Daniel J.H. Greenwood

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Enronitis, The Failure of Shareholder Centeredness, Teams and The Corporation as Polis

Law & Society Association, May 29, 2004

The central problem of corporate law is often seen as how to coerce or invite managers to work for the shareholders instead of themselves. In this essay, I suggest

  1. That the shareholder centered view of the publicly corporation a major cause of managerial misconduct, not its solution. And
  2. The beginnings of an alternative conception of the corporation that might help make corporate behavior more socially useful.

I. Shareholder Centeredness Is The Problem

So, let’s start with the first point:

The shareholder centered view is paradoxically self-destructive.

Corporate law demands that managers simultaneously be selfless servants and selfish masters.

As agents for the corporation, they are directed to set aside their own interests and work only for the entity and the legal construct of its shareholders – which the law imagines to be only maximizing financial returns from the shares.

This extreme form of altruism – beyond even the self-flagellation of a medieval monk, who after all was ultimately hoping to find a way through the highly competitive admissions process to heaven – would, you might think, require long and hard cultural training to accomplish. But instead,

Day to day, managers are directed to learn an extreme variety of instrumental selfishness:

To make things worse, it is a commonplace – and a correct one – of managerial theory and ordinary life, that the best way to get the ordinary corporate participants to contribute to the corporation is to make them believe they are part of a team.

A. Teams and Strangers

Our law and morality reflect two radically different ways of relating to the world.

Within teams, understood broadly, we view ourselves as part of a common enterprise, in which gains to the enterprise or other members are gains to ourselves. “One for all and all for one”is the spirit of the successful sports team, patriotism, healthy families – when you gain, so do I. When we are working together, cooperation is fundamental, not exceptional, because we do not view ourselves as oppositional or even fully differentiated from one another. We are we.

This is the world of agency and fiduciary duty, in which if see that you’ve missed an opportunity, I should tell you about it.

Outside the team, on the other hand, the world is Hobbesian,

“a perpetuall and restlesse desire of Power after power, that ceaseth only in Death.” (Thomas Hobbes, Leviathan, I, xi.)

In this competitive mode, anything good for you is automatically bad for me. The more power you have, the less I do; the more money you make, the less is left for me (or at least, the less relative ability I will have to command scarce resources -- see, Robert Frank, Winner Take All Society ).

This is the world of the market, of the social contract, of Hobbes: mutually competitive, disinterested players each out for themselves and only willing to give if they get in return, respecting a set of laws of fair-play because it is in their enlightened self-interest to do so. Here the rules are honesty – and caveat emptor, where so long as I don’t lie, I’m free – indeed expected – to take advantage of the opportunities presented me.

We switch back and forth between these two modes of thinking easily, but are less clear on when one is appropriate and when the other is.

B. Faking Teams

Team members give; strangers in a market bargain.

So one of the key ways corporations overcome the inherent disadvantages of bureaucracy in order to out-compete markets is by becoming teams.

But managers, under our corporate law, must always remember that the team is a lie.

The firm and its employees, suppliers and customers are not a team, regardless of what the ads or the morning inspirational exercises contend: managers are legally and culturally required to view the other corporate participants – even themselves – as merely tools. Unlike team members, employees are mere means to an end not their own, to be discarded whenever it is profitable to do so.

To be sure, most of the time the best way to convince these tools to sacrifice for the firm is treat them as if they were team members. Nothing irritates people more than to be shown up as fools, who treated someone as a team member and then were reciprocated with Hobbesian competition. Employees who feel exploited will exploit back: as Tom Tyler and others have found, absurd CEO salaries or unfair disciplinary procedures also cause high levels of paper-clip theft.

But the responsible manager understands that this is an illusion. When push comes to shove, the firm participants are only to be treated as members of the team so long as they are giving more than they are getting; the job of management is to extract from them and give to shareholders.

Now, this is training in hypocrisy – dishonesty – in the deepest sense.

And note that managers themselves are one of the groups to be exploited.

This means that a manager acting in good faith is always acting in bad faith

– an unstable situation likely to produce Enron style cynical bad faith.

That is the main point.

Note, that even if it doesn’t, it produces something similar.

In good faith, the only reason to pay a manager a salary is because he is contributing more to the firm than he is being paid. But that is another way of saying that he is being exploited. Moreover, at salary negotiation time, managers are entitled to switch from the team/ agent perspective to the market/self-interested perspective, and demand their true value. It seems to follow as a logical necessity, that every manager either

Ordinary cognitive dissonance should guarantee which way he will think about that problem.

II. Alternatives: Corporations As Polis

Finally, a word about an alternative vision.

Corporations are a locus of struggle over values and cash.

A. Cash

A successful corporation must create value: it can sell its product for more than the minimum it must pay for the inputs. This is a surplus to cooperation, a benefit of substituting planning for market mechanisms.

The surplus cash is available for distribution to any of the corporate participants, and it is critical to recognize that explicitly: all corporate participants have an economic and moral claim to it.

Corporate law and corporate governance exist to police the struggle over this surplus in a civilized fashion -- preferably one that maximizes the size of the available pie for all the participants inside and outside the corporation.

The shareholder centered vision conceals the true conflict and lessens the likelihood of maximizing the pie.

B. Values

Corporations are a central locus of our communal political decision making process for balancing economic growth, narrowly construed, against other values: including, environment, safety, quality of life, childrearing, stability and on and on.

The share centered view of the corporation conceals this corporate function by demanding that corporate managers always choose one value: share value maximization, regardless of what real people – even the humans who own the shares – would do under the circumstances.

The corporation is a semi-autonomous self-governing institution, not unlike a municipality but more powerful. To acknowledge this view of the corporation as polis is to see the need for fundamental political reform, to assure that the interests – and perhaps even the views – of all its multifarious, multiple identitied, multiple participants are reflected in its decisions.