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.



When The Chips Are Down

8 06 2014

This week’s Econtalk episode is on the future of work in an age of accelerating technological change. The guests were Andrew McAfeeMegan McArdle, and Lee Ohanian along with with EconTalk host Russ Roberts. The discussion was wide-ranging and included topics such as the idiotic US system for allocating visas to high-tech workers and changing gender roles. However, the discussion kept coming around to the issue of technological unemployment and the possibility that AI will contribute to increasing income inequality by eliminating even more routine jobs when simultaneously boosting the incomes of the 1%ers with the requisite skills.

Last week, the BBC rebroadcast a 1977 documentary called “When The Chips Are Down”. This documentary, which  was about the social impact of the computer, contains extensive scenes filmed inside Silicon Valley companies. The documentary was somewhat prophetic in its discussion of the possible impact of computers on economic inequality.  I recommend listening to the Econtalk podcast first and then watching the 1977 documentary. The really interesting stuff about the socio-economic impact of computers starts around 40 minutes in. The first half of the documentary just deals with the history of the computer– the replacement of vacuum tubes with transistors, the falling cost of computer power, etc.



European Versus American Way of Life

25 08 2009

Bryan Caplan, an economist at George Mason University, has published a blog post entitled:  “Touristic Bias: Why Americans Overrate Europe, and Europeans Underrate America”.

His basic argument is that while a typical European city centre is more picturesque than the average American city, Americans have a better quality of life than people in Europe. Most Europeans, he points out, don’t live in tourist destinations like the Left Bank in Paris. I thought that Caplan’s article was interesting but a little short on statistics, especially when you consider that he is an economist. The absence of really basic stats like life expectancy and the murder rate is really noticeable. Some of the people who commented on his blog replied to Caplan by citing figures that show the American-style suburban car culture that Caplan praises is actually pretty widespread in many European countries. For instance, a reader in Sweden pointed out that some European countries have roughly as many cars per capita as the US (500 per 1000 inhabitants). This fits with my own observations: the UK has massive Tesco supermarkets that are roughly the same size as any Wal-Mart, drive-thrus, and roadside restaurants that are basically the same as the US chains. The cars are bit smaller, but car culture is entrenched. Outside of London and a few other the UK’s other big cities, it would be rare to see a man of working age on a bus during the middle of the day, which would also be the case in the US or any other New World Anglo-Saxon country.

When I read the column, I was left wondering whether Caplan has ever lived and worked in a EU country. I checked his CV and turns out he hasn’t, so I’m not certain why he thinks he is more qualified to write this article than the zillions of academics who have lived and paid mortgages in multiple countries. (I would be interested to hear the Australian perspective on this debate). I have a lot of respect of Caplan and his research, but I think that this particular piece is poorly thought out. Not his best work. A powerful piece of evidence that Caplan could have cited in support of his position but which he did not is that the most EU countries, including the UK, experience net emigration to the USA (i.e., more Britons move to the US each year than Americans came to Britain). I’m perplexed as to why Caplan didn’t cite this data, which could have bolstered his case.

Another big problem with Caplan’s piece is that Europe, unlike the United States, consists of many radically different countries (Sweden versus Moldova). I know that some people like to talk about the EU as a sort of United States of Europe, but it’s not a single country. If you want a fairer comparison, contrast life in the EU with life in the three NAFTA countries: the gap between Manhattan and southern Mexico is probably as great as the different between London and, say, Tirana.

The other flaw with Caplan’s piece, which appears on a pro-free-market or libertarian website is that he appears to suggesting that because life in the market-oriented USA is better than life in the more socialist EU, this somehow proves that deregulation and the free market are the way to go. (He doesn’t say this explicitly, but this appears to be the thrust of his article).

There are several problems with this argument. 1) Caplan hasn’t proven than life for Americans in better than life for (West) Europeans. 2) Life could be better in the US simply because of lower population densities rather than because of differences in how societies organize themselves. New Zealand, Australia, and Canada are essentially more socialist versions of the USA (wide open spaces with a bit more social spending). 3) I’m not convinced that all Europeans countries are less “free” economically than the USA. Some EU countries have policies that American libertarians admire. The USA can be very statist in some areas and some of most prosperous EU countries (e.g., Denmark) are actually quite market-oriented, at least according to the measures used by an international organization of free-market think tanks.

Update: Megan McArdle of the Atlantic Magazine has posted some thoughts on Caplan’s piece. (McArdle’s piece is better thought out than that of Caplan and the resulting discussion thread contains posts of higher average quality, in my opinion).  I liked the fact that she mentioned Toronto in her post for several reasons. First, I’m from there. Second, bringing a third territory, in this case (Canada) into the discussion helps us to clarify our thinking about the differences between the US and “Europe”. It is hard to compare two thing unless you have at least one other thing as reference point – this is true in geometry and true when comparing countries.