Faculty of Law

Top US Corporate Governance Scholar visits Auckland

29 May 2014
For the news

Professor Stephen Bainbridge is this year’s Cameron Fellow. The fellowship, funded by Auckland alumnus Tim Cameron, a litigation partner in the leading New York law firm of Cravath, Swaine & Moore LLP, and his wife Kathy, enables the Auckland Law School to bring out a leading North American scholar to spend time with faculty and students at the law school.

Stephen Bainbridge is the William D. Warren Distinguished Professor of Law at the University of California (Los Angeles). He is a prolific scholar, whose work covers a variety of subjects, but with a strong emphasis on the law and economics of public corporations. He has written over 75 law review articles which have appeared in leading journals such as the Harvard Law Review, Virginia Law Review, and Northwestern University Law Review. In 2008, 2011, and 2012, Professor Bainbridge was named by the National Association of Corporate Directors' Directorship magazine as among the 100 most influential people in corporate governance.

During his visit to the Auckland Law School in May, Professor Bainbridge took part in a wide range of activities. These included teaching classes in Takeover Law and Company Law, a round table luncheon with top undergraduate and postgraduate corporate law students and a variety of lectures and seminars.

On 27 May Professor Bainbridge delivered a public lecture on director versus shareholder primacy to a large audience at Old Government House.

Any model of corporate governance must answer two basic sets of questions, he contended. Who decides? And whose interests prevail?

When the ultimate decision-maker is presented with a zero sum game, in which it must prefer the interests of one constituency class over those of all others, whose interests prevail?

On the means question, prior scholarship has almost uniformly favoured either shareholder primacy or managerialism. On the ends question, prior scholarship has tended to favour either shareholder primacy or various stakeholder theories. In contrast, Professor Bainbridge has proposed a “director primacy” model in which the board of directors is the ultimate decision maker but is required to evaluate decisions using shareholder wealth maximisation as the governing normative rule.

Shareholder primacy is widely assumed to be a defining characteristic of New Zealand company law. In assessing that assumption, it is essential to distinguish between the means and ends of corporate governance. As to the latter, New Zealand law does establish shareholder wealth maximisation as the corporate objective. As to the former, despite assigning managerial authority to the board of directors, New Zealand company law gives shareholders significant control rights.

Comparing New Zealand company law to the considerably more board-centric regime of U.S. corporate law raises a critical policy issue. If the separation of ownership and control mandated by the latter has significant efficiency advantages, why has New Zealand opted for a more shareholder-centric model? The most plausible explanation focuses on domain issues, which suggest that there are a small number of New Zealand firms for which director primacy would be optimal. The unitary nature of the New Zealand government may also be a factor, because the competitive federalism inherent in the U.S. system of government promotes a race to the top in which efficient corporate law rules are favoured. Finally, New Zealand’s social welfare net may also be a factor.

Although Professor Bainbridge considers that a director primacy model works best, he concluded that New Zealand corporate law  is closer to a shareholder primacy model than the U.S. is.  One of the reasons for this may be the predominance of small and closely held companies in New Zealand.