Does a corporation owe allegiance only to its shareholders-those whose wealth funds the business? Or should a company also seek to protect the interests of its managers and employees-those who contribute valuable human capital to the enterprise?

To study these and other questions of corporate governance in the 21st century, the Law Center has received a three-year, $2.2 million grant from the Alfred P. Sloan Foundation. The grant is being used to create the Georgetown-Sloan Project on Business Institutions, directed by Professor Lynn Stout, a nationally recognized expert on corporate law and securities regulation at the Law Center. Dr. Margaret Blair, an economist at the Brookings Institution and visiting professor at the Law Center, serves as research director.

The Sloan Foundation selected the Law Center on the strength of its faculty's scholarship in the corporate arena. In particular, Stout and Blair captured the Sloan Foundation's attention when they published an influential paper proposing a "team production" theory of corporate law. The pair proposed this model as an alternative to the "agency cost" model that has dominated legal scholarship for two decades.

According to the standard agency cost model, a corporation ought always to be run to maximize shareholder wealth. Stout and Blair offer the view that this approach fails to adequately protect the interests of other corporate stakeholders, such as managers and rank-and-file employees, who also make essential contributions to the firm. Thus U.S. law in fact requires a corporation to be run not by shareholders, but by a board of directors. The board enjoys legal discretion to sometimes sacrifice shareholders' profits in order to protect the interests of other important members of the corporate team. This practice, far from being inefficient, may actually be essential to inducing important stakeholders-particularly employees-to make the career commitments that can be necessary to produce profits in the first place.

As well as encouraging exploration of the team production theory, the Sloan grant supports research into a wide variety of issues at the cutting edge of corporate scholarship. A hallmark of this contemporary type of corporate scholarship is that it is both apolitical and interdisciplinary. Scholars investigate questions and problems without bias, drawing upon insights offered by a range of disciplines: not only economics but also history, psychology, sociology, philosophy, and political science. Recently, for instance, Stout and Blair have been looking at how behavioral concepts of trust, trustworthiness, and cooperation affect laws governing corporations, and, more specifically, fiduciary duty, which they view as the heart of corporate law. Their research includes data from the field of experimental psychology as well as from law and economics.

Scholars involved in the Project also plan to look at conflicts within corporations and between business institutions and the larger society. Business firms, Stout notes, "affect the nation's health in a number of ways: by influencing law and lawmakers, by encouraging the development of constructive or destructive norms of behavior, by changing the patterns of the distribution of wealth and income in the larger society, and by moving funds, production, knowledge, and people across borders." One intriguing question that arises from this area of research concerns the role of the corporate sector in recent increases in the inequality of wealth and income in the United States.

Stout also anticipates that the Project will explore the similarities between profit and non-profit organizations. Certain types of enterprises-education and health services, for example-are typically nonprofit endeavors. Relationships between these entities and the corporate world are fertile ground for research. Such research would also look at the ways that these typical patterns are changing in today's society, with the corporate world venturing into schools and hospitals. Numerous legal questions arise from this blurring of the lines between profit and not-for-profit ventures.

These investigations will naturally give rise to other inquiries into the field of corporate governance. In fact, the overarching purpose of the Project on Business Institutions is to stimulate a wide range of intellectual activity in the field by encouraging research and fostering intellectual interaction among leading scholars. With this in mind, the Project supports several important activities. These include research grants for Law Center faculty to enable them to pursue relevant topics in depth with a lightened teaching load. The Project also supports several visiting scholars each year, from law faculties, economics departments, business schools, and research institutions, such as Brookings. These scholars offer valuable insights into the field, insights that are shared both with full-time Law Center faculty and with the student body. The Project also supports seminars, workshops, and annual conferences, including a two-day capstone conference to which leading scholars in a variety of disciplines will be invited.

Through these various initiatives, the Project seeks to bring about a shift in the terms of academic debate about the role of corporations. For example, rather than assuming that the principal function of corporations is to maximize shareholder wealth, scholars will instead understand that there are other stakeholders in a firm. Similarly, academics will not simply assume that directors, officers, and other corporate participants are purely self-interested, hyperrational actors who only behave when threatened with legal sanctions. Instead, they will take account of trust, cooperative norms, and other complex realities of human behavior. Our understanding of corporate law and the rules of fiduciary duty, it is hoped, will reflect these enlightened perceptions. The result should be a fundamental transformation of the public rhetoric about the social and economic role of corporations and corporate governance.

Main