Irrationality and the Business Judgment Rule

in The Failure of Corporate Law

Published by University of Chicago Press

Published in print February 2007 | ISBN: 9780226306933
Published online March 2013 | e-ISBN: 9780226306988 | DOI:
Irrationality and the Business Judgment Rule

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While corporate law currently encourages irrationality or dishonesty, nothing inherent in corporate law requires it to do so. In his novel Hard Times, Charles Dickens offers a biting commentary on the economic theory of utilitarianism popular during his time. This critique is embodied by Thomas Gradgrind, a retired merchant, who not only espouses the mathematical rationality of utilitarianism as theory but seeks to act it out in his everyday life. Gradgrind's transformation over the course of the novel is a useful metaphor for understanding one of corporate law's persistent paradoxes: that the law imposes strict fiduciary duties on company management but that courts rarely enforce them because of the deference embodied in the business judgment rule. A study of Gradgrind offers a new explanation for this paradox, drawing on his education as both an analogy and a point of departure. This chapter proposes some corporate governance norms that would allow—even require—rational, humanistic decision making on the part of corporate directors and managers.

Keywords: corporate law; irrationality; Charles Dickens; Hard Times; utilitarianism; rationality; fiduciary duties; business judgment rule; corporate governance; decision making

Chapter.  9823 words. 

Subjects: Company and Commercial Law

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