Some Thoughts on the Accountable Capitalism Act

17 08 2018

Over in the US, Senator Elizabeth Warren has published the details of a proposed law that would fundamentally change US corporate governance. Matt Yglesias has given us an excellent summary of Elizabeth Warren’s corporate governance bill. Yglesias draws on a great deal of academic research to show why the bill’s core idea, requiring large US corporations to give workers’ representatives board representation, is a good idea. As is typical in a Vox piece by Yglesias, there are copious references to academic research on the problems with US corporate governance (e.g., the short-termist approach that was promoted by the rise of shareholder value ideology in US boardrooms in the 1980s).

Ygelsias writes:

Warren wants to eliminate the huge financial incentives that entice CEOs to flush cash out to shareholders rather than reinvest in businesses. She wants to curb corporations’ political activities. And for the biggest corporations, she’s proposing a dramatic step that would ensure workers and not just shareholders get a voice on big strategic decisions.

Warren hopes this will spur a return to greater corporate responsibility, and bring back some other aspects of the more egalitarian era of American capitalism post-World War II — more business investment, more meaningful career ladders for workers, more financial stability, and higher pay.

Later on he writes

What’s more, while the codetermination aspect of Warren’s proposal does draw inspiration from Germany, fundamentally, the pitch for the overall package is a lot closer to “Make America Great Again” than to “make America like Scandinavia.” The basic notion is that the American private sector used to operate in a better, more inclusive way before the rise of shareholder supremacy and with a couple of firm regulatory kicks we can get it to work that way again.

My late grandfather, who was an old-line communist in his day, used to tell me with mixed admiration and regret that FDR had saved capitalism by entrenching institutions that guaranteed broadly shared prosperity. Those institutions, fundamentally, are what was undone in the shareholder value revolution.

Warren’s bet is that at a time when the political right is increasingly not even bothering to pretend to offer economic solutions anymore, America can pull off the same trick a second time — offering the public not a huge new expansion of government programs, but a revival of the midcentury stakeholder capitalism that once built a middle class so prosperous that the idea of surging mass interest in socialism was unthinkable.


I’ve co-authored a historical paper that deals with many of the issues mentioned here (fingers crossed, it should come out later this year).  I am, therefore, fascinated by the debate that Warren’s bill has sparked. For a gateway into this debate, see here, here, here, here, here, and here. I will continue to follow this debate and will doubtless have more to blog about in the future. Right now, I have four main thoughts about the bill.

  1. First, as a business historian, I am fascinated by how history has been used by the advocates of co-determination in US companies. As I see it, history is being used in two main ways: to try to understand what the hell is going on in the world right now (let’s call it sense-making use of history) and then to persuade others that the corrective to the problems now facing US capitalism include co-determination (you can call it the use of history for sense-giving or rhetorical history, depending on which academic clique you prefer to get your jargon from). In terms of the use of history for thinking about problems, we see this use of history in the prominent role that historical scholars, including Business History Conference member William Lazonick (U Mass Amherst), played in helping to work out the ideas that went into this bill. (Other academics also appear to have been part of the Brains Trust behind this bill). For years, Lazonick has been writing about the terrible effects  the adoption of Shareholder Value Ideology in US firms has had on R&D expenditure, treatment of workers, etc. In his scholarly works, he has contrasted SHV with the philosophy that informed how US companies were run in the period from the 1940s to about 1980. Lazonick’s jeremiad against the post-1980 excesses of SHV can be viewed, in part, as a call for a return to “the Good Old Days.” It’s interesting to see how the historical research done by Lazonick and others (e.g., Emeritus Dean Roger Martin of Toronto’s Rotman School of Management) is now starting to inform the thinking of policymakers (e.g., Warren) and journalists (e.g., Yglesias). As the popularity of slogans such as “Make America Great Again”, appeals to restore a previous (imagined and vaguely defined golden age) can be effective in political communication.
  2.  Warren’s bill says that the requirement that workers have board representation in corporations would only kick in once a firm’s revenues hits the arbitrary threshold of $1Billion per year. I think that companies could evade this requirement via the subdivision of firms owned by a single holding company. Obviously this provision of the bill needs more thought.
  3. What about the representation of the overseas workforces of US companies? What about the representation of workers based in the US who aren’t US citizens? The cosmopolitan internationalist in me is sympathetic to the idea of giving non-citizen workers the right to vote for representatives on US corporate boards. However, if I were a political strategist advising Warren on how to sell this proposal to working-class native-born Americans, I would suggest that she create a conceptual linkage between national democracy and workplace democracy by restricting the right to vote for board representatives to those workers who also have the right to vote in US elections (i.e., to citizens of adult age).
  4. My libertarian friends ought to support this measure as involves less bureaucracy and less state control of firms than the main alternative mechanism for limiting shareholder power that is being discussed right now (i.e., more intensive regulation of firms by the state). Indeed, I envision a grand bargain whereby the core reforms in Warren’s bill were coupled by de-regulation. I think that libertarians ought to agree that Warren’s short bill is preferable to the massive Dodd-Frank legislation and thousands of pages of regulatory rules that grew out of it.



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.



Killing the Golden Goose: Corporate R&D and Shareholder Value Ideology

5 02 2015

An article in Vox reports on new academic research on the plunging percentage of corporate revenues that are devoted to R&D. The paper that is the basis for this article is by Ashish Arora, Sharon Belenzon, Andrea Patacconi.

In the early 20th century, universities weren’t doing as much cutting-edge research themselves (though they were producing a flood of PhDs). So firms like DuPont began investing heavily in scientific capacity. Later, when companies like AT&T and IBM had monopolies in their respective fields, they could afford to continue funding huge scientific research labs.

But while all this corporate research was hugely beneficial to society, it didn’t always produce huge returns for shareholders. Many companies simply failed to commercialize their own discoveries. Xerox’s PARC famously invented the graphical user interface — only to see Apple and Microsoft got rich off of it.

Arora, Belenzon, and Patacconi document that the percentage of revenues devoted to corporate R&D has fallen since 1980. However, they don’t consider the most obvious explanation for this decline: the rise since 1976 of the pernicious ideology of shareholder value. The money that should be going into corporate R&D is being wasted on stock buybacks and other expenditures driven by the fixation on shareholder value.

The Chicago-trained academics who convinced a generation of MBA students that the sole responsibility of a CEO is to increase the share price have a great deal to answer for. Thank god not all CEOs believed that idea: if they had, we never would have had the iPad or continuous price cuts for the Model T. Steve Jobs and Henry Ford both challenged shareholder value ideology and made the world a better place for it. For Jobs, see here, for Ford’s famous fight with shareholders, see here.

The fixation of shareholder value is dangerous, as Roger L. Martin and others have documented. The solution, however, is not for more government regulation but for entrepreneurs and company executives to push back against this idea with both words and deeds.

Personally, I think that the paper by Arora, Belenzon, and Patacconi could benefit from more engagement with the literature by business historians on the evolution and impact of the ideology of shareholder value.  They could start with:

Lazonick, William, and Mary O’Sullivan. “Maximizing shareholder value: a new ideology for corporate governance.” Economy and Society 29, no. 1 (2000): 13-35.

P.S. I’m working on a paper with Kevin Tennent (York Management School) that deals with shareholder value ideology. It is called “Stock Markets, Corporate Governance, and Financial Capitalism”