Research by Margaret Blair cited in Citizens United dissent

Feb 18, 2010

Research by economist Margaret Blair, who serves on Vanderbilt’s Law and Business faculty, was cited in Justice John Paul Stevens’ widely read dissent in the Supreme Court’s 5-4 decision in Citizens United v. Federal Election Commission.

Read an abstract of “A Team Production Theory of Corporate Law”

In a scathing dissent to Citizens United decision, which was handed down on January 21, Justice Stevens cited an article Blair coauthored with Lynn Stout of the UCLA School of Law, “A Team Production Theory of Corporate Law” (85 Virginia Law Review 247, 1999) to support his assertions that “corporations are different from human beings” and that the decision in Austin v. Michigan Chamber of Commerce, one of the cases cited by a lower-court panel which ruled against Citizens United, was not “a radical outlier” as the majority opinion claimed.

At the conclusion of Justice Stevens’ dissent, he excerpted a quote from the same article to address arguments made by the Court concerning the power of shareholders over the corporation: “By ‘corporate democracy,’ presumably the Court means the rights of shareholders to vote and to bring derivative suits for breach of fiduciary duty. In practice, however, many corporate lawyers will tell you that ‘these rights are so limited as to be almost nonexistent,’ given the internal authority wielded by boards and managers and the expansive protections afforded by the business judgment rule.”

In “A Team Production Theory of Corporate Law,” Blair and Stout defined corporations as “a mediated hierarchy of stakeholders,” and Justice Stevens listed their research among several recognized models of corporate structures in order to conclude that “It is not necessary to agree on a precise theory of the corporation to agree that corporations differ from natural persons in a number of fundamental ways, and that a legislature might therefore need to regulate them differently if it is human welfare that is the object of its concern.”

The “Team Production” model was proposed by Blair and Stout as an alternative to the prevailing assumption that “the central economic problem addressed by corporation law is getting managers and directors to act as loyal agents for shareholders,” Blair explains. “We took issue with the ‘principal-agent approach and argued that the unique legal rules governing publicly-held corporations are instead designed primarily to address the problems that arise when a number of individuals with different interests must work together to invest corporate resources to jointly produce some good or service. We argued that the essential economic function of the public corporation is not to address principal-agent problems, but to provide a vehicle through which all corporate stakeholders can, for their own benefit, jointly relinquish control over those resources to a board of directors.”

The team production model was controversial, Blair acknowledges, because “It suggests that maximizing shareholder wealth shouldn’t be the overarching goal of corporate law,” she says. “The team production model suggests that directors of public corporations should seek to maximize the joint welfare of all the firm’s stakeholders, including managers, employees, and possibly other groups such as creditors or the local community, in addition to shareholders.”

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