A burgeoning critique of the voguish ‘law and economics’ field is that, contrary to the conventional wisdom, shareholders do not ‘own’ the firm in any meaningful sense; rather, firms comprise intricate networks of rights and responsibilities between diverse arrays of stakeholders. Accordingly, managers are legally required not to maximise shareholder value, as the common refrain would have it, but rather to do what is best for the company, whatever that may entail.
This critique is usually framed in terms of short- versus long-term profits. Companies that maximise the value of their shares in the short term are likely to skimp on investment, training, and R&D in favour of financial manipulation, asset stripping, and other ‘low-hanging fruit’, thus compromising their ability to generate profits in the long term. For some reason, however, the critique of shareholder primacy is never taken to its logical conclusion, namely that corporations are, legally speaking, non-profit organisations.
In his rigorous book The Ownership of Enterprise, Hansmann distinguishes non-profit firms by the fact that they are not ‘owned’ in the same way as corporations (or cooperatives). In non-profits, according to Hansmann, an independent management board, entrusted with pursuing some express set of objectives, effectively governs the firm. As the shareholder-primacy critique points out, however, even corporations are in fact governed this way. Thus, according to Hansmann’s logic - and contrary to his conclusion that most firms are owned by investors because this entails a singularity of objectives in the form of profit maximisation - corporations are essentially non-profits.
The mere fact that corporations are structured as non-profits is not particularly surprising given that they were originally chartered to fulfil a specific public purpose. Moreover, it is clear that corporations have sharply deviated from their historical and legal ideal; regardless of what they are supposed to do, what corporations actually tend to do is pursue short-term profits, to the detriment of themselves and society. What is remarkable, however, is that capitalism - a system supposedly driven by profit - is based on organisations that are, technically speaking, not-for-profit. In my mind, this is further evidence that a more effective and more humane economy is not out of reach, and can be achieved without the complete abolition of capitalism.
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What about cooperatives? Aren't they a viable alternative? It is often remarked that, unlike conventional firms - which allegedly contain the sole objective of profit maximisation - cooperatives pursue a multiplicity of objectives, including the various concerns of their members other than share value. To economists, this augurs inefficient governance, which, according to Hansmann, leads many cooperatives to adopt a non-profit style of corporate governance. We have already seen, however, that conventional, 'investor-owned' firms actually feature a broad range of objectives besides profit maximisation, meaning that their distinction on this score is specious.
In fact, the opposite argument can be made, namely that cooperatives feature a narrower range of objectives than conventional firms. Unlike corporations, which are designed to satisfy the needs of a diverse array of stakeholders, cooperatives are specifically established to cater to their members' interests. Indeed, whereas a corporations will rarely (if ever) be created by the individuals who end up owning its shares, a cooperative will often be created by its members with the express purpose of meeting some clearly defined need.
These considerations turn the world upside down. Corporations are usually praised by economists for their efficient governance systems and scorned by everyone else for neglecting social concerns, while the opposite is the case when it comes to cooperatives. Perhaps this state of affairs should be reversed: in reality, the cooperative governance system might be efficient from an economic perspective but suspect from a social perspective, while the opposite might be true for conventional corporations. Indeed, this inverted view of cooperatives was once the norm, with economists (like Marshall and Mill) and social critics (like Webb and Bakunin) respectively lauding their efficient governance structures and deriding their 'collectively selfish' behaviour.
The truth is that neither extreme tells the full story - even if, for the sake of argument, we accept the unduly simplistic categorisation on which that story is based. In fact, the whole point of this post is to discourage the sort of black-and-white thinking that pervades the topic of corporate governance. If we adopt a more nuanced perspective, moreover, the political implications become more nuanced as well. Neither reactionary conservatism nor radical Marxism holds the answer to our problems: the prevailing model of corporate governance is broken, and needs to be fixed, but we shouldn't throw the baby out with the bath water.
In fact, the answer might be right under our noses: corporations can be socially beneficial, just as cooperatives can be economically efficient. The trick is to find a way to get the best of both worlds. So-called 'social cooperatives', which incorporate a range of stakeholders as members, are one possibility, as are the so-called 'community benefit corporations', which return to the original function of the corporate form. We should encourage the further proliferation of these incipient forms of organisation while devising more ways to make business fit for purpose.
