In one of the many mansions of today’s obsession with ‘neoliberalism’ resides a long-running debate about the nature and role of the corporation. Those arrayed on one side of the debate argue that stockholders do not own the corporation – all they own are their own shares – and that corporations should (perhaps consequently) be managed in the interests of a wide variety of ‘stakeholders’. At the other table sit those who believe that, as possessors of the residual rights of control, shareholders are indeed the owners of the corporation and that corporations ought (perhaps consequently) to be managed so as to create the most value for the shareholders. In Company Men, Sean Thomas Delehanty promises to illuminate this debate through an intellectual history of the shareholder-value idea. Unhappily, he is more successful at throwing shade than at throwing light.
On the plus side, the book is well written, and it covers a lot of the right ground. Emerging from Delehanty’s dissertation at Johns Hopkins, it is an attempt to craft the kind of intellectual history of free-market thinking that his advisor Angus Burgin achieved in his important study of the Mont Pèlerin Society. But unlike his mentor, Delehanty is unable to sublimate his own strongly felt ideological position. The result is not only ideological bias – which is common enough, and fair enough with a good argument – but also, in this case, an overall shallowness.
The shareholder-value debate has deep roots, but Delehanty focuses on the modern-day fons et origo of the idea that corporations should be run in the interests of shareholders, a wildly influential 1976 paper by Michael Jensen and William Meckling. Delehanty rightly sees this paper as an attempt, by two free-market-oriented, Chicago-trained economists, to develop the ideas in a famous article by Milton Friedman: that the only ‘social responsibility’ of business is for employees to pursue the goals of the firm’s owners within the constraints of legal and ethical norms. (That would usually, but not always, mean making as much money as possible.) Jensen and Meckling recognized that this implied what economists were coming to call a principal-agent problem. Employees would very likely arrive at work with their own goals, which they could typically pursue at the expense of the goals of the owners.
Jensen and Meckling made this agency problem the centerpiece of their theory of the firm – an attempt, as they saw it, to open up the black box of the firm as portrayed in conventional price theory. On the one hand, the separation of ownership from control in the modern public corporation had untethered the provision of capital from personal supervision, thus unleashing the massive real capital flows that underpinned economic growth. But on the other hand, the agency relationship had its own costs, in response to which firms had generated organizational responses that economists could study. The 1976 paper would become a landmark – though by no means the last word – in the economics of organization, a subfield that was beginning to gain traction in the 1970s.
Delehanty chooses to read the Jensen and Meckling paper, and indeed all of their (mostly Jensen’s) work, as nothing more than ideological weaponry, ‘part of their broader political project of protecting capitalism from democracy. A commitment to shareholder value maximization insulated businesses from the kinds of democratic pressures Jensen and Meckling warned about in their political work, which in turn had a profound effect on the nation’s political economy’ (page 61). As a result, Delehanty never engages with Jensen’s intellectual contributions in any substantive way.
Did the ideas of Jensen and Meckling have ‘a profound effect on the nation’s political economy’? The economic historian Deirdre McCloskey has warned against conflating what she calls think-history with do-history. Good intellectual history must surely engage with the events of the world in order to understand the evolution of thought. Similarly – but with far more difficulty – good economic history must confront ideas as it chronicles events and unearths the economic forces that operate behind events. But it is all too easy to depict a think-history as if it were causative of do-history. Although he occasionally backs off and portrays Jensen’s work as merely ‘justifying’ the movement for shareholder value, Delehanty sometimes seems, especially in an impassioned conclusion, to want us to believe that Jensen’s ideas are largely at fault for the increasing ‘financialization’ of the economy in the late 20th century, which is in turn largely at fault for a litany of what the author believes to be society’s ills.
The U.S. economy was already on the road to financialization early in the twentieth century. But, as I have argued, wars, depression, and the New Deal effectively de-marketized the economy for much of the middle of the century, giving comparative advantage to the large corporations as a locus of economic institutions and to their managers as arbiters of capital allocation. Managerialism continued after World War II, which had bolstered the capabilities of American corporations while destroying their foreign competitors. This was a stable era that saw the slow consolidation of the innovations of the second industrial revolution. Many now look back on the post-war period with nostalgia, even though most segments of American society are far better off today in material terms – and even though critics once complained about the depredations of managerialism in the same loud tones they now use to complain about financialization.
By the 1960s, large American firms were earning economic rents, which appeared to managers in the form of what Jensen famously called free cash flow. Rather than returning those rents to stockholders in the form of dividends, managers acquired firms in wholly unrelated lines of business, creating the conglomerate. (Significantly, conglomerates are in a sense a manifestation of both managerialism and financialization: managerialism because the managers not the market were making decisions about capital allocation; financialization because managers acquired assets in financial transactions rather than developing them internally.) This turned out to be as inefficient in practice as it is in theory, and entrepreneurs arose to unbundle the conglomerate by buying up stock and attempting to unseat the incumbent management, often forcing the selloff of the unrelated divisions. Thus was born the era of the takeover, both hostile and otherwise, which picked up pace over the next decades with the emergence of strong foreign competition and a dramatically changing macroeconomic environment. The assault on the conglomerate both initiated and benefited from the rapid development of external financial markets, which had been a sleepy, clubby sector in the middle of the century.
Delehanty tells much of this story, often in the same terms I have used. But in his account the events of economic history fly by like Burma Shave signs, leaving little real effect. All that seems to matter are the ideas of Jensen, who did indeed provide an intellectual framework for understanding how the market for corporate control created value in the economy. It shouldn’t be surprising that financialization created value, even despite the dramatic (and by no means waste-free) forms it took at the height of hostile takeovers. Handing the task of capital allocation off to a specialized industrial sector brings to bear many more perspectives and much more knowledge than is available to managers for internal decisions, and this is true even if one believes in only the weakest forms of the efficient-markets hypothesis.
What about the terrible effects of financialization? Jensen and others marshaled empirical evidence that takeovers did not reduce overall employment, investment, or R&D but had significantly increased productivity. Delehanty sees these as merely ideological efforts to ‘fully leverage the argumentative power he could gain from claiming the mantle of “scientific” research’ (scare quotes original). Like Nicholas Lemann, whose marvelous if often problematic Transaction Man covers much of the same ground as this book, Delehanty lays the blame for late-century deindustrialization and job loss on financialization while actually using as examples industries – like steel and automobiles – populated by the most managerial and least financialized firms in the economy.
So how important to the events of economic history were the ideas of Jensen and fellow proponents of the shareholder-value theory of the firm? It is certainly true that these ideas were influential. Raiders like T. Boone Pickens could be heard talking about the problem of free cash flow. But would events have moved along much the same path if these ideas had never been uttered? Company Men doesn’t take us much closer to an answer.
Richard N. Langlois is Professor of Economics and Head of the Department of Economics at the University of Connecticut. He is the author of The Corporation and the Twentieth Century: The History of American Business Enterprise (Princeton University Press 2023).
Corporations and Persons is not for the casual reader: the first half comprises a dense and highly contentious examination of the nature of personhood and moral responsibility and the second half includes a torrent of assertions relating to alleged duties of corporations which requires slow and careful consideration.
That said, the book deals with important issues. David Silver argues that ‘the corporation is … a kind of person in moral relationship with human beings, and in particular with democratic society’ (page 1). He thus considers that corporations have moral responsibilities and, ‘in a certain abstract sense’ (page 5), moral rights and he seeks to describe these responsibilities and rights. Unsurprisingly, he considers the acceptance of his thesis to be important, stating ‘I have written this book to urge all of us to adopt an understanding of the relationship between corporations and the rest of democratic society which is grounded in a commitment to liberal democratic values’ (page 186).
