For whose benefit should large corporations be run?
Frank Partnoy, professor of law at the University of San Diego, raises an extremely critical question today in the Financial Times:
When my new law students arrive for classes later this month, I will begin with one question: for whose benefit should companies be run?
Most for-profit companies are run for the benefit of shareholders. But banks have been run more for the benefit of employees.
As banks revert to their more limited historical role in capital allocation, they will face hard choices about who to favour: shareholders or employees?
His focus is on the banking industry but the issue is far greater. If I were one of his students, I’d immediately object that there are at least four interested parties, not two: shareholders, senior management, employees, and the greater public good.
Let’s first look at the battle lines drawn by Partnoy – that between shareholders and “employees”. He doesn’t distinguish between management and rank and file employees but let’s assume he’s referring to top management and the cadre of extremely well paid. Between shareholders and these “employees”, I’d go with the employees. The shareholders, after all, are overwhelmingly absentee owners who know nothing of the industry and contribute nothing other than the transfer of a portion of their speculative funds into the publicly traded stock. One of the major economic justifications for profit is the incentive it provides to efficient management, and I would argue therefore that the managers as the controllers have by far the better economic claim. Profits to shareholders beyond some nominal amount serve little economic purpose since this group has completely surrendered its control function.
The rank and file employees are a separate interest group that I’d argue also have a greater claim than the absentee owners since their actions are far more critical to the success of the corporation.
The question of who should receive the profits of industry is very old and was notably addressed by Adolf Berle and Gardiner Means back in 1932 in their classic book “The Modern Corporation and Private Property”. In this work, they make an extremely effective case that the large corporations should be run in the interests of society.
They point out that there are two forms of wealth existing side by side which are functionally distinct: passive wealth that’s liquid, impersonal, without responsibility, the value of which is determined largely by the ebb and flow of the global markets. And then there’s active wealth which is like a great functioning organism dependent on workers, consumers, management, government policy, and the security holders.
Since all industries are oligopolies and economic power is so concentrated that only 500 corporations control about 40% of global revenues, it seems morally dubious to argue that either management or the absentee shareholders should have the primary claim. To argue in favor of either claim or to see these two as the only interested parties, as does Partnoy, is to argue that such an extreme concentration in global society is an overriding good versus the threat to both democracy and widespread prosperity that such concentrated economic power brings. And, as Partnoy points out in his article, the world is becoming ever less dependent on the need for employees because of technology. The end point of that trend coupled with Partnoy’s value system is clearly quite stark.
As Berle and Means conclude, the class of owners (who own but don’t control) and the class of managers (who control but don’t own) have both been weakened. Passive property rights must yield to the larger interests of society and the mega-corporations should be managed by a neutral technocracy in the public interest.