| It has been said that one of the best qualities of US | | | | firm or monitor management. The holdings of the |
| corporation law, is its federalist organization. A firm | | | | managers running such firms are usually infinitesimal. |
| may choose its state of incorporation, a domicile that is | | | | This creates what is called an 'agency' problem, in |
| independent of its actual physical presence, and one | | | | which the managers' operation of a firm may deviate |
| that can be changed at any time with shareholder | | | | from the shareholders' wishes to maximize the value |
| approval. The corporation codes in each state contain | | | | of the firm. |
| the standard provisions for corporate governance and | | | | It is not inconceivable, for example, to find managers |
| function as default provisions in corporate charters. | | | | implementing a policy that makes their jobs more |
| The firm therefore can tailor their corporate charters | | | | secure, such as engaging in defensive tactics to |
| to fit their needs more precisely under the state code. | | | | thwart a corporate takeover, even though this policy |
| Just as important to them, firms may also look for a | | | | may reduce the company's value. Or, because the |
| state whose corporation law best matches their | | | | managers' wealth is indexed to both present and |
| needs. | | | | prospective compensation in the firm, they may follow |
| The provisions in various corporation laws run the | | | | a corporate strategy to reduce firm-specific risk. A |
| gamut from trivial housekeeping to the more | | | | typical example is the diversification of corporate |
| fundamental need for fashioning the relationship | | | | acquisitions, in spite of the knowledge that the |
| between shareholders and managers. Corporation | | | | shareholders will not benefit because they are holding |
| laws may provide for things as mundane as specifying | | | | diversified stock portfolios which are subject to |
| that a corporation's name be placed in its charter, to as | | | | market, not firm-specific, risks. |
| esoteric a thing as specifying the fiduciary duties of | | | | The primary role of corporation laws in this regard is to |
| managers and voting rights of shareholders, when | | | | establish corporate governance policies that mitigate |
| these can be waived and procedures for corporate | | | | this agency problem by aligning managerial incentives |
| combinations, including when managers' - as opposed | | | | with shareholder interests. Corporation laws have |
| to shareholders' - decisions are controlling. States have | | | | governance devices such as promoting |
| provided a different set of governance defaults for | | | | shareholder-elected boards of directors to monitor |
| small privately held firms, which are called 'close | | | | managers, strengthening shareholder voting rights for |
| corporation codes'. The varieties of corporation laws | | | | fundamental corporate changes, and defining fiduciary |
| have an enabling approach thereby accommodating | | | | duties that impose liability on managers and directors |
| the diversity in organization, capital structure, and lines | | | | who act negligently or with divided loyalty (i.e. favor |
| of business found in different business firms. | | | | their own financial interest over that of shareholders). |
| Most corporation laws have to wrestle with the | | | | Perhaps, managers should be reminded that |
| problem of separation of ownership from control in the | | | | corporation law presumes that firms should be |
| modern public corporation. The big, publicly held firms | | | | managed for shareholders' interests, not those of |
| typically have numerous shareholders with small | | | | managers, in situations when those interests are in |
| holdings, who cannot actively exercise control over the | | | | conflict. |