Silver rejects ‘the idea that we have theoretical intuitions which directly provide us with knowledge of the nature of moral responsibility’ (page 12) but his view of such responsibility is nonetheless ultimately subjective. He refers to our ‘reactive attitudes’, which he describes as ‘a family of mental states which includes blame, resentment, gratitude, indignation, and appreciation’ (page 11) and he goes on to assert that ‘we should understand our theoretical intuitions about moral responsibility as arising out of our efforts to make sense of our reactive attitudes, and then judge their validity insofar as they accurately make sense of them’ (page 12). It is thus ultimately on the basis of our ‘reactive attitudes’ that he concludes that corporations have moral responsibilities.
He recognises that he is dealing with ‘age-old questions’ of philosophy (page 9) and he seeks to deal with a number of modern objections to his theories. However, although some of what he says is powerful, it does not dislodge the most serious objections. In particular, Christians and other monotheists must surely start with a concept of morality that relates to God: to say that someone has a moral duty is to say that they are accountable to God in respect of their behaviour. The implication of this is that only sentient beings can have moral responsibilities and, since corporations are not sentient (a fact that Silver accepts [page 4]), they cannot have such responsibilities. In this connection, it is interesting that Silver himself slips into using language about corporations that implies sentience (e.g. ‘corporations can have a messy set of dispositions towards their moral obligations’ [page 20]).
Quite apart from theistic arguments, contrary to Silver’s view, David Shoemaker is surely right to assert that corporations (in contrast to their directors and managers) ‘cannot be sensible targets of angry blame’ (page 17). To say that a corporation ought to have done something is no more than a shorthand way of saying that those running the corporation ought to have ensured that the relevant thing was done. Anger is only meaningfully directed at them. Anyone who doubts this should imagine a situation in which a corporation has no directors or managers and ask whether they could meaningfully be angry with it.
Silver accepts the existence of objective value and thus objective morality and he centres the latter in ‘the intrinsic value of human beings qua sentient person’ (page 45). Such a starting point may well lead to conclusions similar to those that Christians draw from the idea that human beings are made in the image of God. However, on its own, it leads to an entirely human centred morality which is rather narrower than a morality that starts with God’s creation and care of all things and the notion of responsibility to God. Furthermore, Silver goes on to state that his theory ‘analyzes the world in terms of how to create the greatest level of rational self-governance that can be made available to each person in society’ (page 46; emphasis Silver’s), which elevates self-governance from being a relevant consideration to a central position that is potentially dangerous and is certainly contrary to a monotheistic view of the world.
On the basis of his theories of personhood and morality, Silver seeks to establish the purpose of corporations, which he believe is ‘to create products and services that provide a benefit to those who ultimately use them’ (page 63). He then moves on to describe a large number of duties that he believes corporations owe (25 of varying levels of specificity are listed on page 174) and a lesser number of rights that he believes they enjoy. His view of purpose is contentious but not new and there are books that argue for similar purposes in more detail (e.g. the books by Colin Mayer reviewed on this website). Likewise, there is little new in the duties and rights that he advocates, although this is not to say that they are either uncontentious or even clear. Indeed, many of the alleged duties, as listed on page 174, are not adequately backed up by argument and many of them are vague (e.g. the assertions that corporations should not seek more than their ‘fair share of attention from policy makers’ [page 155]).
Much more seriously, there appears to be a fundamental conflict between, on the one hand, Silver’s reaction to the divergence between his views and the laws of the USA and, on the other hand, his stated commitment to the upholding of democracy. This conflict is most evident in relation to corporate purpose. Silver’s view is, of course, out of line with the law of the State of Delaware (where a large proportion of major US corporations are incorporated), which requires that corporations focus, at least primarily, on the pursuit of profit. At one point, Silver appears to accept that Delaware law inevitably trumps his view: he says that ‘It is up to each democratic society to make its own determination regarding the purpose of the firm’ (page 53). Indeed, he goes further, saying that ‘democratic citizens have the prerogative to institute a system of democratic social governance, which assigns moral and legal rights and duties to individuals and institutions’ (page 54; emphasis Silver’s), which is a truly extraordinary statement in so far as it asserts that morality is determined by the state! However, at the same time, Silver argues for civil disobedience by the managers of Delaware corporations (i.e. non-compliance with the Delaware law relating to corporate purpose [pages 96-99]). How does he reconcile these statements?
The answer is: by characterising the relevant Delaware law as ‘authoritarian’ and ‘undemocratic’. He says that ‘I call a social decision-making process authoritarian if it does not track the values and judgments of the people it affects’ (page 91) and, having stated that ‘interstate competition for corporations is an authoritarian force’, he concludes that ‘to the extent that Delaware’s corporate code posits a legal duty to maximise profits, this lacks democratic legitimacy’ (page 93). This in turn leads to the conclusion that ‘non-compliance [by managers with that legal duty] can be justified given that the law’s understanding of their duties was generated in an authoritarian manner’ (page 98).
This is breathtaking! He simply redefines the word authoritarian so as to include, and the word democratic so as to exclude, things that he does not like. Delaware’s laws may be undesirable, even unethical, but they are constitutional, established through the democratic process and not authoritarian, using these words in their normal senses. Furthermore, leaving aside the linguistic sleight of hand, if a democratic society is to survive, the bar for civil disobedience must be set far higher than Silver suggests.
Silver uses the same technique to attack court decisions that he does not like, including both cases upholding and interpreting the Delaware laws that he dislikes and the much debated Citizens United case, in which the US Supreme Court overturned laws restricting political spending by corporations. He describes the latter as ‘highly antidemocratic’ (page 115) and, at one level, he has a point in relation to this: the role of the US Supreme Court has the effect of transferring power from the legislatures of the USA to the courts. However, while this may or may not be desirable, it is the consequence of the US constitution, which is itself a democratically adopted and amendable instrument. Furthermore, the nature of a Supreme Court decision (i.e. whether or not it is antidemocractic) cannot possibly turn on whether or not it determines that a particular matter is or is not in breach of that constitution.
The strangest thing about Silver’s book is the fact that he could have argued in favour of the duties (and indeed rights) that he discusses in the second half of the book without the need to argue that corporations are morally responsible persons. For example, he could have argued in favour of his view of the purpose of corporations by arguing that their managers have a duty to pursue this purpose. Indeed, as the book progresses, Silver talks more and more about managers and, even human beings in general. In particular, he recognises that the question of civil disobedience is, in reality, a question of the conflict between what he sees as the moral duties of the managers of corporations and their legal duties. He also acknowledges that many of the duties he asserts are duties applicable to all people and his comments about democratic legitimacy are clearly independent of the philosophical issues that he has considered earlier in the book.
This contributes to the impression that Silver may have an agenda that goes beyond that which is the book’s stated purpose or at least a desire to appeal to a particular audience: at several points, there are passing references to stock issues that suggest virtue signalling (e.g. there is a short paragraph on page 49 that crams references to ‘racial and ethnic minorities’,’ indigenous peoples’ and ‘people with nontraditional genders and sexual orientations’ into a few lines); his comments on the Citizens United case include the statement that the decision ‘reflected … close personal connections between the national political and industrial elites, and perhaps a new understanding of their shared class interests’ (page 115); he asserts (without argument) a duty ‘to develop an historical awareness of … the ways that the history of capitalism is intertwined with the history of colonialism, racial oppression, and slavery’ (page 167); and the main part of the book ends with criticism of the repeal of the provisions of the US Glass-Steagall legislation that, in essence, required the separation of commercial and investment banking, an attack on the suggestion that misguided government policy relating to lending to minorities was a cause of the Global Financial Crisis, an attack on the ‘unfair’ response of the US Government to the crisis, and statements relating to the duties of corporations in respect of climate change – all in the space of just over two pages (pages 176-178)!
