Published online by Cambridge University Press: 02 January 2018
In UK and US company law and corporate governance, a highly influential economic theory views the company, and the rules related thereto, as a nexus of contracts for organising business activity. This so-called contractarian theory of the company depicts fundamental corporate governance arrangements as a form of private ordering, in which rules are spontaneously produced in the absence of formal legal intervention. This paper draws upon broader empirical evidence of real world private ordering to make two essential arguments, which provide much-needed nuance to the idealised view of spontaneous governance found in the contractarian analysis. First, it emphasises the significance of a distinctive and essential correlative and causal connection between hierarchy and the development and nature of private orders. Secondly, it highlights the ways in which the state positively interacts with the purported self-regulatory capability of the market to produce these uneven endogenous rules.
The author wishes to thank Andrew Keay, Marc Moore, Chris Riley and Sean Thomas for extremely helpful comments and suggestions on an earlier version of this paper, and is also grateful to the anonymous referees for their extremely thoughtful and constructive criticisms, which have undoubtedly improved the clarity and rigour of the arguments in this paper. The usual disclaimers apply.
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40. Easterbrook and Fischel, above n 16, p 91.
41. A point made famous by Milton Friedman ‘The social responsibility of business is to increase its profits’ (1970) The New York Times Magazine. Cf Millon, D ‘Communitarians, contractarians, and the crisis in corporate law’ (1993) 50(4) Wash & Lee L Rev 1373 at 1378Google Scholar, pointing out that, ‘[t]his view assumes that feasible … contracting strategies exist for correction of the harmful external effects of shareholder/management activity and, perhaps, that such effects are relatively uncommon’. It is also worth noting that the environment is not privy to this notional bargaining process, which means that it has traditionally been viewed as an extra-contractual externality for which environmental regulation, rather than company law, represents the only available means of protection. On this point, see D Attenborough ‘An estoppel based approach to enforcing corporate environmental responsibilities’ (2016) 28(2) J Envtl L at tbc.
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52. Section 33 of the Companies Act 2006.
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72. Ibid, at 126–127, noting that this can happen for a number of reasons, but particularly when a claim has been conciliated, mediated, arbitrated or litigated outside of the club and/or parties have sought remedies elsewhere.
73. Ibid, at 126.
74. Ibid, at 124.
75. BD Richman ‘Community enforcement of informal contracts: Jewish diamond merchants in New York’ Harvard Law School John M Olin Center for Law, Economics and Business Discussion Paper No 384 (2002) at 15, available at http://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=1719&context=faculty_scholarship(accessed 25 March 2016), noting that a party can appeal an arbitration board decision to New York state court only if there is a procedural irregularity. The board's substantive decisions are not reviewed. See Rabinowitz v Olewski, 100-AD 2d 539 (1984); see also Goldfinger v Lisker, 508 NYS 2d 159 (1986).
76. Ibid, at 129.
77. Ibid, at 130.
78. Richman, above n 75 at 17, observing that, ‘nearly 85–90% of DDC members are Jewish’ and ‘[s]ince Orthodox Jews tend to live in specific, insular communities, this means that familiar business relationships are also familiar community relationships, and the members’ ties to each other do not end at the Club's door’.
79. On the extent to which economic action is embedded in structures of social relations, see M Granovetter ‘Economic action and social structure’ (1985) 91(3) Am J Sociol 481.
80. English law equally states that any third party can be agreed by two sides to arbitrate in a commercial or domestic dispute.
81. Gomez, above n 7, at 228, noting that interaction with endogenous rules ‘is conditioned by the existence of an internal social hierarchy, which in turn [facilitates] compliance with the indigenous order’.
82. Ibid, at 229, remarking that ‘compliance with indigenous norms tends to be high basically because group members view them as legitimate, and this legitimacy extends to those in position of authority within the community’.
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85. Ibid, p 4.
86. Ibid, p 112.
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100. Ellickson, above n 6.
101. R Coase ‘The problem of social costs’ (1960) 3 J L & Econ 1 esp at 3–8, theorising that once legal entitlements are clearly defined, market actors in a transaction cost free world can bargain for a socially efficient outcome.
102. Ellickson, above n 6, p 4.
103. Ibid, pp 20–21. Ellickson also notes that ranchette owners, whose properties are generally much smaller than those of cattlemen, ‘may keep a farm animal or two as a hobby, but few of them make significant income from agriculture’.
104. Ibid, pp 22–25.
105. Ibid, p 5.
106. Ibid, p 4.
107. Ibid, pp 116–119.
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109. Ellickson, above n 6, p 117.
110. Ibid, p 25.
111. Ibid, pp 21 and 64, commenting that the shallow roots of ranchette owners in the area are reflected in cattlemen's perceptions that they are ‘not aware of the natural working order’, while ranchette owners ‘admire both the cattlemen and the folkways traditionally associated with rural Shasta County’.
112. Ibid, p 25.
113. Ibid, p 43.
114. Yngvesson, above n 108, at 1797. See also Ellickson, above n 6, p 54.
115. Ellickson, above n 6, p 3.
116. Ibid, p 32.
117. Ibid, p 58.
118. Campbell, above n 64, at 326, opining that ‘no market … can conform to the assumption of fully contingent contracting, nor exist free of regulation’. See also Hale, RL ‘Coercion and distribution in a supposedly non-coercive state’ (1923) 38(3) Pol Sci Q 470 CrossRefGoogle Scholar.