Justin Fox on Shareholder Primacy in the Age of Trump

6 01 2017


The excellent Bloomberg columnist Justin Fox has published a great piece on the current state of corporate governance in the United States. He speculates that the “shareholder value” view of corporate purpose — that corporations exist to maximize value for their investors — is finally on its way out…. Donald Trump is effectively challenging the gospel that shareholder interests should come first. 

As Fox points out, the doctrine that the sole or primary purpose of a public company is to make money for shareholders has long been challenged by a group of academics who believe that CEOs should revert to running firms with the interests of a wider group of stakeholders in mind. (That was the dominant philosophy in corporate America from teh 1930s to the late 1970s). What is new is that the President-elect is questioning the ideology of shareholder primacy through his repeated criticisms of US corporations for sending manufacturing jobs overseas and otherwise being insufficiently patriotic. In effect, Trump has been calling on US corporate managers to adopt the ethos that pervaded US business life in the years between the New Deal and the 1970s, when CEOs saw themselves as stewards who would manage in firms in a way that balanced the interests of workers, shareholders and other stakeholders. In that era, US corporations certainly regarded their interests as closely tied to those of the nation, as evidenced by Charles Erwin Wilson’s famous declaration during his Senate confirmation hearing that For years I thought that what was good for our country was good for General Motors, and vice versa. The difference did not exist. Our company is too big. It goes with the welfare of the country.

Fox’s article deals with many of themes (the impact of shareholder primacy, short-termism, and the obligations of corporations to the nation-states that charter them) that are examined in the paper I wrote with Kevin Tennent and Jason Russell. The title of our paper is: “Berle and Means Reconsidered: the Military Roots of a Philosophy of Stakeholder Governance”. If all goes as planned, we will be presenting this paper on the conference circuit (Academy of Management, EURAM, BAM, Association of Business Historians) this summer. Our paper examines the relationship between military service and the ethos of public service associated with it and competing ways of thinking about the social responsibility of business corporations.  We structure our analysis around a discussion of The Modern Corporation and Private Property by Adolf Berle and Gardiner Means (1932), a text that influenced a generation of US business executives that remains one of the most cited works in management.


Our paper shows that Berle and Means espoused a stakeholder theory of corporate governance that challenged the idea that the sole purpose of a corporation is to create value for the shareholders. Whereas shareholder value ideology was dominant in the United States in the 1920s, the nation’s corporate governance system moved towards a stakeholder model during the New Deal. Berle and Means clearly disagreed with the view that the primary purpose of a corporation was to serve the interests of the shareholders. The communitarian ethos advocated by Berle and Means can be seen in this passage:

 Neither the claims of ownership nor those of control can stand against the paramount interests of the community. . . . Should the corporate leaders, for example, set forth a program comprising fair wages, security to employees, reasonable service to their public, and stabilization of business, all of which would divert a portion of the profits from the owners of passive property, and should the community generally accept such a scheme as a logical and human solution of industrial difficulties, the interests of passive property owners would have to give way…It is conceivable—indeed it seems almost essential if the corporate system is to survive—that the “control” of the great corporations should develop into a purely neutral technocracy, balancing a variety of claims by various groups in the community and assigning to each a portion of the income stream on the basis of public policy rather than private cupidity (Berle and Means, 1933, 356, emphasis added).

In the paper, we argue the ethos espoused by Berle and Means remained dominant in the US corporate world until the late 1970s, when it was challenged by the re-emergence of shareholder value ideology.By the time Gardiner Means died in 1988, the shareholder-centric ideology of corporate governance presented by Jensen and Meckling (1976) had largely displaced the stakeholder approach espoused by Berle and Means.

There is something of an affinity between the view of the purpose of the corporation outlined by Berle and Means and that recently advocated by Donald Trump on Twitter in that they both challenge shareholder primacy. Of course, there are massive differences between Berle and Means on the one hand and Trump on the other. These differences are evident in terms of temperament and style of communication. Berle and Means wrote a scholarly book. Trump writes tweets in the middle of the night. Berle and Means patriotically served in the military when called to do so in 1917. Trump obtained dubious medical deferments during the Vietnam War, although that doesn’t stop him from being a cheerleader for war now that he is too old to serve. There is also a massive disconnect between Trump’s rhetoric on Twitter and the way in which Trump’s companies have actually been run. I’m probably the last person in the world who would defend Trump. However, I do think that Fox and other observers are right to argue that Trump is pushing back against shareholder value ideology in his own crude fashion. I suppose the danger of someone like Trump being the champion of some variant of the stakeholder model is that he may end up discrediting the entire concept.