The book raises important issues but it is deeply flawed. The examination of the philosophical issues in its first few chapters is worthy of study, albeit with considerable care. However, those wishing to consider in detail the duties of corporations and their managers would be better off looking elsewhere.
‘Corporations and Persons: A Theory of the Firm in Democratic Society’ by David Silver was published in 2025 by Oxford University Press (978-0-198-94068-5). 189pp.
Richard Godden is a Lawyer and a Consultant of Linklaters. He was a Partner of Linklaters for 36 years during which time he advised on a wide range of transactions and issues in various parts of the world.
Richard’s experience includes his time as Secretary of the UK Takeover Panel and later as a member of its rule making committee. He also served as Global Head of Client Sectors, responsible for Linklaters’ industry sector groups, and was a member of its Global Executive Committee.
He has been the chair of the CEME board since 2023.
This is a spectacular book whose title only hints at its true ambition. Economist Richard Langlois brings depth to both the overarching framework and to finely crafted historical details. The book’s broad scope and rigorous analysis across 816 pages (a mere 550 pages of main text with extensive endnotes) can only be hinted at in a review.
At heart, Langlois offers a retelling of the conventional view of the rise of the managerial corporation that Alfred Chandler wrote on nearly fifty years ago in The Visible Hand. Chandler’s triumphalist account of the large, multidivisional, vertically integrated corporation was published in 1977, ironically just as the shifting economic sands and corporate raiders were already beginning to transform corporate life. Until that decade, the story seemed one of linear progress away from personal, entrepreneurial capitalism and toward managerial experts. This theme of a competent managerial elite replacing the messiness of the invisible hand of the market extended beyond the business world to policy and politics more broadly. This context is not lost in the book, and Langlois evokes the broader zeitgeist, drawing on the words of figures such as Herbert Croly and John Kenneth Galbraith.
Langlois’s core task is to explain the rise of managerial corporations in the late 19th and early 20th centuries in light of the fact that market forces later dismantled these same large corporations in the late 20th and early 21st centuries. He does this with a deceptively simple theoretical argument and detailed economic history to substantiate his claims. I’ll examine these dimensions in turn.
The theoretical argument is straightforward. Building on the foundational work of Ronald Coase, we know that economic activities are organized within firms when the cost of achieving them via market transactions would be higher than organizing within the firm. That is, the visible hand of an integrated firm replaces the invisible hand of market relations when it is profitable for it to do so.
Langlois argues that large corporations proliferated in the late nineteenth and early twentieth centuries not because they were a permanently superior institutional form, but because they filled a temporary institutional gap. Rapid technological change outpaced the development of market-supporting institutions—the legal frameworks, financial markets, and infrastructure that enable decentralized coordination. In this environment, integrated firms could organize complex production more efficiently than fragmented markets could. These corporations weren’t naturally better at resource allocation; they were simply the best available solution given the institutional constraints of their era. By the late twentieth century, as market-supporting institutions matured, the advantage of large integrated firms diminished, and many were dismantled or reorganized.
After an introductory chapter introducing the main concepts and the nuanced argument of the book in précis, the eight additional chapters and the long epilogue are arranged chronologically. The author deftly weaves a narrative that combines corporate, intellectual, and political history all analyzed through the mind of an economist who has read the empirical economic literature on relevant topics. At various stages, Langlois explains the role of these different forces on the organizational form of the corporation. The result is a synthesis—patchwork in parts—of the various threads needed for this multifaceted undertaking. Readers may get mired in the detail at times, but the amazing thing about Langlois’ enterprise is that he pulls it off and the result is a magisterial book that deserves to be read widely.
These varied threads are necessary because Langlois argues for the role of contingent history in the rise of the Chandlerian corporation. The role of government misapprehensions about business practices played a serious part in the tendency towards certain types of structures. Technological change and economies of scale can explain some industries, but the phenomenon was much broader. Furthermore, the continued dominance of the Chandlerian corporations is explained by the absence of sophisticated decentralized markets the development of which was hampered by antitrust efforts and shocks. There was a reason the market forces which rose at the end of the 20th century did not emerge in midcentury: the chaos of economic turbulence, world war and cold war. The space for an efficient make-or-buy decision was necessarily closed down when, as was often the case, the courts decided that contracts necessary for external contracting decisions are anticompetitive, or the empowered regulator like the Interstate Commerce Commission or Federal Communications Commission intervenes.
In the nineteenth century, commentators increasingly distinguished between closely held businesses and large businesses. Any history stresses the role of the railroad in the rise of professional management, but Langlois brings to life the economics of the business and the politics surrounding it. Through antitrust and regulations like those on the railroads, government changed the optimal institutional structure. Work in economic theory and history has helped explain the practices of businesses that contemporary legislators and regulators dismissed as anti-competitive.
Langlois’s argument is in summary that the business practices which led to government intervention were often efficiency-enhancing and the policy response was often harmful. When this included things like banning contracting practices this led to more business being done within the firm. This rather bold argument is aided by copious references to work in economics on 19th and 20th century business practices and the implications of government policy, making scholarship on this available to the general readers for the first time.
Perhaps most important for understanding the middle of the 20th century is the string of shocks, namely the two wars with unprecedented levels of war planning and the Great Depression that happened in the first half of the century. In general, these contingencies shifted the decision to bring elements within the firm instead of purchasing on the market. The years between 1914 and 1973 can in fact be viewed as the high watermark of state planning. As more time separates this period from the present, a conception of the degree of state planning and the worldview of the managerial elite in politics, economics, and business is lost.
Among the many terrible events, Langlois calls the Great Depression, the signal catastrophe and ‘a worldwide cataclysm that would alter the history of the century in the US more fundamentally and profoundly than even its two brutal wars’ (page 186). He argues, with supporting evidence, that for the United States the century’s worst year was 1933—the second dip in the Great Depression. Between the peak in 1929 and the low point in 1933 the Dow Jones dropped some 86 percent. Over this same time unemployment rose from 4 percent to 25 percent and estimates suggest that real per capita output dropped by 29 percent to a level not seen since 1901.
Drawing on the consensus in the literature, Langlois argues that this catastrophe was not caused by inherent features of capitalism that make it prone to break down or particular features of the 1929 crash itself but was the fallout from bad policy ideas which he dissects in detail. The crucial set of facts is that the Federal Reserve failed to act appropriately when it allowed the money supply to shrink and thereby unleashed the horrors of debt deflation. Beyond this central problem, the government attempted (among other things) to keep wages from falling in a delusional idea that high wages would allow the surplus of goods to clear. Many of the most egregious attempts of the New Deal were stopped by the courts, but there was a more general attempt to control markets.
In a key summarizing passage Langlois says of the Depression and war years:
The Second World War placed resource allocation even more firmly in the hands of the government and ushered in far more comprehensive nonmarket controls. Between fall 1929 and the end of World War II, prices in the United States often transmitted either false information or no information at all about relative scarcities, and many of the institutions upon which market exchange depended were hampered or destroyed. It is against this background, and not against a counterfactual backdrop of thick and well-functioning markets, that we must explain and appraise the rise of the large American corporation in the middle years of the twentieth century.
In a very interesting chapter, Langlois shows how dynamic market forces similar to those of the 1970s and beyond were already emerging in the 1920s but were diminished by the crisis. Across different industries innovative entrepreneurs were able to access capital and generate complex contracting networks solving assorted economic issues. General Motors and other companies (unlike Ford which because of its eccentric founder was steadfast in remaining optimized for the previous environment) would take advantage of responsive, modular supply chains. Even companies like DuPont sourced their patents not in the famous research labs of the midcentury but from acquisition. Much of this energy would become concentrated in the large corporations not because of their superiority as Chandler claimed, but because they were the only ones to survive the Depression. New restrictions on banking and forms of contracting limited new entrants and startups. Furthermore, the capacity of large firms to internally finance led to the growth of R&D departments at DuPont, GM, GE and others.
