Search Results

This chapter presents an empirical analysis of the implementation of the “company with committees law” of 2002 that was aimed at expanding the role of independent directors. Most boards continue to have a significant executive presence and external directors are treated as advisers and associates rather than as monitors of management or as agents of the shareholders. However, there has been an increase in external directors across all companies (not just those opting into the new law), and a clearer separation between monitoring and execution. Because the core of the “community firm” appears to remain intact, the chapter interprets these developments as a renewal of the postwar model, stressing elements of continuity along with the adaptability of the Japanese corporation in the face of external pressures. A similar conclusion is reached concerning the limited impact on managerial practice of growing shareholder engagement, including recent instances of hedge fund activism.

This chapter uses innovation theory to provide both a general theoretical critique and a selective empirical critique of the use of agency theory to rationalize the looting of the U.S. business corporation as enhancing economic efficiency. It focuses on three empirical works, Bebchuk and Fried, Pay Without Performance (2004); Bebchuk, Brav, and Jiang, “The Long-Term Effects of Hedge-Fund Activism” (2015); and Fried and Wang, “Short-Termism and Capital Flows” (2017). The chapter contends that MSV ideology as promulgated by agency theorists has contributed to inferior corporate and economic performance. It then argues that, for analyzing the operation and performance of the economy, innovation theory should replace agency theory.

The debate over corporate governance is skewed by the common misunderstanding that shareholders are the owners of companies, and are entitled to have them run in their interest. The legal model of the firm is more nuanced, seeing the corporation as a complex entity characterized by co-operation between the suppliers of capital and labour, with a co-ordinating role for management. The elevation of shareholder primacy as a focal point for corporate strategy over recent decades is the result of government deferring to financial interests in the making of rules governing takeovers and board structure. Reversing financialization, and the negative impact it is having on social cohesion and innovation, will require a new legislative framework for corporate governance, with a greater role for employee voice and a reorientation of investment priorities.

Chapter 1 presents the wide public, political, and media attack on stock market short-termism. It outlines the channels through which stock market short-termism is seen as seriously damaging the economy and hurting the average worker: slashed investment, cash-burning buybacks, R&D cutbacks, environmental degradation, global warming, and sidelined employees. It describes the views of senators, presidential candidates, and presidents on the issue.

The Introduction begins by recounting the popular view that stock-market-driven short-termism severely damages the US economy. Firms forgo the R&D they need, cut capital spending, and starve themselves of cash by excessively buying back stock to satisfy Wall Street. Stock market pressure means directors and managers cannot manage for the long-term when their shareholders furiously trade their companies’ stocks, they cannot invest enough when stockholders demand rising quarterly profits, they must slash R&D when investors demand that precious cash be used to buy back stock, and they cannot even strategize about the long-term when shareholder activists demand immediate results. If that weren’t bad enough, the stock market’s short-termism is also blamed for environmental degradation, for contributing to global warming, and for employee mistreatment. Due to short-termism, corporations are less socially responsible, in a widely-held view. The Introduction exemplifies these perceptions with statements from national political leaders. However, the Introduction then states, the case for deeply pernicious results from stock market short-termism is weaker on the evidence and on the logic of how markets work than the view popular among pundits and lawmakers. Those lawmakers and pundits who aim at stock-market-driven short-termism can readily miss more likely targets for attacking the ills often attributed to stock market short-termism. For example, stock market short-termism is said to severely damage corporate R&D spending and thereby hold the economy back. But a look at the numbers points to other causes and more propitious targets for improving American R&D. And the environmental, climate, and social responsibility failures emanate from selfishness—externalities in the technical vocabulary—more than from truncated time horizons. The Introduction closes with suggestions that the prominent perception of pernicious short-termism is explained largely by political and social currents: first, targeted interests benefit when stock markets are blamed and, second, a wide but diffuse public dissatisfaction with economic arrangements overall, including discomfort with increasing uncertainty and instability in the workplace, and a generalized disorientation from the rapidity of technological change, which often looks like short-termism but is not.

This conclusion recapitulates how and why the evidence does not support the popular and political understanding that stock market short-termism is severely damaging the economy. Some of the public impetus against stock market short-termism derives from unease over current economic arrangements. Some of it derives from a mistaken belief that short-termism is a major impetus degrading corporate purpose, corporate social responsibility, and corporate effort to head off climate catastrophe. And corporate interests can at times benefit from this popular understanding.