Survival Arts

Quote of the Day

Competitive systems can operate to check each other's excesses. Consider the codes governing the relations between U.S. corporations and their shareholders. The fifty states compete to offer standard corporation codes; companies can either use these default terms or tailor specific provisions in their corporate charters. (A company does not have to be physically headquartered in a state to claim it as the corporation's legal domicile.) Agreeable state rules, backed by well-established case law, can significantly cut the cost of doing business. The competition among states for incorporations and the taxes they bring makes legislatures responsive to new ideas and changing business conditions.

Equally important, company managers can't get away with adopting just any code that makes their lives easy. These rules govern a two-way agreement—between the business (essentially, its managers) and the shareholders. Opportunistic managers who try to use state laws to help themselves at the stockholders' expense are checked by another source of competition: the financial markets. So, for instance, when Pennsylvania passed a law designed to make hostile takeovers difficult, protecting managers but making stock less valuable, pressures from falling stock prices pushed most of the state's publicly traded companies to opt out of the law's provisions. Few other states adopted the same law, lest they lose incorporations.

The legal scholar Roberta Romano, who calls this federalist system of competing rules "the genius of American corporate law," writes: "As the Pennsylvania experience illustrates, the federal system provides a safety net against the consequences of harmful state laws. Some jurisdictions will have no or only mild takeover regulation, and this constrains how much other jurisdictions can act in this area and how much firms can take advantage of value-decreasing laws, especially when major commercial states such as Delaware and California have less onerous laws." Having many sources of competing rules, rather than a single, national standard, makes finding good rules—and eliminating or limiting bad ones—more likely.

Virginia Postrel
The Future and Its Enemies: The Growing Conflict Over Creativity, Enterprise, and Progress, p145 (from Chapter 5, "The Bonds of Life")

Posted by Russell Whitaker at May 7, 2004 10:32 AM | TrackBack