As Langlois writes:
The Depression and the policy responses to it had decisive consequences for the American corporation…. The dramatic monetary contraction, along with the failure of the Fed to act as an adequate lender of last resort, led to an amplifying cascade of bankruptcies and bank failures… this had the effect of destroying much of the capacity of the banking system, and of the financial system more generally, to supply financial intermediation. Small firms, which needed to rely on external capital markets, felt the effects far more than large firms, which could rely on internal financing and had close ties to large banks. Thus the Depression initiated or accelerated shakeouts in many industries. In some industries the process was Darwinian, with the most productive firms surviving; in others, survival depended simply on access to capital. At the same time, the New Deal instituted an unprecedented regime of price supports and entry restriction in financial, labor, and product markets. (187-88)
Absent these events one wonders how different the corporate world would have looked in the 1950s and 1960s.
Another merit of the book is the way it reflects on the way antitrust regulation, industrial policy and scientific and technological progress interacted and on the ideological and political context for them. Odd Progressive ideas underlay aspects of antitrust legislation and decisions of the FTC; odd monetary ideas underlay the decisions of the Fed. The science of industrial practices, whether in steel production or electronics, developed rapidly. Government and industry were closely intertwined in both world wars, and he discusses industrial policy at length in an even-handed but negative way. Another component of many chapters is Langlois’s focus on the role of finance, whether J.P. Morgan through the House of Morgan in earlier chapters or leveraged buyouts in the later chapters. Langlois also examines the form of pyramidal holding companies which was viewed as suspect by Progressives and partially banned in the New Deal. The demise of that form (unlike in the rest of the world) plays some role in explaining the American integrated firm and later conglomerates.
This level of historical detail and context makes the past come alive. Its coverage of the more recent past stands out as well. While the first 400 pages of the main text take readers from Standard Oil to Mad Men, the last 150 pages cover deregulation, disintermediation, and the rise of VC-backed startups. In the past decades, numerous books have been written about the revival of liberal thinking in the 1970s. Until that decade, for a variety of reasons, the story seemed one of linear progress away from personal, entrepreneurial capitalism and toward managerial experts. Many of these works suffer from depicting the changes as merely the actions of a few choice actors rather than a more widespread and diverse set of changes rooted in a disillusionment with the status quo. One illustrative example that Langlois discusses is the role of Ted Kennedy, no market fundamentalist, in the deregulation of trucking, rail, and air travel.
One of many dimensions to the book is that Langlois is seeking to undermine what he sees as a broader Progressive vision of society (he explains American Progressivism in detail and contrasts different varieties) that runs up to the present. The introduction and epilogue contain some understandably pointed remarks about the contemporary efforts by those on the right and left who have sought a more muscular state to regulate businesses. Many of these figures make explicit historical claims and hearken back to Progressive efforts to restrain the dominance of big business via antitrust and regulations banning practices like self-preferencing by Amazon. Building on the work of others, Langlois shows many ways in which past attempts failed to understand the efficiency of practices they villainized and how state regulation often empowered big business against markets and consumers. In doing so, he illuminates both past failures and the risks of repeating them. General readers may disagree with the broader view and specialists might have issues with one of the many episodes he covers, but The Corporation and the Twentieth Century is a tour de force.
‘The Corporation and the Twentieth Century: The History of American Business Enterprise’ by Richard N. Langlois was published by Princeton University Press in 2023 and came out in paperback in 2025 (978-0-691-24753-3). 816pp.
John Kroencke is a Senior Research Fellow at the Centre for Enterprise, Markets and Ethics. For more information about John please click here.
Magnuson, a professor of corporate law, has compiled a detailed and entertaining narrative of the key episodes in corporate history that documents how the corporation has been deployed by society’s problem-solvers. The corporation is a distinct form of human organisation that pre-dates many of those we take most for granted, such as the democratic nation state and even the Church. In Magnuson’s prosaic account, rich in surprising details, corporations are not seen as individual agents that pursue goals we can easily evaluate as simply good or evil. Rather, they are an organisational tool that enable human beings to cooperate at scale to do things that human beings might want to do, for better or worse. In their success, they transform the world around them, and often create new problems to solve. They are always impressive, but never morally pure.
The legal privilege that constitutes the corporation is what makes them useful both to society in general and to particular people’s purposes. Corporations survive the death of their members, and therefore, so do their fiduciary obligations. When undertaking large-scale and long-term projects, it makes one more attractive to creditors if the project is known to continue even if its individual members might come and go, have a career change, go bankrupt, or even die. With the reach of human agency transcending the life time and changeable circumstances of any individual, corporations can achieve what would otherwise be impossible.
For most of recorded human history, the main source of organisational capacity in society has been the state. It is the state, therefore that originally created the corporation through granting, at its discretion, this peculiar form of legal privilege. From the first corporations of Rome to the early 19th century in England, those who wanted to avail themselves of incorporation would need to be granted such a privilege by the state. For the state to agree to creating this impersonal legal agent for your purposes, it generally needed to be shown that it was also in the state’s interests to do so, and not just the entrepreneur’s. At its very conception, then, there was the possibility of divergent or even conflicting interests between the agent who controls the corporation and the agent that grants it its status.
A fascinating aspect of this history of the corporation is that they are shown to be in one sense distinctively ‘private’ entities in that they are definitionally not states. But on the other hand, they are explicitly creatures of the state. In earlier epochs the way in which corporations served state interests was much clearer – they collected taxes, lent capital, subdued foreign lands to the glory of their sovereign, etc. A corporation could only be created if it did in fact serve the interests of its state (for better or for worse – the interests of the state have not very neatly converged with the interests of the general public for much of human history). Magnuson makes this tension vivid. However, it does leave us confused as to why he sometimes refers to the corporations of the ancient and pre-modern world as ‘capitalists.’
Over the course of the 18th to early 19th centuries (in Western Europe) incorporation went from being a discretionary legal privilege to being an impersonal, general right. One now has to fill out the forms and pay the taxes, but one does not need to persuade the sovereign of the virtues of one’s intentions. The discipline of the market is what now regulates which corporations get to exist or not, rather than the discretion of the sovereign. What this means, which is well shown in the second half of the book, is that profitability takes the place of perceived service to the realm. Magnuson impresses upon the reader that profitability is a good, but imperfect, measure of a corporations’ contribution to society. What he somewhat elides, however, is that its imperfections are so much less serious than those of premodern corporations. Serving Rome meant imposing arbitrary taxes that often left people literally starving; bringing glory to England often meant war and slaughter. Whilst the difference in the way corporations functioned before and after this revolution in corporate law took place is made vividly clear in the book, Magnuson does not explicitly mention the legal changes themselves. Analysis of this change would, I think, help him to ground the normative conclusions he lays out at the end.