I would also hasten to add here Hillary Clinton, Trump’s Democratic opponent, also critiqued the doctrine of shareholder primacy. She did so by calling for a return to “corporate patriotism” during her campaign. Her first use of this term was during the Democratic presidential primaries, when she was battling with Bernie Sanders, a fierce critic of outsourcing and globalization. Campaigning in Detroit in March 2016, Clinton criticized the outsourcing of US manufacturing jobs to low-wage countries: “I’m not asking corporations to be charitable, although that’s important. I’m asking corporations to realise that when Americans prosper, they prosper too. The idea of corporate patriotism might sound quaint in era of vast multinationals, but it’s the right thing to do” and in the long-term interests of the companies themselves, as “more money in the hands of working people helps everyone, including businesses” .

In her speech to the July 2016 Democratic National Convention, Hillary Clinton once again called on American corporations to begin acting in a more “patriotic” fashion. Clinton’s call for a “New Bargain” with American workers, which was delivered after a series of military speakers had warmed up the audience, echoed the ideas of Berle and Means and challenged the view that the sole purpose of a company is to make money for its worldwide shareholder base. Noting that the US left had appropriated the rhetoric of militarism and patriotism, Megan McArdle quipped that progressives had “learned to speak Republican” .

I think that McArdle is on to something there. The US has been on a war footing ever since 9/11. For fifteen years, nationalistic flag waving and patriotic exhortations to “service” to the nation (i.e., military service)  have been everywhere. In this political climate, it is not surprising that the idea that a CEO’s primary duty is to maximize returns for his or her global shareholder base would come to be regarded as unpatriotic.  The US appears to be locked in a cycle of perpetual war, fighting perceived Others in the Middle East and elsewhere. Given this cultural and political context,  it will be difficult to defend the Friedmanite thesis that the sole purpose of a corporation is to make profits for the shareholders. This idea may have flied in the peaceful days of the 1990s, but it doesn’t fit the nationalist and anti-globalization mood of the present.



British Banks, U.S. Politicians, and the Return of Anglophobia

17 08 2012

Canary Wharf at Night

British banks have been the subject of a wave of criticism by U.S. politicians in recent months. The Libor Scandal and the money laundering charges against HSBC’s Mexican operations grabbed headlines earlier this summer. Last week, the New York Department of Financial Services accused Standard Chartered, a London-based bank, of violating the U.S. sanctions on Iran. Some British observers have argued that these accusations are motivated by simple protectionism and a desire to ruin London’s reputation as a financial centre and thus drive business back to New York. Many Britons remember that in the aftermath of the 2010 Deep Water Horizon oil spill in the Gulf of Mexico, American politicians stressed that “British Petroleum” was a foreign entity.

The attacks on British corporations in the United States appear to have involved a certain amount of grandstanding by Congressmen and ambitious prosecutors. However, the frequency and virulence of these attacks may also be a sign of decreasing American self-confidence in an age of perceived relative decline. We have seen the revival of the sort of anti-British sentiment that was last popular in the United States in the nineteenth century, when Britain was still the world’s most powerful nation.

Pulling Down the Statue of King George III, N.Y.C. A romanticized depiction of the Sons of Liberty destroying the statue after the Declaration was read by George Washington to citizens and his troops in New York City on July 9, 1776.

Pulling Down the Statue of King George III, N.Y.C. A romanticized depiction of the Sons of Liberty destroying the statue after the Declaration was read by George Washington to citizens and his troops in New York City on July 9, 1776.

Prior to the First World War, Britain was the primary target of U.S. economic nationalism.  Most Americans welcomed British investment in the American economy but they also feared it might undermine their political independence.  Memories of the American Revolution and the War of 1812 were still fresh.  During Andrew Jackson’s war with the Second Bank of the United States in the 1830s, critics of the bank noted that some of its shareholders were British. Britain’s perceived support for the cotton-producing South in the Civil War intensified Anglophobia in the northern states.

