Consider this: In a functioning democracy, the people – who are the sovereign – are generally able to communicate their broad wishes about the identity and direction of the state, as well as their concerns and preferences regarding specific policies and initiatives. The politicians they elect are typically pretty clear about all of this.
Moreover, the citizens maintain and exercise this ownership-level authority without, themselves, becoming involved in the minutiae of day-to-day government (with the limited exception of referendums, which, for a number of reasons, aren’t relevant in the context of our current discussion). The meaningful presence of this authority, in the daily deliberations and actions of the elected officials, is maintained through the periodicity of elections and, in many cases, via polling conducted by those officials.
But in an anonymous shareholder-owned corporation, despite the undoubted presence of ownership in the shareholders, there is no really effective way to make it felt, in a practical sense, in the boardroom or executive suites of the corporation. It’s as though citizenship in the state consisted of the right to vote on a slate of candidates selected for you by – well, by the incumbents. Does that remind you of anything?
It is that disjunct in the expression of ownership, vital to the productive functioning of capitalism, that causes the vacuum of power which is then perversely filled by management. It is why we have dual-hatted CEOs/chairs. It is also why the alternative proposals to that system are largely inadequate to the task (and in truth, they really aren’t designed to address that task).
Where capitalism fails to function properly or smoothly, regulation is often required. So why should we be surprised, in the face of recent examples of broken corporate governance regimes, to see popular momentum building behind increasing regulation? As we have said here before, if we don’t police ourselves, the police will.
So, the problem seems to be that, in order to retain the indisputably beneficial advantages of the anonymous shareholder system, we need to keep firmly in place the corporate veil. And that, in order to shield owners from liability for the actions of the corporation, must keep them at a distance sufficient to maintain their inability to meaningfully influence those actions.
That is, we must insulate owners from the corporation. This also results, however, in managers being similarly insulated from owners. As a result, directors have no firm ground on which to develop traction in their relationship with managers; consequently, they are typically co-opted.
This is the central dilemma that corporate governance must resolve in order to comprehend and discharge its charter in as freely operating and unregulated a manner as possible. As long as directors remain unable to communicate with shareholders sufficiently to enable them to determine and represent the latter’s interests, but without nullifying the corporate veil, our corporate governance structures will continue to find themselves inadequate to tasks they don’t understand.
But that doesn’t mean we can do without them, of course. It just means we have to construct systems that can maintain themselves with as much fiduciary integrity as is possible on such peculiarly infirm foundations.
We will take a brief look at that over the next several days, before turning our attention to the role of directors. Please do be sure to join in!
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This post is a part of a series. You can learn about and link to the other articles here: Corporate Governance and Capitalism
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Today’s tip: The coming shortfall of management, and overall employment, talent will present numerous challenges. It should not be forgotten that chief among them will be the effective use of the talent already on board. Please see this WSJ piece about the boom in talent management software.
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3 Comments
“if we don’t police ourselves, the police will.”
This was my favorite mantra several years ago, until I stumbled upon William Penn’s quote:
“Those who will not be governed by God will be ruled by tyrants.”
They’re two ways to say essentially the same thing, except the latter recognizes the necessity of a sovereign source of universal morality that the first doesn’t.
Through reason, those who prefer the first can come to the same conclusions as those who prefer the second, but I find it less likely that they will, especially as we lose our ability to reason, over time, as we have been.
I’d like to explore this comment for a moment:
“Where capitalism fails to function properly or smoothly, regulation is often required.”
Regulation is sometimes required, but altogether less than politicians think it is. The instances of broken corporate regimes aren’t examples of market failure, but of market success.
Enron, for instance, was governed poorly and is no longer in business — Not because the government got there a day late and a dollar short — but because the company was losing money, and it could not perpetually sustain itself on a myth.
Investors got savvy to this and started pulling their capital, but Enron employees were prevented from doing so — something made possible, by the way, by regulations set forth by the government pertaining to such things. Had the government allowed or even preferred a free market system, employees would have been allowed to take their money and put it wherever they wanted, whenever they wanted to do it, without even tax liability.
That such things are not allowed to happen freely without government interference shows just how reluctant the government is (and we are) to allow a free market.
I understand that people lost money, but people lose money in the market all the time. Market success doesn’t mean everyone wins. It means those who perform well are left free to succeed and those who perform poorly are left free to fail.
That we keep turning to government when we witness the natural vicissitudes of a free market (vicissitudes that, by the way, government is ill-equipped to manage) speaks, perhaps, to an overarching problem that is the real cause of the behavior that results in corporate failure as well as the people’s willing, gradual surrender of their sovereignty.
Hello Cam,
Thank you so much for your visit and this wonderfully thoughtful comment.
Your quote about being ruled by tyrants is really quite relevant, because, divorced of the ability to influence – and even, for all practical purposes, to select – managers, shareholders typically do find their corporations headed by tyrants, even if they see themselves as benevolent ones.
Regarding Enron, I gather that you are talking about the tax consequences of moving a company retirement account, such as a 401k. This can be done, although the ways of doing it aren’t widely known, can be unnecessarily complex, and take time. I certainly also agree that government regulation isn’t the answer – that’s why I hope we can find a way to more effectively police ourselves.
The concern I’m trying to express isn’t that the market is risky or that people pressure politicians (or politicians sense populist opportunities) to unwisely try to legislate morality into the capitalist system. It’s that the distortions between ownership and responsibility in the anonymous shareholder system tend to punish people (owners and others) for problems created by other people (managers) who are generally divorced from responsibility for creating those problems.
That, in and of itself, of course, is one way to look at the risk of the marketplace. But that is not, I don’t think, a sufficient approach to addressing the shortcomings of our corporate governance system.
In this context, your reference to the “overarching problem” that is the reason for “people’s willing, gradual surrender of their sovereignty” is indeed a large part of the problem, here, and one I haven’t been addressing:
I’ve been criticizing boards for failing to control managers, and managers for taking advantage of the vacuum of power and responsibility, and arguing for addressing what I see as the core genesis of this problem so we can try to develop a corporate governance system to address it.
But in the anonymous shareholder system, owners are largely trying to have it both ways, also. They want to enjoy unsustainable returns, and either run away or even sue when things go south.
This is an important aspect of the overall issue – thank you so much for forcing me to see it this way! I will try to bring it into the discussion.
“But in the anonymous shareholder system, owners are largely trying to have it both ways, also. They want to enjoy unsustainable returns, and either run away or even sue when things go south.”
Spot on. I’m enjoying this journey you’re leading us through very much.
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[...] But Cam Beck, of ChaosScenario, has pointed out an important missing element in the discussion, so far: the motivations of owners. So we’re going to spend a little time over the next few days asking some questions about them: [...]
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