The book is divided into seven periods of corporate history, told through the story of a particular corporation or industry that defined its era. In the beginning was the corpus economicus of the Roman Republic, first created to raise private funds for the overstretched military ambitions of Rome, and then to collect taxes on behalf of the later territorially stretched Republic. Such ‘tax-farming’ was the standard way states raised revenue. It was not until the dawn of early modernity that states had the bureaucratic capacity to do it themselves and thereby cut out the middle man. Such middle men were essentially local gangsters who extorted as much as they could from the population because a fixed sum was owed to Rome, and they got to keep any surplus they could squeeze out (hence the New Testament’s constant equation of tax-collectors and sinners). Rome could never have ascended to the power it did without them. But, inevitably, they became a source of political and economic interests unto themselves, separate from the Republic. Next comes the first bank, started by the Medicis, which made available huge amounts of wealth for European princes and merchants, as well as the Church, and were able to manipulate their debtors in the interests of their own long-term profits. Then we come to the joint-stock companies of England, created for seafaring trade to generate revenue for the Crown and bring glory to the realm. The most famous among them, the East India Company, would become so rich and powerful, with its own armies, currency, and slaves, that it was a de facto state in India. Eventually it became such a rival to England herself that the Crown would, bit-by-bit, take it over. Next, we turn to the American railroad companies that were granted monopolies for the purposes of connecting and thereby modernising a vast and internally conflicted country. The particular way in which they were granted privileges over land and the trade that would take place on their rails presented various opportunities for them to exploit, which would inform a whole era of American anti-trust legislation. The next episode occurs firmly within a legal and economic context in which corporations no longer had any special privileges but rather had to compete with one another on legal terms that tended to favour value-creation and efficiency over government favour. Henry Ford’s ambitious and successful plan to make a high-quality vehicle every working American family could afford required no special monopoly privileges but rather an innovative technology (the petrol-powered engine) and production method (the assembly line). Then the narrative moves onto multinational oil companies, which, on the one hand were able to coordinate oil supply far better than separate nations were, and on the other used their wealth and influence to suppress climate change science. The final two chapters are on private equity, and then Facebook as the archetypal tech start-up. In both cases, head-spinning profitability was reached at lightning speed. While there is no doubt they provide value to society, it is also clear they found ways to make profits without creating value, in the former case through arbitrage of the tax code, and in the latter case by purposefully drawing on compulsive human behaviour.
Magnuson says from time to time that profit-maximisation is what often leads to corporate abuse. However, by his own account Ford was driven by keeping his profits low so as to keep quality and volume as high as possible, and prices as low as possible so that all Americans could afford one of his cars. From time-to-time Magnuson invokes various cliches about corporations being short-termist. But this is in tension with the general idea that what corporations do is enable longer-term planning and risk-bearing investment than individuals are otherwise capable of. Nonetheless, the driving normative lesson from this fantastic account Magnuson has compiled is that corporations are a tool of human ingenuity, and human ingenuity is not always benign. He gives many examples of how well societies tend to respond to the new problems introduced by corporations – typically in the form of adaptive regulation – but this should in no way give corporations or the entrepreneurs that wield them moral permission to disregard their consciences, and tell themselves that whatever is good for them must be good for the public. This is a fascinating book and one of which there is very much more to speak about!
‘For Profit: A History of Corporations’ by William Magnuson was published in 2023 by Basic Books (ISBN: 978-1-541-60157-4). 368pp.
Billy Christmas is Associate Professor at West Virginia University, in the John Chambers College of Business and Economics, affiliated with the Kendrick Center for an Ethical Economy.
Prior to joining WVU he was Senior Lecturer in Political Philosophy at King’s College London, in the Department of Political Economy.
Alison Taylor, in her new book Higher Ground: How Business Can Do the Right Thing in a Turbulent World, offers practical advice to business owners and executives on how to navigate the choppy waters of business leadership in the 21st century, which includes trying to please everyone from customers, vendors, shareholders, activists, regulators, policymakers, and employees, to anyone with an influential social media account. It is an exhausting and impossible task that creates distractions and pulls executives in unobtainable directions. Taylor is a clinical professor at the NYU Stern School and has years of experience consulting large multinational corporations on matters such as organizational risk, corruption, and navigating the strange business world that we find ourselves in today, which she rightly describes as turbulent.
The book is divided into three parts. Part I begins with an explanation of why everything became so chaotic and complicated. Part II offers advice on how businesses can do the right thing, which includes dealing with building stakeholder trust, tackling corruption, understanding the human element, dealing with transparency without worsening the situation, and tackling corporate political responsibility. Part III provides advice on corporate leadership into the future. Taylor argues this requires a more curious and dynamic corporate culture that eschews top-down control and values ethical leadership in the C-suite, which has appropriate checks and balances.
Long gone are the days when you were on a first-name basis with the local hardware store owner. We live in a world of trillion-dollar companies that create vast social and material value; however, both large and small companies are increasingly pulled in contradictory and chaotic directions. A company that attempts to serve everyone will likely fail in fulfilling its most important mission: serving its customers. This is where many will take issue with the author.
She wastes no time disputing Milton Friedman’s claim that the social responsibility of business is to maximize profit within the boundaries of the law. This comes from both Capitalism and Freedom and his famous 1970 New York Times essay where he argues:
‘The short‐sightedness is also exemplified in speeches by businessmen on social responsibility. This may gain them kudos in the short run. But it helps to strengthen the already too prevalent view that the pursuit of profits is wicked and immoral and must be curbed and controlled by external forces. Once this view is adopted, the external forces that curb the market will not be the social consciences, however highly developed, of the pontificating executives; it will be the iron fist of Government bureaucrats. Here, as with price and wage controls, businessmen seem to me to reveal a suicidal impulse.’
Ironically, in 1970, Milton Friedman predicted the chaotic environment in which corporations find themselves today. Most of the anecdotes Taylor documents throughout the book are occurring because we did not heed Milton Friedman’s advice.
Taylor is correct that businesses are pulled in too many directions and cannot possibly be all things to all people. The Coasian theory of the firm is not dead—the firm has boundaries regarding what it can accomplish based on transactions costs. Yet, throughout the book, a tension remains regarding what the author would like corporations to accomplish and the clear absurdity of what firms face today from every angle. She is correct when she argues that focusing on human beings, fostering a corporate culture of respect with open feedback loops, thwarting corruption, and overcoming executive blind spots are immensely important.
We live in a social media-driven world, where a single corporate email can become a viral TikTok trend that takes down a company. Taylor is correct that corporate culture and leadership must be priorities for businesses, as one business alone cannot solve all political issues within its industry, and it should not use legal and regulatory rules to serve its interests. Taylor affirms this, yet, firms distort and manipulate the legal rules of the game all the time.
Taylor is not an economist, and as such, this book is unable to address some of the very problems it seeks to confront. It begs for public choice analysis. In the introduction, she reasonably claims that business has become increasingly political, which causes internal conflict and problems. She later dedicates a chapter to navigating the political process more effectively. Taylor suggests that companies may need to argue for ‘shrewd regulations which level the playing field.’ Still, this almost always creates snowballing regulations, which are socially costly and distract businesses from serving their customers. Taylor appears to understand the threat of cronyism, citing research that demonstrates a negative relationship between corporate political investment and market valuation (page 131), but understates its pathologies, believing that companies can remain neutral while engaging in political matters.
We must always count the costs and be aware of potential unintended consequences. One is the formation of the Iron Triangle, where special interest groups, bureaucrats, and policymakers align in such a way that outsiders cannot assert any influence or change those symbiotic and preferential relationships. Moreover, the author makes assumptions about which political and corporate matters are essential based on her more progressive worldview.
She assumes measures to address climate change are valuable, that ESG has been maligned as an ‘ideological, “socialist” movement,’ that environmental and social responsibility ‘is always good for the bottom line,’ and that healthcare is a human right. Yet, there is wild disagreement on these claims. Taylor understands that when a firm chooses a side on any of these issues, some backlash is inevitable. Yet her point of view argues that these progressive causes are worthy, but that Republicans and conservatives try to block them at every turn, and she seems somewhat critical of capitalism itself. These vantage points are the basis for her somewhat technocratic approach to using regulations productively. The economic way of thinking, if employed, would force her to put these assumptions to the test of cost-benefit analysis.
