Lenore Palladino is Associate Professor of Economics and Public Policy at the University of Massachusetts Amherst. She suggests that a good company is one that is ‘innovative and responsible’ (page i). She believes that large corporations focus ‘too little on creation and too much on distribution’ (page 2) and she places the blame squarely on the shoulders of the doctrine of ‘shareholder primacy’. In Good Company she, therefore, sets out ‘to provide a sketch of how ending shareholder primacy and reorienting corporate decision making towards productivity would work in practice’ (page 1) and to propose policies to ‘reorient corporations away from shareholder primacy and toward innovation’ (page 9).
Extraordinarily, however, the book provides little evidence in support of either the link between shareholder primacy and a lack of innovation or the efficacy of her proposed policies in promoting innovation. Instead, there are many indications of other policy objectives, leaving a strong impression that Palladino’s objective is not really innovation but the implementation of a left-wing socio-economic agenda.
The book contains many left of centre linguistic markers such as references to ‘elites’, ‘progressive legal scholars’ and ‘industrial democracy’. It is also littered with gratuitous references to matters that are, at best, peripheral to the subject matter. The number of such references to race verges on the obsessive (there being five before the end of chapter 1!) and these are joined by various references to climate change and a throwaway claim that ‘hospitals and schools should be fully public’ (page 9). Furthermore, Palladino seems to regard many of her propositions as already proven since she often simply asserts them or quotes other like-minded authors as if stating their opinion is sufficient to establish her point. The more striking unproven assertions include the claim that ‘Shareholder primacy has led to extreme wealth inequality in the United States’ (page 50) and the ex-cathedra statement that ‘companies with the most market power are not paying nearly enough in taxes’ (page 77). Like her basic contentions regarding innovation, neither of these propositions is self-evident.
Leaving aside issues in relation to her specific proposals, Palladino’s overall thesis is built on sand. She attacks a version of the doctrine of ‘shareholder primacy’ that considers the only duty of directors to be the advancing of the financial interest of shareholders regardless of all other considerations. Of course, this version has been advocated but there are other versions that incorporate nuance that, at least, mitigates some of the issues that Palladino perceives, including the concept of ‘enlightened shareholder value’ that is enshrined in Section 172 of the UK Companies Act 2006. In its more extreme forms, ‘shareholder primacy’ is flawed but this should not cause us to dismiss the concept that the shareholders of a company are its owners and that the directors have a duty to promote the success of the company for the benefit of its shareholders within the context of other legal and, equally importantly, ethical duties.
Palladino admits that her book is US focused but this does not excuse her failure adequately to engage with non-US experience. In some cases, she appears to have misunderstood foreign laws and practices. For example, she asserts that in Germany workers represent one-third to one-half ‘of the directors’ of companies falling within the ambit of the co-determination laws (page 85) but in fact worker representation in Germany is at the level of a supervisory board that is not permitted to manage the company and that has carefully circumscribed powers. More seriously, Palladino fails to address the question why, if (as she suggests) some of the reforms that she advocates have been implemented in European countries, those countries appear to have a worse record in innovation than that of the United States, which is generally regarded as among the more innovative economies of the world.
Most seriously of all, Palladino addresses herself solely to publicly listed corporations. She recognises this and says that the next phase of her research will consider the growing importance of the private markets but she does not appear to recognise that the time has passed when one could credibly discuss issues to do with the businesses and governance of major corporations while considering only those that are publicly listed. Huge corporations are now owned by a variety of financial sponsors (ranging from sovereign wealth funds to venture capital houses and family offices) and one cannot analyse corporate failings and propose solutions to these failings without considering such corporations.
Palladino presents proposals relating, among other things, to: US federal incorporation and the licensing of major corporations; a ‘real seat’ doctrine of state incorporation (that is, a requirement that a corporation be incorporated in the US state with which it has the closest connection); stock buy-backs; the taxation of corporations (including a ‘wealth tax’ on market value); shareholder taxation (including a proposal that tax be paid on unrealised gains); employee-elected representatives on corporate boards; changes to the duties of board members; works councils; employee equity funds owning perhaps 20% of corporations; and proposals relating to asset managers, including the establishment of a public asset manager.
Many of her proposals deserve, and in other books have received, detailed consideration and have been the subject of extensive debate. A further contribution to the debate might have been helpful but, adequately to cover all of Palladino’s proposals, the book would have had to be several times longer than Good Company. As it is, Palladino has tried to cram her analysis and proposals into 135 pages and the result is a deluge of contentious assertions and proposals, few of which are adequately worked through. On occasions (for example, in relation to the composition of employee representation on corporate boards), she acknowledges the complexities and the need for further thought but all too often she does not acknowledge these things and, in any event, she fails to distinguish between issues that are mere points of detail and those that raise questions that pertain to the viability, effectiveness or potential adverse consequences of her proposals.
Her discussion of what she perceives to be the evils of share buy-backs in the USA illustrates many of the book’s frustrating weaknesses. She suggests that buy-backs ‘are used to prop up share prices while contributing nothing to corporate productivity’ (page 63) and some of her concerns have an element of truth. In particular, there are legitimate concerns about the opportunity provided for insider dealing and market manipulation. However, whilst there is evidence of wrongdoing, there is little that suggest that wrongdoing is endemic or that it necessitates anything more than consideration of the detail of the applicable regulations. In fact, it is strongly arguable that the real problem is the structuring of executive share option and other incentive packages rather than the buy-backs themselves.
Palladino argues that limiting buy-backs would leave more money in corporations and thus lead to greater innovation but it is by no means clear why this should be the case and she presents no supporting evidence. Money left in a corporation might be used on mergers and acquisitions, a reduction of capital or simply the payment of greater dividends, rather than for innovation.
Palladino also fails adequately to address possible unintended consequences of her proposals. Sometimes she briefly alludes to the possibility of such consequences (for example, she recognises that employee equity funds might result in increased agitation for larger dividends and thus a reduction in the amount of capital available for investment [page 111]). However, there are glaring omissions. In particular, her discussion of the ways in which employees and their representatives might have a say in relation to the running of corporations never addresses the evidence of employee conservatism and, perhaps more importantly, the conservatism of trade unions that historically, in many places, acted as an impediment to the very innovation that Palladino purports to be seeking.
Sadly, despite dealing with important issues, Good Company does not advance current debates regarding corporate purpose and corporate governance. It is likely only to convince those who are already signed up to its underlying philosophy. Those who want to understand the relevant issues and consider carefully the pros and cons of possible reforms need to look elsewhere.
‘Good Company: Economic Policy after Shareholder Primacy’ by Lenore Palladino was published in 2024 by The University of Chicago Press (978-0-226-83650-8). 135pp.
Richard Godden is a Lawyer and has been a Partner with Linklaters for over 25 years during which time he has advised on a wide range of transactions and issues in various parts of the world.
Richard’s experience includes his time as Secretary at the UK Takeover Panel and a secondment to Linklaters’ Hong Kong office. He also served as Global Head of Client Sectors, responsible for Linklaters’ industry sector groups, and was a member of the Global Executive Committee.