April 3, 2006
GM and Constituency Statutes
Those fans of "constituency statutes" and other theories of board management style (team production) should note GM's problems. There is a sizable group of academics that favor empowering boards of directors to favor constituencies other than shareholders (employees, suppliers, local citizens) in corporate decision making. GM overpaid labor, buying peace for managers, at the expense of shareholder profit (and share price) for years. Now GM's survivability is at stake; employees themselves would be better off it the GM board had been more careful of shareholder profits. Railroads situation is similar to GM (they have special legislation that protects their unions). Compare GM's (or the railroad's) situation to that of Caterpillar's. Caterpillar went through some tough strikes to hold the line on labor costs; Caterpillar is now doing very well and is an international success story. The theory of shareholder primacy, rejected by many academics, is that in 9 cases out of 10, sustained shareholder profits are a surrogate for long-term gains for other constituencies -- when shareholders make money over-time, employees have good, stable jobs. If we hold boards accountable for profits, all constituencies, over-time, also benefit. In those rare cases in which interests are at conflict and do diverge, in takeovers for example, shareholder profits should be preferred. A bidder should not, by law, have to make a payment to workers to buy a company (unless contractually stipulated).
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They can pick any constituencie they like, they are still Toast.
Posted by: Robert Schwartz | Apr 4, 2006 12:36:21 AM
This would be all good and well if boards of directors actually represented shareholders. The strong empirical evidence, however, is that they represent CEOs, rather than shareholders, except in the rare cases where one shareholder has a majority or near majority stake in the business.
Posted by: ohwilleke | Apr 5, 2006 3:29:17 PM