Corporate Governance In Contention. Ciaran Driver and Grahame Thompson (eds). Oxford University Press. 2019.
Corporate Governance in Contention, edited by Ciaran Driver and Grahame Thompson, is highly recommended reading for anyone, whether a novice student or seasoned academic, who is interested in this important topic. The book’s central preoccupation, as signalled by the word ‘contention’ in its title, is to counterpose a ‘stakeholder’ perspective on the governance of large corporations, which today account for the majority proportion of output in many advanced economies, to the ‘shareholder’ perspective that is currently dominant in the economies of North America and some parts of Western Europe. As there have been many other recent publications similarly devoted to challenging the shareholder primacy paradigm, there have to be some strong reasons for recommending the present book. And indeed there are.
One is that the co-editors provide an excellent introduction to the book that includes, in addition to a customary brief summary of the chapters, an overarching thematic framework that highlights the main areas of difference and contestation between the two key competing corporate governance paradigms. The central difference concerns what is described as collective engagement: where the shareholder paradigm gives overriding priority to the providers of finance for the corporation, the stakeholder paradigm gives more balanced consideration and importance to all agents that are connected in one way or other to the corporation. The two surrounding areas of concern are those of application where the key claims made on behalf of shareholder primacy are put into question. On one side, there is the matter of enterprise: does the shareholder paradigm promote the economic efficiency of corporations to an extent not possible under the stakeholder paradigm? On the other side, there is the matter of politics: does the shareholder paradigm give rise to a more progressive stance on a broad range of social and political issues than the stakeholder paradigm?
A further reason for strongly recommending this book is that, after having been briefed as to its three major themes, the reader is then offered in-depth critiques of the current direction of corporate governance. Although mounted from contrasting angles of approach, these critiques offer complementary solutions as to what can be done to shift corporate governance in the right direction.
To take a few examples, I begin with Simon Deakin’s chapter which opens the section on corporate forms and the law, ‘Reversing Financialisation: Shareholder Value and the Legal Reform of Corporate Governance’. Its central theme is that shareholder primacy in corporate governance is not underpinned by hard law: shareholders do not own the firm and there is no legal duty on directors to maximise shareholder value. Rather, shareholder primacy has come to be accepted as the dominant corporate governance norm as a consequence of ‘soft law’ codes and standards that have been promoted by institutional shareholders along with other financial actors and that have been endorsed by governments. After providing a lucid account of the processes by which the legal environment has been shaped to accommodate the increasing financialisation of firms, Deakin suggests some legal reforms that might help to reverse the tide of financialisation. These include making substantive changes to current regulation concerning hostile takeovers and board structure, increased state ownership of shares in large corporations (which in certain cases might extend to outright nationalisation) and increased worker representation on company boards.
The call to reverse the financialisation of the corporation is echoed in William Lazonick’s paper, ‘The Functions of the Stock Market and the Fallacies of Shareholder Value’, which opens the book’s section on corporate governance systems and innovation. In his characteristically trenchant style, Lazonick contests the conventional wisdom that the primary purpose of the stock market is to supply cash for companies which can be used to promote productivity capacity. Stock markets have not only been insignificant suppliers of funds for firms, but in certain advanced economies, and most notably in the US, the reverse trend is now the case in that firms are net suppliers of funds to the stock markets through share buy-backs. Contrary to the tenets of agency theory, this reverse flow of cash does not improve the efficiency of firms. Rather, the ‘legalized looting’ of US corporations, as Lazonick puts it, is seriously undermining their long-term productive capability by depriving them of the investment funds needed for technological innovation and experiment. In Lazonick’s view, what US corporations must do to again become the models of innovative enterprise that they once were is to reject the ‘downsize and distribute’ model of corporate governance as promoted by the ideologues of shareholder value in favour of the ‘retain and re-invest’ model.
While the argument that worker participation on company boards improves corporate governance is a recurrent theme throughout the book, the many components of this argument are discussed in more detail in the book’s third section. A fine example is Bob Hancke’s paper, ‘How Including Labour Can Improve Corporate Governance’. The key point that he makes is that the inclusion of labour in the decision-making process is not just about fairness and a more equitable distribution of company profits. It is also about improving the long-term sustainability of a company insofar as a joint capital and labour decision-making structure would help guard against ‘an unhealthy obsession with short term results’.
The one criticism that can be levelled against the book is that little attention is paid to the composition of the shareholder body. Throughout the book there are criticisms of the negative effects of hedge fund activism and rightly so. However, neither hedge funds nor households comprise the major shareholders in large corporations. That position is held by the institutional investors, mutual funds and pension funds and, to a lesser extent, insurance companies. The fact that these institutions market asset portfolios to the public means that they need certain assurances as to both the rate and the regulatory with which cash is returned to them. These assurances are more solid in the case of bonds that pay interest by law than in the case of equities that pay dividends on discretion. Deakin is correct in stating that it is institutional investors who are the main drivers behind the soft law codes and standards designed to constrain managerial discretion over cash disbursements. What he does not go on to say is that this constraint is aimed at giving equities the necessary tangibility that would enable them to serve as stores of value in which clients’ monies can be stored and from which monies can be extracted to pay clients. Several authors, including Lazonick, point out that a key purpose of a share buy-back is to shore up its stock market price. What they do not proceed to point out, however, is that it is household investors who are typically the ones who cash in their shares when given a profitable opportunity to do so, not institutional investors.
The above critical comment on the book in no way undermines my overall assessment that it makes a valuable contribution to the literature on corporate governance. Several arguments presented in the book’s chapters may be familiar from previously published journal articles. This said, what is fascinating when reading all of the chapters in tandem with each other is that one does gain – as is stated in the book’s jacket – ‘a richer understanding’ of why the corporate governance agenda as currently structured is on the wrong track and of what kind measures need to be adopted to put it on the right one.
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Photis Lysandrou is research professor at the City University Political Economy Research Centre (CITYPERC), department of international politics, City University of London. His main research areas, in which he has published widely, are globalisation, global finance, shadow banking and corporate governance. His most recent book is Commodity: The Global Commodity System in the 21st Century, published by Routledge.