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Corporate Governance, The Firm and Investor Capitalism

Alexander Styhre

The shift from managerial capitalism to investor capitalism, dominated by the finance industry and finance capital accumulation, is jointly caused by a variety of institutional, legal, political, and ideological changes, beginning with the 1970s’ downturn of the global economy. This book traces how the incorporation of businesses within the realm of the state leads to both certain benefits, characteristic of competitive capitalism, and to the emergence of new corporate governance problems emerges. Contrasting economic, legal, and managerial views of corporate governance practices in contemporary capitalism, the author examines how corporate governance has been understood and advocated differently during the New Deal era, the post-World War II economic boom, and the after 1980 in the era of free market advocacy.
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Alexander Styhre

The finance market collapse of 2008 has inspired many scholars and pundits to spill much ink, and some have argued that the events of 2008 were the ‘Berlin Wall moment’ of free market capitalism (at times referred to as neoliberalism). In my view, that characterization is a misnomer, as the Berlin Wall coming down was the culmination of a long-term process where a politico-economic regime finally came to the end of the road as it could no longer uphold itself and satisfy even the most elementary human needs. In contrast, the financial market collapse of 2008 has led to few structural changes and the finance industry per se has been most successful in both pushing the costs for its restoration onto other actors (most notably national states, now operating under ‘austerity schemes’; see, for example, Major, 2014; Schui, 2014; Blyth, 2013) and further entrenching their own interests, leading to an even more salient oligarchic structure of the finance industry. Rather than being a Berlin Wall moment, the 2008 events were more like the Harrisburg or Chernobyl nuclear plant accidents: they made us all aware of the risks and revealed some of the costs of the system but, after all, when the dust had settled, they changed very little. In the case of nuclear energy, the underlying nuclear physics theories, the regulatory work, or the market for nuclear energy did not change in any decisive way. In the case of the 2008 financial market collapse, the underlying neoclassical economic theory framework justifying the practices in the finance industry, the regulatory and legal framework (becoming increasingly more lenient and liberal), and the demand for credit and financial services did not change in any decisive way. In both cases, too many people had too much to gain from justifying and further reinforcing these advanced but ultimately fragile and thus potentially harmful energy and financial systems. In both cases, these were ‘man-made disasters’ and what Charles Perrow (1984) calls ‘normal accidents’. Humans made and built these systems but apparently failed to keep them under full control; even more importantly, after the fact, when the harm had already been done, there were few possibilities for abandoning these systems despite their hazardous risks.

Perhaps future historians will address these two disasters – one environmental, polluting the life world of humans and other forms of life, one socio-economic, leading to enormous social costs in terms of increased economic inequalities (but also, indisputably, provided many merits in terms of increased supply of credit) – as evidence of the learned helplessness of advanced, capitalist human societies, building techno-scientific and socio-economic systems to serve these societies but eventually no longer being able to run them as humans may wish as they become too complex to slow down and monitor, even when the risk of derailment becomes too high, or even acute. From my own perspective, the latter type of ‘normal accidents’, that of socio-economic systems such as the global finance industry, is part of my jurisdictional domain as a management researcher and business school scholar. The underlying politico-theoretical framework that justified and served to construct and fortress the present finance industry arguably deserves systematic scholarly attention. During the last few years, I have published three research monographs addressing the shift from managerial capitalism to investor capitalism. The first volume, Management and Neoliberalism (2014), addressed the political changes and free market activism beginning in the New Deal era during the 1930s. The second volume, The Financialization of the Firm (2015), examined the consequences for the individual corporation when it was no longer treated as a site where production capital was integrated and monitored under one single management and the board of directors, but was now better seen as ‘a bundle of financial assets’. The third volume, Leadership Varieties (2016, co-authored with Thomas Johansson), discussed how the concept of leadership is strongly informed by the shift from managerial capitalism to investor capitalism, and how the fiduciary duties of former corporate elites have been gradually displaced by rational choice-informed incentives and compensation packages. In addition, the emergence of a market for corporate control has gradually undermined the very idea of the firm as an economic and social team production unit dependent on various forms of professional expertise for its functioning.

This fourth volume in this series of investigations focuses more explicitly on corporate governance and corporate law, and how neoclassical economic theory has by and large misunderstood, ignored, marginalized or trivialized not only management theory but also legal theory and corporate law when advocating its favoured contractarian theory of corporate governance. That is, this volume adds to the previous three volumes the analysis of how primarily legal theory and neoclassical economic theory in many cases are irreconcilable or complementary, and how much of the free market advocacy that has been integral to the politico-economic project to overturn managerial capitalism and to advocate free market capitalism – a project propelled by the political objective to restore capital owner interests – is factually wrong or seriously flawed regarding the assumptions made and propositions stated. This may sound like a bold declaration, but in order to understand corporate governance the analyst must recognize legal theory, corporate law and the day-to-day practices in corporations. In other words, rather than being neatly derived from deductive reasoning on the basis of neoclassical economy theory propositions regarding, for example, market efficiency and individual decision choices, corporate governance is social and economic practice seated in legal traditions and political objectives that have evolved over time. Free market protagonists may wish the world looked differently (and I do not in any way deny them the right to think so), but they must recognize, like any other researcher and scholar, that their preferences are not the same thing as factual conditions. What is the case in the best of all possible worlds may, sadly, not be the world that we inhabit and try to operate within. Unfortunately, the world that managers, shareholders, regulators, politicians, customers and so on, inhabit and operate within and govern and regulate is far more messy and non-linear than neat models and parsimonious theories of economic activity may suggest, and consequently the tendency to cut theoretical corners easily obscures and leads astray to a higher extent than is recognized.

Alexander Styhre

Melbourne, December 2015