Enronitis: Why Good Corporations Go Bad

Abstract

The Enron problem is widely understood to be the result of too weak of a legal mandate supporting the share-centered paradigm of corporate law. Paradoxically, however, it is in fact the predictable result of too strong of a share-centered view of the public corporation; share-centered corporate law creates the very problems it is meant to police. The single-valued profit maximization ethos of the share-centered corporation demands that managers teach themselves to exploit everyone around them. It is inevitable that some will learn this lesson so well that they will exploit even those for whose benefit they are supposed to be exploiting. What is needed is a new paradigm for understanding corporate law, one that emphasizes the collective, corporate nature of the public corporation without falling into the trap of assuming that easy professionalism can resolve difficult value choices. Corporations are governance structures as complex as any other and deserve to be analyzed as such. Reforms emanating from a new understanding of the public corporation as polis are more likely to ameliorate the dangers of Enronitis and other corporate dysfunctions. This Article reviews a few of the recent scandals and some of the reforms proposed in response. In addition it sets out the basic theoretical framework of the share-centered corporation and the fictional shareholder as applied to the problem of managerial incentives and loyalty: managers are directed to work for fictional shareholders who are, in turn, imagined to have no relationships with the rest of us. The law teaches managers to act as if they were fiduciaries for foreigners interested only in using us and our world, not as fellow citizens in a common enterprise. Instead of acting as the representatives of a major part of our collective governance system, they are told to treat us much as a not-too-benevolent colonial power might, as tools for a stranger’s projects.