After 1865, both of the major political parties engaged in selective Brit-bashing. The Republicans, the protectionist party, focused on the need to keep the tariff high so as to include foreign manufactured goods, a policy that clearly harmed Britain, which was then the workshop of the world. Somewhat ironically, most Republicans were ardent supporters of the gold standard, which was essentially a British invention: in the nineteenth century, countries from Portugal to Japan adopted the gold standard so as to link their currencies to those of the world’s foremost power. Democrats typically favoured lower tariffs, a policy that was popular in the western and southern states and which would have helped British manufacturers. However, many Democrats were hostile to the gold standard. The 1896 Presidential election, which pitted Democrat William Jennings Bryan against Republican William McKinley, became a de facto referendum on whether the United States should remain on the gold standard. Republicans charged that departing from the gold standard would destroy the confidence of European, largely British investors and would, in effect, be an act of confiscation. Gold, they declared, was the currency of Western civilization, since only backward nations such as China still based their currencies on silver. The Republicans, along with their friends on Wall Street and in the City of London, predicted apocalyptic consequences should Bryan be elected.

McKinley stands on a gold coin, a very subtle reminder to voter that he supported the gold standard

For his part, Bryan replied that his Republican opponents were the henchmen of the great financial interests of New York and, above all, London. Bryan invoked the Declaration of Independence in his famous “Cross of Gold Speech” to the Democratic National Convention in Chicago. Taking issue with the Republican argument that the United States needed to be on the gold standard as long as Britain was on it, Bryan declared that “it is the issue of 1776 over again. Our ancestors, when but three million in number, had the courage to declare their political independence of every other nation; shall we, their descendants, when we have grown to seventy millions, declare that we are less independent than our forefathers?”[1]

To twenty-first century ears, Bryan’s rhetoric is remarkably similar to that sometimes used by leftist leaders in the Third World whenever they seize the assets of a Western company. In the 1890s, they were as American as apple pie.

The 1880 and 1890s also witnessed a political campaign in the United States against foreign, especially British investment. As historian Mira Wilkins has shown, the flood of British capital into the United States after 1865 contributed enormously to U.S. economic development: British investors financed everything from transcontinental railroads to ranches to factories. She also shows that there was a political reaction against British control.  British investors were demonized in some newspapers and laws limiting foreign investment were passed by some western states.[2]

In 1887, Congress prohibited land ownership by foreign citizens in the western territories in response to complaints from small ranchers that rich British cattle companies were engrossing grazing land.  This statute influenced state politicians: laws banning land ownership by non-citizens were passed in Illinois, Kansas, and Texas.[3]  The Glasgow Herald dubbed this trend the “Monroe Doctrine” applied to capital.[4] The attacks in the American press on William Scully, an Irish landlord who had acquired vast numbers of tenanted farms in the mid-west, intensified so much so that he decided to take the precaution of acquiring American citizenship in 1895.

Hostility towards British investment dissipated largely because of the growing power and self-confidence of the United States after 1914. The First World War dramatically changed the position of the United States in the world economy. Within the space of a few short years, it replaced Britain as the world’s largest creditor nation. In this new context, it was anachronistic to worry that British investment as somehow going to undermine American sovereignty. By 1945, the transition from British to American global hegemony was essentially complete: the City of London was just a shadow of its former self: Wall Street was now the undisputed financial capital of the world and the British economy was dependent on Marshall Plan aid. Few if any American politicians in the 1940s or 1950s worried about the extent of British economic power in the United States. In fact, they were more likely to complain about Britain being a charity case.

In recent years, we have heard much about America’s relative decline. Books with titles such as “The Post-American World” have become best-sellers. Those who speak about American relative decline usually focus on the rising fortunes of the BRIC countries, not Britain, which is itself suffering from the problems in the Eurozone. However, the fact a great deal of business migrated from Wall Street to London after the passage of SarbOx is a datapoint that has been used to support the overall narrative of American decline.

