Corporate Law and Social Norms

Abstract

Corporate law serves both to facilitate and to regulate the conduct of the corporate enterprise. Insofar as corporate law is regulatory, it provides incentives and disincentives to the major actors in the corporate enterprise -- directors, officers, and significant shareholders -- through the threat of liability. In significant part, however, these actors are motivated not by the desire to avoid liability, but by the prospect of financial gain, on the one hand, and by social norms, on the other. Much work has been done on the way in which these actors are motivated on the threat of liability and the prospect of financial gain, but relatively little work has been done on the operation of social norms.

In this Article, I examine the interrelation of social norms and law in corporate law. The purpose of this examination is to illuminate both corporate law specifically, and the interrelation of social norms and law generally, by studying ways in which that interrelation operates in a specific field. I focus on three kinds of social norms, which I call descriptive norms, conventions, and obligational norms.

The organization of the Article is as follows: I begin by describing and defining the kinds of social norms that are relevant to law. I then consider, in a preliminary way, the effects and origins of social norms. Finally, I examine the critical role of social norms in three central areas of corporate law: fiduciary duties (care and loyalty), corporate governance (board composition and the role of institutional investors), and takeovers. In the course of that examination, I apply and elaborate the introductory analysis concerning the kinds, origins, and effects of social norms, and consider some of the kinds of interrelations between social norms and law.