Table of Contents

Handbook on the Economics and Theory of the Firm

Handbook on the Economics and Theory of the Firm

Elgar original reference

Edited by Michael Dietrich and Jackie Krafft

This unique Handbook explores both the economics of the firm and the theory of the firm, two areas which are traditionally treated separately in the literature. On the one hand, the former refers to the structure, organization and boundaries of the firm, while the latter is devoted to the analysis of behaviours and strategies in particular market contexts. The novel concept underpinning this authoritative volume is that these two areas closely interact, and that a framework must be articulated in order to illustrate how linkages can be created.

Chapter 25: Corporate Governance, Innovative Enterprise and Executive Pay

William Lazonick

Subjects: business and management, strategic management, economics and finance, industrial economics, industrial organisation, institutional economics


25 Corporate governance, innovative enterprise, and executive pay William Lazonick 25.1 MAXIMIZING SHAREHOLDER VALUE Since the early 1980s corporate executives have justified their stock-based compensation as well as the corporate financial behavior that increases it by the dominant ideology that the role of the corporate executive is to ‘maximize shareholder value’ (MSV) (Rappaport, 1981 and 1983). At the same time, through agency theory, academic economists have supported this ideology by propounding a shareholder-value perspective on corporate governance that is consistent with the neoclassical theory of the market economy (Fama and Jensen, 1983a and 1983b). Especially in the United States, MSV remains the dominant ideology of corporate governance not only in business schools and economics departments but also in executive suites and corporate boardrooms. This chapter critiques agency theory and its MSV ideology by arguing that its basic tenets are contradicted by the theory of innovative enterprise (see Lazonick, 2002, 2010b, and 2010c). Indeed we contend that in the United States the use of stock-based compensation, and in particular stock options, to motivate corporate executives to have a strong personal interest in the performance of their companies’ stock prices has resulted in not only an inequitable distribution of income but also reduced investment in innovation and unstable economic performance. In the next section, we make the intellectual argument that, given the way the real world actually works, innovation theory trumps agency theory as a theory of superior economic performance. In the following section we show that in the corporate economy of...

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