, withbody and members and a will of its own.Itself can will, itself can act; it willsand acts by the men who are its organs as a man wills and acts by brain, mouthand hand.41The normative value of these assertions is obvious since corporate realismprovides theoretical legitimacy to managerial power.Being a real entity, thecorporation can have its own interests and duties separately from its members, itcan own property and employ a workforce, but most importantly it cannot itselfbe owned, just as all other real persons cannot.As a result there is a differentiationbetween corporate property and shareholder property.Shareholders cannot beregarded as the owners of the company and so it is not run solely for their benefit.Instead the corporate entity defines its own objectives and uses all its availableinputs to achieve them through its officers.Consequently, the shareholdersupremacy norm advanced by the aggregate theory loses its validity.All this fitswell the managerialist paradigm, and so it is not surprising that corporate realismbecame dominant with the emergence of the managerial firm.42 However, withregard to the role of the state corporate realism is somewhat contradictory.WhileGierke and his followers were prepared to advocate for more regulation in order toascribe a public character to the corporation, others used corporate realism to denyany state involvement in what they saw as strictly private bodies.43The theory has two major flaws.The first is that, although it offers plausiblearguments about the existence of the firm as a real entity, it stops short of attemptingto define the nature of the corporate entity s interests.This is, in fact, one of theaggregate theory s strengths since it precisely defines the corporate interests byidentifying them with those of the shareholders.Realism convincingly refutes thisassertion, but it does so by creating an uncertainty.In effect there is a shift of thetheoretical uncertainty from the company s nature to the company s interest.The second flaw derives from the realist assumption that the corporate personis similar to the human person, in that they both seek to achieve their objectiveswithout any internal tensions or conflicts of interest.In other words, officers suchas managers and other employees, being the company s organs, are treated asan integral part of the corporate entity and have no will, interests or objectives41 Ibid., xxvi.In the original text as translated by Maitland, Gierke uses the term German Fellowship.42 See Bratton, W., above n3, 1490 1493.43 Hager, M.(1989) Bodies Politic: The Progressive History of Organizational RealEntity Theory , University of Pittsburgh Law Review, vol.50, 575 at 630 632.See alsoDodd s approach below, n45. Corporate Governance Convergence and Corporate Theory 15of their own [ Pobierz caÅ‚ość w formacie PDF ]