The sapping of American self-confidence and the resurgence of U.S. economic nationalism has serious implications for European companies, especially British ones. Britons may like to think that their close cultural ties and military alliance with the United States will protect their companies from U.S. economic nationalism. It may be that the social memory of the American Revolution will be a greater influence on U.S. thinking about British companies.  A certain degree of anti-British sentiment is still present in U.S. culture. Every U.S. schoolchild learns about the revolutionary struggle against British rule.  Even seemingly apolitical films have a whiff of Anglophobia: in the 1977 film Star Wars, the soldiers on the nefarious Death Star were played by actors with British accents.

All of this means that grandstanding U.S. politicians have a rich cultural legacy to tap into when targeting British firms.

[1] Speech by William Jennings Bryan in Official Proceedings of the Democratic National Convention Held in Chicago, Illinois, July 7, 8, 9, 10, and 11, 1896, (Logansport, Indiana, 1896), 226–234.

[2] Mira Wilkins, The History of Foreign Investment in the United States to 1914 (Cambridge, Mass: Harvard University Press, 1989), 566.

[3] New York Times, “Alien Land Law” 24 December 1891,  New York Times, “Irish Landlords in America” 20 March 1886.

[4] Glasgow Herald, leading article, 26 September 1891, 6.

 [ADS1]Citation needed

Jim Balsillie, Canadian Economic Nationalist

21 07 2009

Jim Balsillie, the co-CEO of RIM, the maker of the Blackberry, is upset that the wireless assets of Nortel Networks may end up in non-Canadian hands. (RIM hopes to acquire this part of the defunct Nortel empire for itself).

A RIM statesman said that the company believes that the loss of Canadian ownership of Nortel’s wireless businesses “may significantly, adversely affect national interests, with potential national security implications, and that the Government of Canada should review the situation closely.”

I’m pointing out this news story to remind everybody that Canadian economic nationalism, the venerable tradition that gave us the National Policy, FIRA, and much else, is not dead. Neither has economic nationalism become the exclusive concern of ivory tower intellectuals and left-wing journalists. Balsillie is an eminently successful businessman, but he has also shown some impressive nationalist credentials.


The last 24 hours have seen a flurry of news items related to Jim Balsillie’s efforts to acquire the wireless assets of Nortel. See here, here, here, here, and here. For a aarticularly good article about this in the Toronto Star, see here. An editorial in today’s Globe and Mail expresses cynicism about Mr Balsillie’s Canadian nationalism, calling his nationalist arguments “dubious” and dismissing them as empty rhetoric designed to cover his true interests. I’m not convinced that this is an accurate reading of the situation or that it is right to reduce all business behaviour in terms of a pure form of the rational actor/homo economicus model. Business people are, obviously, out to make money, but I do think that economic nationalism, a desire to benefit the collectivity, is also a force that influences how businesspersons operate.

Today’s Globe also contains an excellent column by Jeffrey Simpson in which he asks why the federal government had plenty of money to prop up the Canadian operations of two American corporations (GM and Chrysler), but was unwilling to help out Nortel, a genuinely Canadian company.

Second Update:

My understanding is that RIM’s interest in Nortel’s wireless assets relates to some patents held by Nortel. See here, here, and here. The patents are very attractive to RIM because they are for new technologies that allow more data to be sent faster over increasingly crowded networks. The patents are especially valuable since demand for wireless bandwidth is predicted to increase dramatically as people do more complex things, such as watch YouTube videos, with their mobile phones. To get a sense of the possible consequences of not addressing the issue of cell network congestion, consider that during Obama’s inauguration ceremony, most of the cell networks in Washington were overloaded because so many people in the crowd were simultaneously sending digital photos to their friends back home. Whichever mobile phone maker can solve this issue first will be able to deliver vaster content to customers and thus gain a real advantage.

Interestingly, Japan’s cell phone network deals with this issue much better than the networks of either European countries or North America. There is a consensus among experts and ordinary visitors to Japan (including myself), that Japanese mobile phones are more advanced than the ones used in other countries. (I can speak with some authority on this issue, as I live in a household that uses three different mobile phone standards, Japanese, UK, and Canadian).  A recent issue of the New York Times had a fascinating article examining why Japan’s superior mobile phone technology has not been adopted in other countries. If the Japanese can get other countries to adopt their standards, then Nortel’s patents may or may not be worth less than RIM and the other people bidding for them now think.