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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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Chapter 4: Investor capitalism and the nexus of contract view of the firm: assessing the consequences

Alexander Styhre


By the early 1990s, after roughly fifteen years of mobilization of the business community and free market advocacy and reform, the new theory of the firm was conventional wisdom. It consisted basically of two principal ideas, both rooted in the combination of theoretical perspectives, derived from the same propositions and methodological assumptions, mutually reinforcing one another and yet representing their own specific interests including price theory (in economics), contractual theory (in legal studies), and agency theory (in corporate governance and management theory): (1) the firm was understood as a nexus of contracts, a ‘legal fiction’, that granted owners of stock the right to claim their proportional share of the residual cash flow generated by the firm; and (2) corporate governance practices were strongly oriented towards shareholder welfare at other principals’ and stakeholders’ expense. Gordon (2007: 1535) summarizes the essence of the new conventional wisdom as ‘[t]he 1950s tendency was to believe that firms could create and manage markets. By contrast, as evidenced by the growth of disaggregated, networked firms, the 1990s tendency was to use market signals to manage the firm’. In this new milieu, it was asserted, shareholders claimed their share of the residual cash flow but also provided the auxiliary benefit to reduce agency costs and better allocated the stock of finance capital to industries and niches in the economy with a better growth potential than mature or stagnating industries. To act in accordance with these prescriptions, executives were incentivized to fully commit to cost-cutting...

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