We analyze whether non-shareholder constituencies are better protected with internal corporate law reform or with external regulation. We reply to Professor Aneil Kovvali’s article, Stark Choices for Corporate Reform, that criticizes some of our previous output, in which we warned that a stakeholderist corporate law reform would stymie efforts to achieve effective stakeholder protections with external regulation. In his article, Kovvali attacks our work for imposing a “stark choice” on policymakers (that is, that reformers would face a mutually exclusive choice between two types of reform, internal and external), and for our view that stakeholderism should not be embraced because it would give directors renewed powers to lobby more forcefully for reforms they like and against reforms they dislike. Kovvali argues that while internal and external reforms are not incompatible, internal reform is more realistic and might pave the way to external reform.
Contrary to Kovvali’s characterization, we do not object to voluntary corporate actions that improve stakeholder welfare and that can happen without statutory corporate law changes. Moreover, we do not think internal and external reforms are inherently incompatible; rather, reformers would prioritize internal reform, give the opportunity for executives to cherry-pick the changes they want, and jeopardize reform attempts that would truly benefit weaker constituencies. While Kovvali’s support for stakeholderism revolves around its feasibility, he does not show how an internal corporate law reform capable of shifting power and resources to stakeholders (one that is mandatory, specific, and enforceable) would be any more feasible than external regulation.
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