Chapter 9: Takeover law and managerial incentives in the United States and Japan
In their seminal work The Corporate Contract, Frank H. Easterbrook and Daniel R. Fischel conceptualized the interaction among corporate actors as a series of contractual agreements. Easterbrook and Fischel argued that through these contractual agreements, “managers and certain other participants exercise a great deal of discretion that is ‘reviewed’ by interactions with other self-interested actors.” In this conception of corporate law, formal legal rules function as gap-fillers in the contracts between corporate participants. Three types of formal rules relevant to corporate governance in most countries are: (1) corporate statutes enacted by legislators; (2) fiduciary principles defined by courts; and (3) regulations promulgated by securities regulators and stock exchanges. In every economy, informal (non-binding) gap fillers, such as codes of best practice, also play an important role in fleshing out the corporate contract. Managerial discretion is “reviewed” by other self-interested actors in many ways, creating competitive pressures that shape corporate contracts.
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