Adam B. Badawi


In their classic and insightful article on team production in corporate law, Margaret Blair and Lynn Stout identify the minimization of rent-seeking as one of the chief benefits of vesting ultimate authority over a firm with the board of directors. In their analysis, this problematic rent-seeking arises when parties need to divide the gains from production after the fact. The squabbling that is likely to ensue may threaten to eat away most, or all, of the gains that come from productive activity. If parties know that this sort of rent-seeking will occur, they may not engage in productive activity in the first place. Parties view the board’s ability to act—or threaten to act—as a neutral arbiter to divide the gains from production as a mechanism that preserves the incentive to engage in productive activity. While this is a creative and plausible account of the board’s role and of its enduring success, the presence and prominence of the board introduces new opportunities for rent-seeking and other similarly distortive activity. In this Article, the authors identifies the rent-seeking and related problems that the board creates rather than solves. Like Blair and Stout, this Article draw on insights from the theory of the firm literature to understand the incentives that firm managers may have to shade, contort, and otherwise manipulate the information that the board receives. Particularly, this Article focuses on two specific behaviors that the informational dynamic between managers and the board engenders: lobbying and pandering. Part II describes the literature on influence costs and applies that literature to the problems faced by the board. Part III works through a recent model of pandering and analogizes that model to the interaction between the board and management. Part IV concludes by relating the problems of lobbying and pandering to the team production model of corporate law.