Volume 10, Issue 3 - The Corporate Issue: A Tribute to Lynn Stout

The last book by legal scholar Lynn Stout proposes a bold plan to transform corporate governance and enhance their sustainability by creating a “Universal Fund” that would acquire a substantial share of many publicly traded corporations, but hold those shares passively. The plan would also help to redistribute wealth and income to reduce the effects of factors that are driving income inequality. This review examines how the plan might work, and where it is likely to run into problems.

In recent decades, advocates of the shareholder value perspective regarding corporations have depicted the shareholding investor as the owner of the corporation and the entrepreneur proprietor of corporate activity. Political discourse and regulatory frameworks keep imagining that one single subject or legal person holds the whole bundle of rights and responsibilities related to corporate investment, management and control. This subject would be the shareholding investor (acting as the owner of the corporation), while the bundle would be embodied in the one kind of security issued by the corporation, that is, the share. As a matter of fact, corporate practice shows fundamental disconnection between equity investment, enterprise management and corporate control. Over time, three main legal-economic innovations have featured this disconnection: (i) the very introduction of the corporate legal form; (ii) the working of corporate groups and financial intermediaries; and (iii) the overwhelming web of contractual arrangements and financial derivatives which characterise business affairs of listed companies and equity markets nowadays. In this context, this article argues that an ownership view of corporate activity misleads understanding and undermines efforts to enforce corporate sustainability, responsibility and accountability. Ownership and market are insufficient to assure this enforcement, while ownership sovereignty is irremediably lost. Insisting on such misunderstanding would result in facilitating if not favouring structuring opportunities to circumvent control and responsibility, including through regulatory avoidance. Instead, an enterprise entity view may comprehend the corporate activity (of which the corporation is one possible legal form, often embedded in a more complex legal structure involving an enterprise group) as an organisation and an institution which responds to and must submit to a variety of inside and outside checks and balances, with a view to assuring its consistent and continued role in business and society. From this systemic perspective, consolidated accounting and disclosure may represent a fundamental element of the institutional system of protection. In particular, a comprehensive accounting system – based upon economic substance (rather than legal form) – may make enterprise groups accountable for their ongoing activities to stakeholders (including shareholders), human community and nature.

Shareholder Value is not only a myth, as forcefully demonstrated by Lynn Stout. It has also led to a mess under the form of extensive negative externalities and growing inequalities. A different measure of value creation is urgently required.

This article is an historical analysis of the U.S. labor movement’s shareholder activism during the 2000s, which was based on their pension-plan assets. During the previous decade, corporate governance had tilted to give shareholders greater voice in corporate decisions. The protagonists were public pension plans such as CalPERS. Come the 2000s, they were replaced by unions and union-influenced pension plans. Their agendas overlapped but union investors were distinctive in their use of shareholder activism to make companies more public-minded, raise labor’s organizing power, and challenge executive power by reliance not only on shareholder activism but also political activities. Labor’s signature issue was executive pay, which was a topic that that shareholder activists during the 1990s had avoided other than to push for stock-based pay. But three waves of corporate scandals during the following decade caused other shareholders to become skeptical of executive pay-setting methods. Union investors zeroed in on expensing and backdating of stock options, and fought for say on pay, the issue where they had the greatest impact. An interaction between private orderings and regulation now developed, whereby shareholder pay reforms found their way into law. With inequality a major social concern, unions repeatedly contrasted lofty executive pay to stagnant wages. Yet little was said about lofty payouts to shareholders, which may have been a more important driver of inequality than executive pay. The article ties corporate governance to larger social and political developments in the U.S., and to the labor movement, embedding corporate governance in historical context.

In honor of Lynn Stout’s efforts to better suit the business corporation for the pursuit of long-term, publicly-beneficial purposes, the present essay reviews critically the historical process by which the corporation’s tie to public purposes—a precondition of the earliest grants of corporate powers to business enterprisers—was slowly severed. And it explores a form of corporate control, once widespread in the U.S. and easily revivable, that could partially restore corporate emphasis on public benefits—the foundation-controlled corporation.

It is now 50 years since Milton Friedman set out his doctrine that “The Social Responsibility of Business Is to Increase Its Profits.” This paper seeks to add fresh and compelling new evidence of why Lynn Stout was correct in her resolute critique of the thesis of shareholder primacy at the heart of the Friedman doctrine, and how this doctrine remains profoundly damaging to the corporations that continue to uphold this belief. It is argued that the Friedman doctrine has had a catastrophic impact upon American business and society beginning with General Motors failure to respond to investor calls for increased concern for safety and pollution at the time of Friedman’s intervention in 1970, stretching all the way to the recent fatal errors of Boeing in placing a higher priority in getting the new Boeing 737 MAX into the market than ensuring the soundness of software controls on the flight deck which led to two horrific plane crashes in 2018 and 2019 with the loss of 346 lives. These tragic errors in corporate judgement are ultimately related to the constricted sense of corporate purpose imposed by Milton Friedman and taken up with enthusiasm by agency theorists focused upon maximising shareholder value. This reckless single-mindedness has privileged the pursuit of the narrowest of financial measures of performance above fundamentals including passenger safety and environmental emissions controls. As a result, innocent lives have been lost, brands have been tarnished, and ultimately the strategic future of significant corporations endangered, and the ecology of the planet imperilled. There is now emerging a new sense of the purpose of the corporation that defines a rationale for corporate social and environmental responsibility in a way similar to Lynn Stout’s more inclusive stakeholder approach. The question remains open whether this will lead to the development of fiduciary duties, governance, strategies, targets, measures, transparency and disclosure that might deliver the sustainable corporation.

In this brief essay, I want to call something Lynn Stout was passionate about: building a better account (both theoretical and empirical) of human nature and motivation. This was the subject of a book that extended well beyond the corporate world (Cultivating Conscience [2011]) and was implicit in her most complete set of thoughts about corporate governance, The Shareholder Value Myth (2012). Lynn understood that such a behavioral account was needed to support her theory of corporate purpose. The other CONVIVIUM contributions say little about this aspect of her work, so I am bringing her thoughts about human motivation frontstage.