Democracy and Dysfunction

Abstract

Since the 1930s, corporate law scholarship has focused narrowly on the public corporation and the problem of the separation of ownership and control — a problem many now believe has been mitigated or even solved. With rare exceptions, scholars have paid far less heed to other business forms that still play important roles in the American economy. In this Article we examine a significant, and almost completely overlooked business form, the Rural Electrical Cooperative (REC). RECs were founded in a moment of optimism during the New Deal. As with other cooperatives, their organizational rules differed sharply from those of for-profit corporations. They were owned by their customers, with each customer member having one vote irrespective of their energy consumption -- and it was hoped these owners would provide active oversight of the REC’s managers and activities. The reality has proven otherwise. Corporate governance innovations of the last forty years have passed RECs by, leaving an organizational sector mired in governance dysfunctions stemming from the separation of ownership and control. Here we explain why RECs evolved as they did, and why New Deal planners seized on the cooperative form to electrify the countryside; how significant governance problems have persisted, largely unaddressed, from the 1930s to today; and how a change in corporate governance rules, one allowing for a market for corporate control in RECs, could fix some persistent problems in this still-important sector. Alternatively, we propose that RECs take up a new public role as rural broadband internet providers with a reinvigorated federal regulator to police governance failures.