December 09, 2005
Final Thoughts on the Progressive Dilemma
Posted by Matt Bodie

Many thanks to Gordon, Christine & Vic for a chance to be a guest Glommer.  (Glommian?  Glommite?)  And thanks to those of you who have read and commented.

I wanted to close my visit here with some thoughts on what I see as the progressive dilemma in corporate law.  Right now, as the continuing conferences on the issue suggest, there is still debate within the academy on the proper theoretical paradigm for corporate law.  On one side is the shareholder primacy model.  Although it comes in different permutations, the crux of the model is that the corporation's purpose is to maximize the residual returns provided to shareholders.  Stephen Bainbridge and Lucian Bebchuk disagree on a lot of things, but they agree that shareholder wealth maximization should be the corporation's ultimate goal.  On the other side is the stakeholder model, which is premised on the notion that the corporation exists to serve its many stakeholders or constituencies -- shareholders, employees, creditors, customers, and even communities.  The "entity" model -- whereby the corporation exists to serve itself -- and the Stout & Blair team production model are variations on this theme.

As many here at the Glom have noted, perhaps too much time is spent on high-level theorizing about which model is more appropriate.  But I can understand the fascination, because there doesn't seem to be an easy answer.  In fact, looking at it from a progressive point of view, both models have significant positives and negatives.

There is a progressive streak to shareholder primacy -- a "fight the management" refrain that looks even more progressive as a greater percentage of Americans become shareholders.  After all, shareholders can be relatively powerless in the face of management, and it's natural to want to fight for the "rights" of those shareholders.  If it's Kozlowski versus TIAA-CREF, it's not hard to figure out whom to support (especially as a prof).  Look at the recent shareholders rights' cause celebre -- excessive executive compensation.  There's much in shareholder primacy that fits well with the progressive agenda.

But as academics like Lynn Stout and Larry Mitchell observe, there's much to shareholder primacy that's twisted, as well.  Shareholder primacy lends itself to an excessively short-term focus.  Shareholder-centered managers tend to kowtow to the markets, sacrificing values for a boost in stock price.  Moreover, if maximizing shareholder wealth really is the goal, a lot gets thrown out the window.  Everything else -- a quality product, loyal employees, happy customers, good community relations -- is only important if it leads to higher profits or stock price.  And a lot of times, it will help the shareholders to hurt those other constituencies, particularly employees.  That's why Mitchell advocates a "directors-for-life" model -- he wants to free directors to manage without looking over their shoulders at the stock price.  But then -- don't we end up with Kozlowski, or if not that, then at least GM?  Good, solid corporate values, good relations with employees, but too little pressure or incentive to increase productivity?

As one who has written about the dangers of shareholder primacy, I recognize the liabilites of that normative model.  But I cannot say I am completely sold on an alternative.  In September Gordon posted on different kinds of primacy models -- entrepreneur primacy, employee primacy, customer primacy.  Each has its pros and its cons.  It may be that there is no answer -- that, like the Aristotelian mean, we have to balance a number of competing interests to arrive at the best result.  But the danger in not choosing is the vice of inconsistency.  Take Robert A.G. Monks, for example.  He criticized the Paramount v. Time holding as an attack on the shareholders.  But as a talking head in the movie The Corporation, he attacks shareholder primacy.  Can you have it both ways?

Perhaps there is a way to thread the needle.  But by failing to adopt one model or the other, progressives may risk being marginalized, as corporate law scholarship continues to build on existing models.  And thus my question -- what is the best way for progressives to proceed?

Happy holidays, and many wishes for a joyous and peaceful season.

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