January 9, 2011
Another Corporate "Problem-Solution" Dance
A while back I blogged about the "problem-solution dance" introduction I usually give to my Corporations class. Here's another version based on the notes I took while listening to David Yosifon's presentation at the AALS panel on "Corporate Political Speech and Dueling Conceptions of the Corporation in Supreme Court Jurisprudence":
- Problem: All thoughtful people agree corporations should serve a pro-social purpose, but how do we best achieve that goal?
- Solution: Many believe elevating shareholder wealth maximization as the primary (Only?) corporate objective will achieve the greatest social good.
- Problem: Shareholder wealth will often be maximized, at least in the short term, via exploitative conduct and thus the market will often favor exploitative corporations even if no particular individual in the firm consciously pursues exploitative policies.
- Solution: Regulations specifically targeted at limiting exploitative conduct, like environmental or labor laws, will do a better job of correcting this problem than corporate governance adjustments.
- Problem: Corporations exercise sufficient political influence to keep such regulations from becoming meaningfully effective.
- Solution: Insulate politics from corporate influence.
- Problem: Citizens United.
- Solution: Now we're back to the "second best" solution of tweaking corporate governance. Yosifon favors imposing on corporate directors a duty flowing to stakeholders.
Putting aside for the moment questions about whether Citizens United actually created a new problem, I'm willing to consider solutions based on corporate duties flowing to shareholders so long as they are actually enforceable by stakeholders. Otherwise, they risk just serving as additional cover for management self-dealing. (I should note here the [paraphrased] comment of a member of the audience who claimed to have worked extensively at the highest levels of corporate hierarchies: "I've never seen any indication that directors or managers of corporations care about shareholders or the long-term well-being of the corporations that pay them. Rather, they appear solely concerned with their standing in the little club of well-paid executives and directors who will gladly sacrifice both shareholder and corporation when the pending bonus check quarantees a comfortable retirement.")
Proxy access is obviously another proposed solution currently garnering quite a lot of attention. I recently read some comments suggesting that one of the reasons empowering shareholders won't work is because they themselves favor excessive risk-taking since they are well-diversified. I would argue, however, that there is a difference between diversified shareholders favoring more risk than if they had all their eggs in one basket and favoring the sort of unconsidered risk-taking (i.e., the analysis seemingly stops with the finding that everyone else is "dancing") that seemed to mark the recent financial crisis.