Chapter 4. Law and Corporate Governance

Pragmatic and effective research on corporate governance often turns critically on appreciating the legal institutions surrounding corporate entities—yet such nuances are often unfamiliar or poorly specified to economists and other social scientists without legal training. This chapter organizes and discusses key legal concepts of corporate governance, including statutes, regulations, and jurisprudential doctrines that “govern governance” in private and public companies, with concentration on the for-profit corporation. We review the literature concerning the nature and purpose of the corporation, the objects of fiduciary obligations, the means for decision making within the firm, as well as the overlay of state and federal law pertaining to how that decision-making authority is exercised within publicly traded companies. A core feature of this analysis is that while the basic structures pertinent to corporate law and governance are familiar and in some ways predictable, they are also in a constant state of flux, shaping and being shaped by institutional adaptations of firms, regulators and courts. This chapter is most appropriate for social science researchers and/or students who are new to the legal dimensions of firm governance.