CORPORATE LAW'SLIMITS 3 Corporate law, when it's effective, impedes insider machinations: it stops, or reduces, controlling shareholders from diverting value to themselves, and bars managers from putting the firm into their own pockets. When, for example, controllers obtain very high private benefits from control, because they divert firm value into their own pockets, then holders mistrust the insiders and ar Ownership concentration should, all else equal, persist. Good corporate law(or substitutes like stock exchange rules, contract, media glare, or reputational intermediaries)can, by reducing this potential for thievery, facilitate separating ownership from control But there is more to running a firm than controlling insider machinations. Managerial agency costs to distant shareholders come in two basic flavors: thievery and mismanagement. Law can reduce the first, but does very little directly to minimize the second. Not yet fully recognized in the current literature is that american law avoids dealing with the second. The business judgment rule has courts refusing to intervene when shareholders attack managerial mistake. Indeed, one might argue in only a modest over-statement that in modern American business history, there has been only one significant successful judicial attack on managers for mistake, that in Smith v. Van gorkom, an attack the legislature promptly reversed It's business conditions, incentives, professionalism, capital structure product and managerial labor market competition, and financial alignment ith shareholders that directly impede managerial mistakes, not corporate law. Conventional, technical corporate law has little to say here.( True law can create or destroy anything, so law isn't irrelevant, but it is a second-order phenomenon: other institutions primarily control managerial mistake, law's role here, if any, is either to support or drag on those primary institutional controls. Even if one believes law to be central to competition, compensation, and so on-the institutions that reduce managerial agency costs--one must recognize that these laws differ from orporate law that controls insider machinations, and their efficaciot could differ: one nation's laws might control machinations well but managerial error poorly Today's corporate theory cannot explain why several wealthy ons protect minority shareholders well, bu have concentrated ownership. The most plausible theory is that ownership hasnt separated not because of weak corporate law, but because aCORPORATE LAW’S LIMITS 3 Corporate law, when it’s effective, impedes insider machinations: it stops, or reduces, controlling shareholders from diverting value to themselves, and bars managers from putting the firm into their own pockets. When, for example, controllers obtain very high private benefits from control, because they divert firm value into their own pockets, then distant shareholders mistrust the insiders, and are unwilling to buy. Ownership concentration should, all else equal, persist. Good corporate law (or substitutes like stock exchange rules, contract, media glare, or reputational intermediaries) can, by reducing this potential for thievery, facilitate separating ownership from control. But there is more to running a firm than controlling insider machinations. Managerial agency costs to distant shareholders come in two basic flavors: thievery and mismanagement. Law can reduce the first, but does very little directly to minimize the second. Not yet fully recognized in the current literature is that American law avoids dealing with the second. The business judgment rule has courts refusing to intervene when shareholders attack managerial mistake. Indeed, one might argue in only a modest over-statement that in modern American business history, there has been only one significant successful judicial attack on managers for mistake, that in Smith v. Van Gorkom, an attack the legislature promptly reversed. It’s business conditions, incentives, professionalism, capital structure, product and managerial labor market competition, and financial alignment with shareholders that directly impede managerial mistakes, not corporate law. Conventional, technical corporate law has little to say here. (True, law can create or destroy anything, so law isn’t irrelevant, but it is a second-order phenomenon: other institutions primarily control managerial mistake, law’s role here, if any, is either to support or drag on those primary institutional controls.) Even if one believes law to be central to competition, compensation, and so on—the institutions that reduce managerial agency costs—one must recognize that these laws differ from corporate law that controls insider machinations, and their efficaciousness could differ: one nation’s laws might control machinations well but managerial error poorly. Today’s corporate theory cannot explain why several wealthy European nations protect minority shareholders well, but nevertheless still have concentrated ownership. The most plausible theory is that ownership hasn’t separated not because of weak corporate law, but because a)