actually, that's not quite accurate.
There have been movements to pry open the corporate machinery for pretty much as long as I have been alive. A lot of people who would like corps to act in the way
they want corps to act have the fairly standard illusion that their own views are so reasonable that, if only the bad people in charge could be bypassed, the other people - here, shareholders - would go along with them.
It ain't so. Shareholders expect accountability from management. They own the company and they expect returns. The model of how the legal relations work has always been that way; what has changed in the last 30 years is, in the main, the degree of accountability and the mechanics for it. The biggest shareholders are now institutions, with their own clout and the ability to force management to pay attention to them.
At the risk of seeming hostal, let me quote some things for you that will give you an idea of why that not only is so but why it
should be so and why it is a
good thing that it is so. Compelling corps to account for nonshareholder constituencies erodes the premise for having corporations to begin with (which is to mobilize and aggregate resources for economic purposes).
First,
Larry Summers:
Quote:
Inherent in the multiple objectives urged for creative capitalists is a loss of accountability with respect to performance. The sense that the mission is virtuous is always a great club for beating down skeptics. When institutions have special responsibilities it is necessary that they be supported in competition to the detriment of market efficiency.
It is hard in this world to do well. It is hard to do good. When I hear a claim that an institution is going to do both, I reach for my wallet. You should too.
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He was talking about Fannie Mae and Freddie Mac, but they are a paradigm of what a corporation with goals other than maximizing profit would look like. Here is more of his explanation:
Quote:
How about chartering private companies as government sponsored enterprises with the mission of promoting home ownership affordability? Give them boards with some private representatives and some public representatives. Make clear that government stands behind their capital market innovations so they can borrow more cheaply and pass the savings on. Exempt them from the state local taxes that others pay. Give them specific objectives on affordability that they must meet. Rely on a special government regulator to assure that they balance their social responsibility with their drive to profit. Harness the profit motive to meet a social objective.
This is roughly the rationale behind Fannie Mae and Freddie Mac. I would submit that it is about as good or as bad as most creative capitalism ideas involving joint profit making and social objectives. But one hopes that we are now witnessing the end of this particular experiment in creative capitalism: the government is moving to pick up the pieces of the mess the GSEs have made and their shareholders are losing most of their money. (emphasis mine)
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OK, that's one explanation. Here's another. I forget where I saw it, probably on
Stephen Bainbridge's "Law and Business" blog (he's a law prof at UCLA, and it was via his blog that I found the Summers quote above). Shareholders pay for their shares (in theory, and over the long run in practice too) an amount that, in the market, is the discounted present value of the expected future cash flows of the company (discounted for time, risk and uncertainty). By introducing the interests of other constituencies into the corporation's decisionmaking, it increases the risk or uncertainty for the shareholders because the number of factors in the decision multiplies exponentially. What that means is that the shareholders will require greater returns for their investment in order to compensate them for the additional risk. That raises teh cost of capital to the company. By making capital more expensive, we depress growth rates and hinder economic growth. We also inhibit risk taking because there is already some additional risk built into the very fabric of the entreprise, which means that each additional quantum of risk is more costly.
In other words, forcing the corporation to include the interests of nonshareholder constituencies in its decisionmaking will have the effect of hurting those very consituencies, because it hamstrings the corporation as an economic entity. The shareholders are flexible and can put their money elsewhere but the employees and neighbors can't do that. They are best served by having a healthy prosperous company that can pay good salaries and keep its streetfront clean - and, not incidentally, purchase goodwill by contributing to the local PAL or YMCA, or sponsoring the PBS show.
Am I being clear? or is my barrister's opacity coming through?
-----Added 30/7/2008 at 11 : 16 : 31-----
Oh yes, and there is another consideration as well,
this one also in Bainbridge:
Quote:
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This then is the major failing of the Bishops’ support for a multi-constituency conception of corporate directors’ duties. “Any social order that intends to endure must be based on a certain realism about human beings and, therefore, on a theory of sin and a praxis for dealing with it.” Here, the sin in question is that of self-interest. While the Bishops’ proposal would empower honest directors to act in the best interests of all the corporation’s constituents, it also would empower dishonest directors to pursue their own self-interest. There is a very real risk that directors and managers given discretion to consider interests other than shareholder wealth maximization will use stakeholder interests as a cloak for actions taken to advance their own selfish interests.
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In other words, increasing the number of consituencies increases the opportunities for corruption. (This is standard libertarian argument, by the way - as you can see, it applies to all kinds of authority structures, not just government.)