A Catholic Theory of Corporate Law

Over the past century, the Catholic Church has developed a powerful philosophical and theological theory of social institutions, including economic institutions. In particular, the Church has addressed a number of issues concerning the modern corporation, especially in areas of special concern such as just wages for workers, working conditions, social responsibility of corporations, etc. There is a discernable “gap,” however, in the Church’s social doctrine when it comes to the question of why corporations are formed at all, and why the law that governs them is designed the way it is. This paper proposes a theory to fill that gap—viz., an entrepreneurship-based theory of the corporation which is consistent with Catholic social doctrine and modern corporate law. Several approaches dominate American corporate law scholarship. The first, derived from the application of neoclassical economics, stresses shareholder primacy—shareholders are the owners of a corporation, and thus the goal of the corporation as an institution is the maximization of shareholder wealth. Scholars working in this tradition stress the perceived problems created by the separation of ownership from control in the modern corporation. Because the agent/directors of a corporation, and not the owner/shareholders, largely control the corporation, agency problems are created by the resultant misalignment of incentives. For such scholars, the primary goal of corporate law is to ameliorate the agency problem inherent in corporations in order to achieve the goal of increasing shareholder wealth. The second major approach is the “stakeholder” model of the corporation. Proponents of the stakeholder model envision the corporation as an amalgam of various “stakeholders,” each of whom has an interest in the corporation through their contribution to it. Shareholders contribute capital, managers contribute their business skills, communities provide a place for the business to conduct its activities (and sometimes tax breaks and other incentives), employees contribute their labor, etc. Through these contributions, stakeholders gain a right to influence the direction of the corporation which the law ought to recognize.