Taylor (page 30) invokes the controversial Larry Fink, CEO of BlackRock, who has made the social and political case that business must ‘show how it makes a positive contribution to society.’ Taylor implies Republicans have unfairly targeted Fink, yet some would argue that he is imposing a social agenda outside the rule of law and has created vast personal wealth in the process. This appears to be cronyism on full display. Taylor points to the Boeing 737 Max scandal as an example of why Friedman was wrong, because maximizing shareholder value might lead one to defend corporate political spending to reduce regulatory burdens. Taylor implies that avoiding this crisis requires either more or better regulations. This, however, is actually a problem of incentives. If Boeing has captured the regulators who are charged with ensuring its operation is safe, then, rather than advocating for more or better constructed regulations, the only corrective is to disentangle these political and corporate interests.
Yet, Friedman argued that we should get back to the basics. Firms do their best when they make a profit and operate within the rules of the game. This is not to suggest that we do not face real problems in the world. Environmental concerns are real and require creative solutions. Human rights issues abound around the globe, and firms must ensure they are acting with integrity, as corruption can be a powerful intoxicant.
This book wrestles with real problems. Yet Friedman is vindicated even though Taylor thinks his argument is no longer enough. Taylor (page 134) succinctly characterizes the pressures businesses face today: ‘We’ve all begun to expect action on the issues of the day from brands we patronize. We cannot possibly keep track of all the issues and corporate stances, let alone consistently and effectively reward or punish companies via our spending or in statements we post on social media. This illusory process has lured us down a side trail of unrealistic expectations. It redirects valuable energy that’s needed to run businesses and responsibly manage operational impacts. It distracts the public from pursuing healthy political endeavors.’ There is much to agree with in this statement, but doesn’t it vindicate Friedman’s warning?
Business exists to serve the demands of consumers, and consumers are fickle. They always want things faster, better, and cheaper. The goal of a firm is to serve its customers and uphold the rule of law. The more firms diverge from this and try to wade into political and regulatory battles, the more they invite the government into their business, causing them to lose sight of value creation and distorting their incentives to create social value.
Firms operate through property rights, profits and losses, and prices, but government intervention distorts these signals and incentives. Economists agree that firms should be free to advocate for any issues they care about, yet this freedom often leads to disagreement, as Taylor points out. Lines will be drawn in the sand, so maybe companies should talk less and innovate more. This book addresses timely, complex, and important matters of corporate governance. Taylor offers sound practical advice when it comes to remembering that one firm cannot do everything, that political battles are divisive, and that we must focus on a humane corporate culture. Perhaps returning to the basics is the best way to navigate complex and multinational corporations in this digitized and globalized world.
Approaching a new book on the recurrent and vastly researched question on the responsibilities of business towards society, readers might wonder where the novelty might be. In Everyone’s Business: What Companies Owe Society, Ron and Singer take a specific perspective to solve the old (and still relevant) question and apply a novel lens to provide answers: readers will not be disappointed. The authors, from their point of view as ‘political theorists’ (page 18) and openly (and critically) from ‘the left side of the political spectrum’ (page 11), explore the political dimension of business activity, with a specific focus on the concept and practice of power. Ultimately, the authors work to develop the idea that business has a responsibility towards democracy, which translates into an obligation to respect those processes which confer on business the position it has.
Overall, the book makes for good reading, and is well structured, written and presented. There is clearly a conceptual density, to the point that each chapter can be commented on in itself regarding the content and the selection of the literature that the authors offer. For this reason, this review presents a brief synthesis of the first chapters, where the authors present their theory, then it provides a glance at the remaining chapters with a more specific focus on one of them (Chapter 5), to give an idea of how the authors put their approach into action.
The Introduction offers a concise, ordered, and logical synthesis of the main lines of argument of the book. It presents an exhaustive preview of the book. It introduces the research question and the starting point of the authors’ research: ‘we take the problem of corporate power, and the threat that power poses to democracy, as the starting point for thinking about business ethics and corporate social responsibility. What obligations do businesses have given their place within societies aspiring to democratic systems of governance?’ (page 3). The Introduction also provides a preview of an essential construct for an understanding of the book: the authors see business activity as a ‘social subcontract’ (page 5). They present commerce as an organized ‘sphere of social activity’ (page 6), that society itself establishes, conferring on it a degree of autonomy with the purpose of contributing to social ends.
Chapter 1 provides an enjoyable anthology of approaches to business ethics, and a re-reading of them as theories of power. Profit-maximization, stakeholder theory, social contract theories, and also political corporate social responsibility and market failure approaches are presented in terms of corporate power. There is also a final table (page 47), which gives visual evidence of the structure followed by the authors in building their perspective throughout Chapter 1. The other chapters would have probably not allowed for a similar synthesis, but it is highly beneficial at the end of a dense chapter to be gifted a structured table to appreciate the content at a glance. All these theories, according to the authors, leave unaddressed important questions regarding different dimensions of corporate power. Ultimately, the authors want to show that a functioning democratic society is able to host a functioning business and make it work for social ends, and that the dynamic of power between business and society sheds light on how this can happen. Chapter 1 concludes with a good synthesis of what one of the main contributions of the book is: ‘If business ethics is fundamentally about constraining the power that businesses possess, and democracy is an essential background process for determining what aspects of that power need to be constrained and how, then businesses’ ability to affect and undermine democratic processes is a crucial topic for business ethics to consider, which the theories on offer, despite their many strengths, don’t quite address’ (page 48).
Therefore, and this leads to Chapter 2, the authors start building their own contribution, making their way to outlining the obligations that businesses have towards democracy. They take more space in this chapter to define the idea of business as ‘social subcontract’ (pages 50-51), which entails the existence of obligations attached to the social position of businesses but also attached ‘to the political processes that determine their social position’ (page 51). The authors define those as second-order obligations. They then provide a definition of democracy and finally outline principles for democratic business ethics.
After a chapter dedicated to the rule of law and related ethical obligations (Chapter 3), the authors show how to apply their principles for democratic business ethics to contexts where democracy is potentially undermined. Therefore, they present lobbying (Chapter 4), as a form of undermining formal democratic procedures; marketing (Chapter 5) and activism (Chapter 6), as ways of undermining informal democratic procedures; and they conclude with forms of undermining democratic relations (Chapter 7 and 8), taking into account relationships in the workplace and between businesses and communities.
As the content of each chapter is very dense, readers can navigate the chapters according to their interests. Here, a quick preview of the chapter on marketing (Chapter 5) is offered. Marketing is integral to current market practices, and it has a very wide and diverse reach. The authors here are worried about how marketing influences the processes and structure of a deliberative democracy, where the accent is on the engagement of citizens in the formulation of ideas, positions, reasons and in good debate. Marketing is in a position to influence deliberation, and also to influence what citizens think about politics, for example. From this perspective, the omnipresence of advertising in citizens’ everyday lives comes under the spotlight in the second half of the chapter: the authors present compelling cases regarding ad placement, the creation of stereotypes, product placement and the erosion of trust (pages 120-125). They conclude with four short cases regarding product placement: these examples show, in different degrees, that businesses, by penetrating the public sphere with advertisements designed not to be perceived as such, have the power to undermine the essential trust ‘needed for a reasoned exchange of ideas in the public sphere’ (page 124).
Looking at possible criticisms regarding this book, the authors state that they aim to ‘introduce the uninitiated’ (page 18). While commendable, the level of the book is clearly higher than a completely uninitiated reader could digest. This does not mean that the book is not clear. On the contrary, the authors do a tremendous job in summarizing complex theories and selecting the elements they need to advance their thesis, in an ordered and logical way. Nevertheless, approaching the book in possession of some degree of familiarity with the existing theories on the relationship between business and society would clearly help with navigating the work’s complexity.
To close the loop, of course there is always something more and something else to theorize in a crowded and well-researched field. Ron and Singer, well aware of the ‘sheer volume of discussion about what businesses owe to society’ (page 2) show an extremely good mastery of the complexity of this interdisciplinary exploration and deliver a novel output of praiseworthy specialized academic quality.
