Search Results

This chapter reports the results of interviews with senior managers of large Japanese companies in 2007 and 2008. There is recognition of a greater role for the CEO, and of a less collegial approach to management. There is more direct communication with shareholders than there used to be and greater sensitivity to shareholder value, but many companies continue to stress regularity of supply to customers as the main priority. It is accepted that dividend payouts are not going to be as stable as in the past and there is a growing role for independent directors, but they tend to be seen as advisers, not the representatives of the shareholders. On executive pay, there is a perception that the gap between the pay of senior managers and the rest had not become excessive. The idea that shareholders “own” the company has little support.

This chapter analyzes the general level of executive compensation and explains the main components of executive pay packages. It focuses on two approaches that address why executive pay is so high and distributed across so many vehicles. The “optimal contracting” or “incentive alignment” approach stresses that executive compensation must be structured to provide executives the right incentives to manage the firm in a way that maximizes its value. The other approach, “managerial power hypothesis”, asserts that executives capture the pay-setting process and essentially write their own excessive paychecks.

Chapter 5 deals with the 1990s, a decade when changing market conditions dramatically affected perceptions of public companies and the executives in charge. Pessimism prevalent as the 1990s got underway would dissipate in a few years with the American economy and the stock market both thriving. Public company executives ended the decade riding high in a manner that was unmatched throughout the post–World War II era. Concomitantly, confidence in the efficacy of internal and external constraints affecting public company management grew substantially. Optimism about corporate governance would quickly dissipate, however, when public companies suffered a sharp reversal of fortunes as the 2000s got underway.

This chapter focuses on the general transformation of senior corporate executives in the United States from industrialist leaders dedicated to value creation into financial engineers intent on value extraction. It argues that, being incentivized by stock-based pay and legitimized by MSV ideology, senior executives of major American corporations began in the 1980s to turn their backs on long-standard practices of resource allocation: Ceasing to retain profits and reinvest them for the future, many executives placed the emphasis on cost-cutting and distributing profits to shareholders in the form of not only dividends but also stock buybacks Some companies’ distributions to shareholders have exceeded 100 percent of net income for years, even decades. This chapter emphasizes the dire consequence of executives turning from value creation to value extraction.

This chapter summarizes the weight of evidence on incentive compensation and shows how it can be improved through the strengthening of corporate governance. It characterizes a system of beneficial incentives and suggests improvements that can occur within the general framework of corporate governance and regulation. Whether or not the desirable outcome can be achieved, executive pay will still be based on incentive compensation. No matter how refined and improved corporate governance and governmental regulation becomes, the system of executive compensation will still suffer from the plunders of unscrupulous CEOs for whom “too much is not enough”.

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.

This chapter analyses the way in which company law shapes two important markets—the market for executives and the market for corporate control—in the hope of addressing the agency problems identified in Chapter 1. Both sets of rules are controversial. The rules on executive pay make use of independent directors on remuneration committees and various forms of ‘say on pay’ to structure executive remuneration. But they have been criticised for not robustly linking pay to performance and for setting pay at socially unacceptable levels. The rules on the market for corporate control, set out mainly in the Takeover Code, contain a very strong version of the non-frustration rule, making it difficult for incumbent managers to defend themselves against unwelcome bidders. Here, it is heavily debated whether the rule promotes managerial efficiency or encourages ‘short termism’.

This concluding chapter suggests the following changes in the United States’ corporate-governance regime that can get its economy back on the path to sustainable prosperity: (1) rescind SEC Rule 10b-18 and ban open-market stock repurchases; (2) redesign executive pay to incentivize and reward value creation, not value extraction; (3) reconstitute corporate boards of directors to include to include representatives of households as workers, as taxpayers, and as savers as well as households as founders—and exclude the predatory value extractors; (4) reform the corporate tax system so that it returns profits to taxpaying households and funds government spending on infrastructure and knowledge for the next generation of innovative products; (5) redeploy corporate profits and productive capabilities to support collective and cumulative careers, and thus enable widespread upward socioeconomic mobility.

This chapter addresses some principal questions about labor market justice. Some of these are old concerns about the persistence of poverty due to the forces that keep wages low among unskilled workers. This leads to worries about exploitation. It will also examine the concern, most often associated with Marx, that much paid work is of a character that is detrimental to human flourishing, or serves to “alienate” workers from their labor. The focus then moves to more recent trends, such as the rise in executive pay and other aspects of “labor market polarization.” These motivate some discussion of whether it’s unjust for a few people to earn so much more than everyone else.

This chapter argues that the low risk-taking behaviour predicted of mutual financial institutions like building societies by certain theories of the firm can only be expected of small, regional building societies which were less exposed to competition than their larger, city-based counterparts which competed more aggressively for investor funds and mortgage business. In the interwar period, increased competition between societies led to levels of risk taking hitherto unseen in the movement, leading to calls by the movement’s leaders to consolidate the sector into the hands of a few large societies. This process of consolidation promised to benefit members and to improve the overall efficiency of societies in the movement. The evidence gathered in the chapter, however, shows that these promises were largely unmet. Rather, it is shown that the only beneficiaries of firm growth were building society managers, who were able to extract higher pay from empire building.