This critique is usually framed in terms of short- versus long-term profits. Companies that maximise the value of their shares in the short term are likely to skimp on investment, training, and R&D in favour of financial manipulation, asset stripping, and other ‘low-hanging fruit’, thus compromising their ability to generate profits in the long term. For some reason, however, the critique of shareholder primacy is never taken to its logical conclusion, namely that corporations are, legally speaking, non-profit organisations.
In his rigorous book The Ownership of Enterprise, Hansmann distinguishes non-profit firms by the fact that they are not ‘owned’ in the same way as corporations (or cooperatives). In non-profits, according to Hansmann, an independent management board, entrusted with pursuing some express set of objectives, effectively governs the firm. As the shareholder-primacy critique points out, however, even corporations are in fact governed this way. Thus, according to Hansmann’s logic - and contrary to his conclusion that most firms are owned by investors because this entails a singularity of objectives in the form of profit maximisation - corporations are essentially non-profits.
The mere fact that corporations are structured as non-profits is not particularly surprising given that they were originally chartered to fulfil a specific public purpose. Moreover, it is clear that corporations have sharply deviated from their historical and legal ideal; regardless of what they are supposed to do, what corporations actually tend to do is pursue short-term profits, to the detriment of themselves and society. What is remarkable, however, is that capitalism - a system supposedly driven by profit - is based on organisations that are, technically speaking, not-for-profit. In my mind, this is further evidence that a more effective and more humane economy is not out of reach, and can be achieved without the complete abolition of capitalism.
***
What about cooperatives? Aren't they a viable alternative? It is often remarked that, unlike conventional firms - which allegedly contain the sole objective of profit maximisation - cooperatives pursue a multiplicity of objectives, including the various concerns of their members other than share value. To economists, this augurs inefficient governance, which, according to Hansmann, leads many cooperatives to adopt a non-profit style of corporate governance. We have already seen, however, that conventional, 'investor-owned' firms actually feature a broad range of objectives besides profit maximisation, meaning that their distinction on this score is specious.
In fact, the opposite argument can be made, namely that cooperatives feature a narrower range of objectives than conventional firms. Unlike corporations, which are designed to satisfy the needs of a diverse array of stakeholders, cooperatives are specifically established to cater to their members' interests. Indeed, whereas a corporations will rarely (if ever) be created by the individuals who end up owning its shares, a cooperative will often be created by its members with the express purpose of meeting some clearly defined need.
These considerations turn the world upside down. Corporations are usually praised by economists for their efficient governance systems and scorned by everyone else for neglecting social concerns, while the opposite is the case when it comes to cooperatives. Perhaps this state of affairs should be reversed: in reality, the cooperative governance system might be efficient from an economic perspective but suspect from a social perspective, while the opposite might be true for conventional corporations. Indeed, this inverted view of cooperatives was once the norm, with economists (like Marshall and Mill) and social critics (like Webb and Bakunin) respectively lauding their efficient governance structures and deriding their 'collectively selfish' behaviour.
The truth is that neither extreme tells the full story - even if, for the sake of argument, we accept the unduly simplistic categorisation on which that story is based. In fact, the whole point of this post is to discourage the sort of black-and-white thinking that pervades the topic of corporate governance. If we adopt a more nuanced perspective, moreover, the political implications become more nuanced as well. Neither reactionary conservatism nor radical Marxism holds the answer to our problems: the prevailing model of corporate governance is broken, and needs to be fixed, but we shouldn't throw the baby out with the bath water.
In fact, the answer might be right under our noses: corporations can be socially beneficial, just as cooperatives can be economically efficient. The trick is to find a way to get the best of both worlds. So-called 'social cooperatives', which incorporate a range of stakeholders as members, are one possibility, as are the so-called 'community benefit corporations', which return to the original function of the corporate form. We should encourage the further proliferation of these incipient forms of organisation while devising more ways to make business fit for purpose.