‘Everyone’s Business: What Companies Owe Society’ by Amit Ron and Abraham A. Singer was published in 2024 by The University of Chicago Press (ISBN: 978-0-226-81938-9). 234pp.
Marta Rocchi is Associate Professor of Business Ethics at DCU Business School, Dublin City University, Ireland. For more information, visit her webpage here.
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.
Colin Mayer is a distinguished professor at the University of Oxford, former dean of the Said Business School and a Fellow of the British Academy . Throughout his career one of his fields of interests has been the business corporation and at present he is director of the Academy’s research programme into the Future of the Corporation.
However neither the title nor sub-title of the book do justice to its contents. The book is nothing if not ambitious. In examining the business corporation the claim is that “it will take you across history, around the world, through philosophy and biology to business, law and economics, and finance to arrive at an understanding of where we have gone wrong, why, how we can put it right and what specifically we need to do about it”.
The remarkable fact is that I believe he has achieved his aim. The book is wide in scope, has considerable depth and is not superficial. It is well written, interesting to read and draws on a lifetime of research into different aspects of the business organisation.
The book is first a sustained and vigorous attack on Milton Friedman’s claim that the sole social responsibility of business is to increase its profits, subject however to doing so in open and free competitive markets, without deception or fraud, while conforming to the basic rules of the society embodied in law and custom. For Mayer the public have lost trust in business precisely because business has followed Friedman’s advice and put the interests of shareholders above other stakeholders.
In its place he proposes a total reinvention of the corporation. Corporate law should be changed so that each company is required to state its ultimate purpose over and above profit, redefine the responsibilities of directors to deliver these new objectives, develop new measures by which they can be judged and introduce incentives to deliver them.
In exploring the purpose of business Mayer distinguishes between ‘making good’ (such as manufacturing cars, or electrical products) and ‘doing good’ (treating employees well, cleaning up the environment, enhancing the well-bring of communities). The latter has a social public-service element which goes beyond the private interests of the firm’s customers and investors, and even beyond section 172 of the 2006 UK companies Act, which already imposes duties on directors to take into account the interests of stakeholders other than shareholders. As examples of successful and enlightened corporations he mentions with approval “industrial foundations” companies such as Bertelsmann, Bosch, Carlsberg, Tata and John Lewis which are set up as foundations or trusts.
While I admire his ability to explore different dimensions of the business in one book, I have serious problems with his argument.
First, the pursuit of long term profitability is essential if a company wishes to prosper in the long term. Long term profit is a great discipline. This applies not just to publicly quoted companies; it applies equally to private companies, B-corps, partnerships, foundations and trusts. If companies of any kind make losses, capital will drain away and either they get taken over or go bust. This applies to all companies even those which are foundations and trusts. Not only that but long term profitability is a pre-condition of companies doing good: being able to reward employees well, help communities, develop new products and services for customers and invest to protect the natural environment. In this context it is important to distinguish between long term profitability and short term profitability.
The pursuit of short term profitability is bad business. Just recall the financial derivative products created by banks in the feverish boom years leading up to the 2008 crisis which ultimately led to some banks going bust and others being bailed out by governments. This was bad business. British Home Stores was a classic example of short term profit maximization with inadequate investment in the business itself or the pension fund. Again short termism leading to bad business.
Pursuing long term profitability is not just a matter of management getting numbers right. Before they can do that it requires them to set out a vision which makes the firm “a great place to work”, ensures customers recognize value for money in what they buy, becomes known as an ethical organization by the way they conduct business and admired by shareholders for earning a superior long term return to capital.
A second problem with Mayer’s proposals is the sheer complexity of managing the diverse and frequently opposing interests of stakeholders. It is logically impossible to maximize in more than one dimension. If managers have to manage the interests of all stakeholders they need to be able to make meaningful tradeoffs between competing interests. Profit or change in long-term market value is a way of keeping score in the game of business. Michael Jensen and others have shown that in the long term prospective profit maximization and shareholder maximization amount to the same thing. The use by management of a balance scorecard is no better as it ultimately gives no objective way in which to weigh all of the elements in the scorecard to arrive at a single figure.
A third problem with Mayer’s argument is accountability. “Accountability to everyone means accountability to no one”. The author’s proposal is a revolutionary re-definition of property rights within a modern corporation to make it “trustworthy” but to whom is the board of this new “trustworthy” corporation responsible? And what are the rights of ownership over the funds invested in the business? Already in the US the number of publicly traded companies quoted on exchanges has roughly halved over the past 25 years. One reason is the increasing cost of regulation: another is the availability of private equity finance. If Mayer’s proposals were ever to be implemented they would constitute a major disincentive for companies to raise capital through the public markets and only accelerate the decline in stock market listings.
In Mayer’s proposal shareholders would become providers of capital to business rather than owners of the business. The general public have never had a great trust in business which is why ever since the Industrial Revolution governments have stepped in to control business through laws passed by parliament, regulation, mutualisation, nationalization and state ownership. Mayer’s proposals will downgrade the existing well defined ownership rights which exist in publicly traded companies and replace them with a form of ‘social’ decision making in which the leadership of the company is answerable to trustees but shielded from competition in the market place through take over bids. A sure way to create inefficiency.
In this respect these proposals are a far cry from an exercise in academic research, more a political statement. Far from having no objection to the existence of ‘trustworthy’ corporations as one of many different forms of corporate ownership, I welcome them. In terms of corporate structures let a hundred flowers bloom. If the author was making a case for the idea of ‘Industrial corporation’, fine. However he is doing more than that. He is making the case for eroding private property rights and restricting what companies can do, which is as much a political statement as one based on objective analysis.
“Prosperity: better business makes the greater good” by Colin Mayer was published in 2018 by Oxford University Press (ISBN: 978-0-1988240-08). 288pp.
Lord Griffiths is the Chairman of CEME. For more information please click here.
They often say ‘never to judge a book by its cover’, that initial external appearances can distort or even deceive the audience from the content that lies within. Well, the principle doesn’t apply here. Lynn Stout’s The Shareholder Value Myth attempts to achieve exactly what the title entails: a pure and straight forward critique of the belief that the ultimate purpose of business is to maximise shareholder value, which often dominates the field of business management.
Author Lynn Stout is Professor of Corporate & Business Law at the Cornell Law School where her main areas of research include corporate law, securities and derivatives regulation, economics, and organisational behaviour. Stout argues that the Shareholder Value ideology is ultimately just an ideology, not a legal requirement or a ‘practical necessity of modern-day business life’ (p3). In this sense, Shareholder Value thinking is a mistake for most companies because it indirectly forces corporate managers and executives to ‘myopically’ focus on short-term earnings at the expense of long-term stability and performance. It also ‘discourages investment and innovation, harms employees, customers, and communities; and causes companies to indulge in reckless, sociopathic, and socially irresponsible behaviours’ (p10).
The book is written clearly and concisely, predominantly using direct rhetoric and short sentences. In terms of structure, the book is broadly divided in two comprising parts: Part 1 is a direct attempt in ‘Debunking the Shareholder Value Myth’ while Part 2 is mostly an investigative endeavour into who the ‘shareholders’ are and what they actually value. Each part is made up of five shorter Chapters so let’s take a closer look into some of the main points and arguments made throughout the book.
The first half can be seen as a systematic critique of the means and (even disastrous) consequences of ‘shareholder value thinking’. Corporate scandals such as the 2010 BP Oil Spill and cases of serious fraud in large companies such as Enron, HealthSouth and Worldcom throughout the 2000s are all cited as consequences of shareholder value thinking. Professor Stout makes a compelling case that the ‘narrow’ focus on share price alone can result in ruthless management behaviour. The drive for extreme cost-cutting in the hope of increasing short term profit doesn’t just hurt the employees and the company, but the shareholders themselves.
