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97 Nw. U. L. Rev. 547 (2002-2003)
Director Primacy: The Means and Ends of Corporate Governance

handle is hein.journals/illlr97 and id is 557 raw text is: Copyright 2003 by Northwestern University School of Law                   Printed in U S A
Northwestern Univcersty Law Review                                         Vol 97, No 2
Stephen M Bainbridge*
Since Ronald Coase's famous article The Nature of the Firm appeared
over six decades ago,' both economists and legal scholars have devoted
considerable attention to the theory of the firm.2 Over time, this body of
work generated a substantial literature providing both positive and norma-
tive insights into, inter alia, the internal governance institutions of firms.'
Although the various theories of the firm developed in that literature can
be classified in various ways, and while some defy classification, two
basic systems of classification capture most of the competing theories
(see Figure 1). Along one axis (the Means Axis), theories of the firm are
plotted according to whether they emphasize managerial or shareholder
primacy. Older theories at the shareholder primacy end of the spectrum
posit that shareholders own the corporation.' Accordingly, directors and
officers are mere stewards of the shareholders' interests. A more recent vari-
ant, known as the nexus of contracts or contractarian model,5 which is
one of Coase's many progeny, denies that shareholders own the corporation.6
. Professor, UCLA School of Law. Portions of this Article are based on Chapters 5 and 9 of my
Foundation Press text, CORPORATION LAW AND ECONOMICS (forthcoming 2002). 1 am grateful to Mar-
garet Blair, Bill Klein, and Lynn Stout for their constructive criticism of an earlier draft. I also thank the
participants in the Georgetown-Sloan Project on Business Institutions' Conference on Corporations as
Producers and Distributors of Rents, where an earlier draft of this paper was presented.
I R.H. Coase, The Nature of the Firm, 4 ECONOMICA (N.S.) 386 (1937).
2 See generally Nicolai J. Foss et al., The Theory of the Firm, in 3 ENCYCLOPEDIA OF LAW &
ECONOMICS 631 (2000) (providing a survey of the literature on the theory of the firm). The so-called
theory of the firm is a shorthand for a substantial body of research that really is a general theory of
economic organization that also include [sic], for example, 'intermediate forms,' such as franchising ar-
rangements or joint ventures. Id. at 633.
much of what corporate lawyers do with economic analysis is positive rather than normative, but also
noting the normative role of economic analysis).
4 See infra notes 80-81 and accompanying text.
5 See BAINBRIDGE, supra note 3, at 27-33 (describing the nexus of contracts model).
6 See infra note 81 (explaining why concepts of ownership are irrelevant in the contractarian

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