Professor Bainbridge and the Arrowian Moment: A Review of The New Corporate Governance in Theory and Practice

The New Corporate Governance in Theory and Practice, a new book by Stephen Bainbridge, pulls together the leading arguments for director primacy that Bainbridge has made in a series of articles. In his core argument, Bainbridge uses theoretical work by Kenneth Arrow to explain the attractions of the separation of ownership and control with a centralized hierarchy headed by a board of directors. Bainbridge posits that achieving an optimal trade-off between authority and accountability is the central problem of corporate law. He uses a key passagefrom Arrow to argue that in making this trade-off, lawmakers should always make a presumption in favor of preserving managerial authority. This article examines Bainbridge's argument, and shows that he does not succeed in justifying this presumption. Arrow's argument persuasively shows why rules that lead to constant review of all board decisions would effectively eliminate board authority, and that this would be unattractive. None of the major proaccountability reform proposals currently in play, however, comes even close to eliminating board authority. Arrow's argument cannot tell us whether reform in favor of somewhat more accountability at the expense of some loss in authority, but far from a total loss in authority, is a good idea or not. That is, Bainbridge's use of Arrow does not help us determine the wisdom of current reform proposals. Bainbridge's attempt to use Arrow thus falls short of his target. Bainbridge has other, less original, arguments which supplement his core argument for board authority. This article considers the leading supplementary arguments as well, and also finds them wanting. The article ultimately moves beyond a critique of Bainbridge to argue more affirmatively for greater accountability for boards. *Professor and Associate Dean for Academic Affairs, University of Minnesota Law School. I thank Claire Hill, Paul Rubin, participants at the Midwestern Law and Economics Association annual conference, and especially Stephen Bainbridge for helpful comments on an earlier draft. DELAWARE JOURNAL OF CORPORATE LAW