Creditors and the New Corporate Governance

This paper challenges the conventional view of corporate governance that focuses exclusively on corporate law as the dominant mechanism by which investors exercise control over corporate affairs. Creditors - especially banks and other private lenders - play an enormously important role in influencing management. Only a handful of legal scholars have noted the governance role that private lenders play. Even these few scholars focus predominantly on the distress context, observing creditor influence only after a borrower firm has lapsed into financial distress. In my view, these scholars underestimate private lenders' sway over corporate managers. The distress focus casts the influence of private debt as episodic, exceptional, and dramatic. Creditor influence matters only when a firm is in peril. I argue just the opposite - that creditor influence is pervasive. I highlight the governance role of creditors, relying on empirical studies showing the effects of private debt on corporations' financing and investment decisions, operational matters, and even officer retention. I detail the institutional and contractual features of private debt that constrain managerial discretion. I also identify important theoretical and policy implications for corporate and debtor-creditor law.