2014 • Volume 38 • Number 1

Deconstructing Corporate Governance: The Mechanics of Trusting

Rene Reich-Graefe

The phenomenon of trust among firm participants is a much neglected academic inquiry in corporate governance research and the theory of the firm. This Article elaborates on the comparatively small sample of existing legal research on the intersection of trust and corporate governance and tries to interrupt the selective (in-)attention given to the philosophical, psychological, political, sociological, economic, and legal phenomenon that is our individual as well as collective, everyday trust (or distrust) in the functionality and explainability of the world tomorrow in accordance with our preferences of today and our experiences of the past. Trust—as a phenomenon—is a concrete but severely underappreciated reality for the success of corporate investments and the accountability of corporate management. It constitutes part of a complex solution for encouraging investor confidence in the face of absolute decision-making power of corporate directors. Trust efficiently combines and balances otherwise unrestricted managerial power with a robust measure of accountability of corporate management—an entirely elusive measure within the realm of corporate governance law. It thereby provides a sophisticated, yet poorly understood, remedy to the most significant but unresolved academic dilemma in corporate governance theory—namely, the lack of predictive ability of existing micro theoretical models of the firm. ThisArticleprimarily discusses trust (and trustworthiness) as a mechanism, not as a virtue. By focusing on the procedural and substantive mechanics of trusting as a phenomenon, this Article explains the cohesive power and low-transaction- cost functionality which is built into successful exercises of trusting for purposes of encouraging and establishing pervasive corporate investments as the rational-choice baseline for voluntary firm participants.

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