- 17 Mar, 2021
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Introducing issues in corporate governance and society: shareholder primacy and corporate purpose
Each panelist will submit a discussion paper (~1500 words) in each of the classes on days which they are panelists. Each discussion paper should address all of the discussion questions for the week on which the panel is held plus all of the questions from one of the previous weeks.
Discussion of current week material and previous week material will have equal weight and should be roughly of equal length, and whenever possible connections should be made between current and previously covered materials.
Please answer the following questions only from the readings uploaded.
Introducing issues in corporate governance and society: shareholder primacy and corporate purpose.
Sanford Jacoby (2005) “Corporate governance and society” Challenge 48(4): 69-87
Lynn Stout (2012) “The problem of corporate purpose” Issues in Governance Studies 48: 1-14
[see also Sebastian Mallaby (2019) “How economists’ faith in markets broke America” The Atlantic Sept. 2019
Johan Hielbron et al (2014) “Origins and diffusion of shareholder value in US.” Theory and Society 43(1): 1-22
This week’s readings continue to introduce the key debate that the course will revolve around: that of corporate purpose. What objective ought the management of a publically traded, for-profit, private sector corporation pursue? One answer is that the criterion of management performance should be to maximize shareholder value. Stout and Jacoby both maintain that corporations’ increasingly single-minded focus on shareholder value since the 1980s has resulted in corporate irresponsibility and socio-economic problems. They do not, however, necessarily converge on a single explanation for the shift toward shareholder primacy, nor on the desirable alternative. The Hielbron study attempts to use empirical, quantitative evidence to help resolve the question of when the concept of “shareholder value” took off and why. The recent Mallaby article provides a brief overview of the background to the debate, providing you with a bit of information on Berle (who we will meet next class) and on the economists that Stout complains about (who we will study in depth later).
Heilbron et al deploy a bit of jargon developed to label different roles social science ideas can play in society. The “performativity” thesis states that ideas that purport to describe how people act can affect how they act. Social science ideas can also play a “legitimating” role: ideas that describe how people act can be used to justify those actions retrospectively. For example, suppose there is a theory that says it is common for students to cheat on exams. If learning about that theory makes students more likely to cheat on exams than they otherwise would, that would be an instance of performativity. On the other hand, maybe students who learn about the theory are not more likely to cheat, but if they are caught cheating they will try to use the theory to excuse their actions. That would be legitimation.
Now, let’s turn back to shareholder primacy. Stout blames neoliberal theorists like Jensen for the rise of shareholder primacy, and points out that their theories received a lot of attention. The performativity hypothesis says that attention to Jensen’s ideas influenced the corporate world to shift from a managerialist to a shareholder primacy orientation. The legitimation hypothesis says that this shift occurred for other reasons, and that Jensen’s ideas became popular because they could be used to justify this shift. Hielbron’s study tries to judge which of these hypotheses is best supported by empirical evidence.
Discussion questions:
1)What do Jacoby and Stout think is wrong with shareholder value as a corporate purpose? Do they agree on the problem? What does Stout mean by “managerialism” and “rational apathy”? Where does Jacoby discuss rational apathy and managerialism (without using those terms)? What is the Business Roundtable’s criticism of the stakeholder model and how does Stout respond to that criticism?
When did shareholder value displace managerialism in thinking about corporate governance, for what reasons, and to what effect? Compare & contrast Jacoby’s and Stout’s answers to these questions.
Why, according to Stout, are shareholders not owners of the corporation, and why does this matter for her argument? What do the social science terms “tragedy of the commons”, “external cost” mean, and what role do these concepts play in Stout’s argument? Why does Jacoby say [p. 86] that by “giving shareholders a real opportunity to be represented on boards, it would repair defects in the crude shareholder value model”? Does that make sense? [See this Canadian update on the proxy access reform issue.]
2) What do Hielbron et al mean when they suggest that “the shareholder value doctrine…had a legitimizing rather than a performative function” (19)? Do they agree more with Jacoby or Stout (week 2)?) What do they think accounts for the rise of shareholder primacy governance practices? Explain the logic of their study: what evidence did they analyze and how was it relevant to the performative vs legitimizing function question? (To answer this question, you will have to pay attention to the section on “research strategy” pp. 6-7, as well as to the results of their study and their interpretation of those results.)
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3) Focusing now on the more complete documents (1997 and 2016), what do you see as the main topics of corporate governance? What are the main recommendations and criteria of good corporate governance, according to the BRT? How are these related to the BRT’s shifting views about corporate purpose?
Please find ALL the readings attached..
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