The book provides a brief historical account of how shareholder value thinking came to dominate teaching in business schools as well as becoming the norm within the private sector itself. If in the 1800s most privately held companies were of single ownership (or a tight shared ownership), by the 1990s publicly held companies have tens of thousands of shareholders. Stout rightly argues that this replacement of the ‘single’ ownership model with an executive Board to represent the vast number of shareholders causes the Board (as well as the senior management) to assume that all the shareholders want is ‘to make as much money as possible, as quickly as possible’. It rather quickly trickles down to the lowest common moral denominator, ignoring the fact that shareholders are real human beings with different investment timeframes, different priorities and different attitudes toward the well-being of others. In this sense Lynn Stout rightly argues that ‘recognising these differences reveals that the idea of a single objectively measurable “shareholder value” [i.e. solely based of share price] is not only quixotic, but intellectually incoherent’ (p60).
The second half of the book turns its attention toward the shareholders themselves: who are they? And what do they want to get out of their investment? These questions in turn give rise to a clear dichotomy within a company’s pool of shareholders: ‘short-term speculators versus long-term investors’. Again, Lynn Stout rightly points out that ‘long-term shareholders fear corporate myopia. Short-term investors embrace it – and many powerful shareholders today are short-term’ (p65). The conflict of interest generated by short vs. long-term investors indirectly forces a company’s management to take the default position and assume that every shareholder is a ‘platonic investor’ – i.e. an investor that only owns shares in company ‘X’ and the share price increase is all that they are interested in. Lynn Stout argues that in reality however, this ‘platonic investor’ does not exist. The overwhelming majority of investors today own more than just shares in company ‘X’, they are invested in the marketplace as a whole and want to protect the value of their other investments also. In this sense, the short-term focus generated by shareholder value thinking can actually work against the interests of the shareholders themselves.
The book as a whole presents a compelling critique of shareholder value thinking. Yet it’s strength is also its greatest weakness: it is just that, a critique –nothing more and nothing less. What are the solutions? The final pages of the book only tentatively touch on a possible way forward in arguing that what is needed is a more ‘complex and subtle understanding of what shareholders really want from corporations’ (p115). This all sounds great and very necessary but how do companies get there? Even if executives come to acknowledge the variations in their shareholder’s desires – is this a guarantee that the company’s approach to corporate governance will change?
I have written on this topic in the past where I highlighted the importance of first establishing a concrete set of internal ethical values and practices. Only then does it become possible to accommodate the desires of a larger pool of shareholders and indeed, stakeholders.
A great deal remains to be written on this topic and The Shareholder Value Myth by Lynn Stout is an excellent addition to the growing body of literature that forces us to re-think the role and purpose of business in society.
A recommended read.
“The Shareholder Value Myth” was published in 2012 by Berrett-Koehler Publishers (ISBN 10: 1605098132). 134pp.
Andrei Rogobete is Associate Director of the Centre for Enterprise, Markets & Ethics. For more information about Andrei please click here.
Colin Mayer is Professor of Management Studies at the Saïd Business School in Oxford. He believes that “the corporation is failing us” and that dramatic changes in the rights and obligations of those who control corporations are needed. Firm Commitment explains why and makes proposals for change.
Mayer uses the term “corporation” to refer to the kind of limited company that is commonly used by large businesses. He recognises the huge benefits that corporations have brought but he considers them to be seriously flawed. Indeed, he describes his book as “both a tribute to and a condemnation of this remarkable institution that has created more prosperity and misery than could have ever been imagined”. He perceives the main problem to be that corporations are seen as the creatures of their shareholders, rather than as independent entities, and this leads to the pursuit of shareholder value over the interests of stakeholders other than shareholders. In support of this, he cites numerous well-known corporate scandals.
The primary focus of his book is the UK and Mayer appears to believe the position here is worse than elsewhere. However, he is not starry eyed about any currently available option. Notably, he recognises that family and other tightly owned companies may have their own problems and scandals (citing Parmalat) and, in any event, family ownership “is not the resolution to the 21st–century corporation’s problems”. He is also dismissive of the attempts that have been made in recent years to correct problems through regulation (which, he asserts, “promotes immoral conduct”) or through enhanced corporate governance (which, he suggests, may promote increased shareholder control to the further detriment of other stakeholders). He suggests that what we need is “to find mechanisms by which companies can demonstrate a greater degree of responsibility themselves without relying on others to do it for them”. Specifically, he suggests that “we need to establish the means by which corporations can demonstrate more commitment to their stakeholder community”.
Salvation is in what he calls “trust firms”, which would be like existing corporations subject to three adaptations: entrenched within their constitutions would be corporate values (which might reflect the values of their founders, public policy or other things); there would be trustee boards to act as custodians of these values; and the corporation would have “time dependent shares” whereby the voting rights of shareholders would depend upon the extent of their commitment to hold their shares for the longer term (e.g. a share which its holder is committed to hold for a further ten years would have ten times the voting rights of a share which the holder is only committed to hold for one more year).
Mayer does not want any compulsion to be applied in relation to this. He argues that diversity in corporate forms should be permitted. He does, however, suggest that there be tax incentives to encourage the use of trust firms.
There is a lot to applaud in this book. In particular, there is depressingly little evidence that increased regulation or the focus on corporate governance in recent years has materially improved the corporate world and, against this background, Mayer’s stress on the importance of “commitment” as opposed to “control” deserves serious consideration. It links with ideas derived from the work on “relational thinking” that has been undertaken in recent years by, amongst others, the Relationships Foundation and Tomorrow’s Company. Furthermore, the concept of a “trust firm” is an interesting one that could contribute to the development of a broader view of corporate purpose and responsibility.
Unfortunately, however, this is a flawed book. Perhaps Mayer has tried to cram too much into 250 pages. Whatever the reason, almost every page contains contentious statements or statements that require significant qualification. Although there are plenty of footnotes referring to past research, there are also many ex cathedra statements as well as many assertions and assumptions with which specialists will take issue. For example, some of the statements of law are, at best, partial and Mayer seems unaware that much of what he proposes can already be achieved through existing law (as, for example, the entrenchment of editorial independence within the constitution of The Economist Newspaper Ltd illustrates). He also accepts dubious interpretations of past events. In particular, his long description of the Cadbury takeover accepts the views of its former chairman, Sir Roger Carr, without examination. This is a pity because others involved in that takeover (including former Cadbury directors) have different views and consideration of these might have led to Mayer modifying some of his suggestions.
More seriously, Mayer’s analysis of the objective of corporations is unhelpful. He states that “shareholder value is an outcome not an objective” and even quotes former GE CEO Jack Welsh in support of his views. However, his argument only addresses the use of short term share prices as the test of shareholder value and his suggested alternative as a corporate objective is demonstrably inadequate. He asserts that a corporation’s “first and foremost objective is not to its shareholders, or to its stakeholders. It is to make, develop, and deliver things and to service people, communities, and nations”. It is unclear from where he derives this overarching normative assertion and, in any event, it is no more useful than saying that the objective of corporations is “to do things”! It does not help a corporation’s management to decide whether they should remain in heavy engineering or move to IT or whether to be a volume manufacturer or a niche player.
Finally, Mayer’s evident confidence that the trust firm does not suffer from serious flaws and is the solution to the myriad of issues that he has identified is not backed-up by careful analysis. He appears to recognise this since he says that his ideas need to be “subject to careful scrutiny”. They certainly do and, whilst they are undoubtedly worth such scrutiny, it may be seriously doubted whether they are the “cure all” that Mayer appears to believe.
That said, provided that the book is read critically, it is well worth reading.
“Firm Commitment” by Colin Mayer was first published in 2012 by Oxford University Press (ISBN-10: 0199669937).
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.
