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Corporate Governance, The Firm and Investor Capitalism Legal-Political and Economic Views

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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Index

Alexander Styhre

Adelstein, Richard P. 66, 67

agency costs 8, 116–18, 120, 130, 136, 139–42, 144, 145, 148, 149, 155, 159, 165–7, 169, 183, 196, 197, 199–201, 208, 232

agency theory 23, 103

agency theory model 107–59

contractarian view vs. corporate law view 122–7

contractual theory inconsistencies 127–32

of corporate governance 112–22

practical recommendations and policies 120–22

team production theory 145–8

algorithmic trading 45

Almandoz, Juan 56

American Association for Labor Legislation (AALL) 65

American corporate law system 109

American Housing Rescue and Foreclosure Prevention Act (AHRFPA) 43

American revolution 1, 34

Anglo-American corporate and securities law 173

Annales school 1

anti-collectivism 138–42

anti-takeover legislation 175

anti-trust legislation 40, 51, 53, 54, 61, 62, 171

aristocracy 1

Aron, Raymond 73

Arrow, Kenneth J. 12, 92, 93

asset shielding 205

assumption 8

austerity 215

Babb, Sarah 47

Bainbridge, Stephen M. 197

Baker, George P. 117, 118, 152

Bank of Sweden’s Prizes in Economic Sciences in memory of Alfred Nobel 75, 230

bankruptcy law 178

Baron, James N. 52

Baumol, William J. 90–92

Baysinger, Barry D. 123, 124

Bear Stearns 151, 194, 197

Bebchuk, Lucian A. 178, 197, 201, 202

Beckert, Jens 193

Bellow, Saul 68

Bendix, Reinhart 89

Berkeley, California 150

Berle, Adolf A. 23, 62–4, 71, 88, 102, 111, 115–16

Bernanke, Ben 4

Bernanke, B.S. 4, 189, 230

Bertrand, Marianne 174–7

Blair, Margaret M. 38, 39, 41, 145, 147, 148

Blau, Peter 89

Blauner, Robert 89

Blinder, Alan S. 3, 6

Block, Fred 82

Blyth, Mark 14, 188

bounded rationality 14, 92, 233

Bourdieu, Pierre 210

Bowen, Howard 55

Brahe, Tycho 10

Brandeis, Louis D. 60–62, 66, 101

Brandeisian progressives 70

Bratton, William W. 63, 64, 182

Bratton, William W. Jr. 36, 62, 107, 133, 136, 139

Braudel, Fernand 5

Brownstein, Ronald 87

Brudney, Victor 127–30, 133, 134, 138, 146

Bryan, Dick 193

Burgin, Angus 76

Bush, G.W. 4

Business Behavior, Value and Growth (Baumol) 90

business charters 33–5

Butler, Henry N. 123, 124

Cambridge University vs. London School of Economics 82–5

Campbell, John L. 31, 32

Canguilhem, Georges 9, 14, 108

capital inflow and deregulation 189–92

capitalism 5

capital lock in 205

capital market efficiency hypothesis 131

Carlyle, Thomas 10

Carosso, Vincent 70, 71

Carruthers, Bruce G. 47, 48

Carter, J.E. Jr. 100, 189

Cassidy, John 76

Celler–Kefauver Act 110

Cheng, Ing-Haw 194

Cheung, Steven N.S. 123

Chicago law and economics school 123, 124, 126, 231

Choo, Jennifer 18

Clark, Cynthia E. 45

Clark, Robert C. 134, 143, 144, 146

Clayton Antitrust Act (1914) 40

Coase, Ronald 123

cognitive ideas 31

cognitive parading 31

Cold War rationality 222, 227

collectivism 23, 61, 62, 67–9, 71, 72–80, 85, 99–102, 107–9, 111, 158, 168–70, 188, 207, 209, 210, 232

Collins, Robert M. 84

Commodity Futures Modernization Act 191

Commons, John R. 65

Common Sense (Paine) 29

community logic 56

competitive capitalism 12, 32, 51, 108, 166, 219–20

complicit decoupling 45

Comte, A.M.F.X. 66

Conard, Alfred F. 184

Connecticut 104

conservatism 80–81

Conservatism 29, 30, 80–81, 88, 89, 99

The Constitution of Liberty (Hayek) 79

contract 112, 127, 128

legal concept of 113

contracts ex ante 124

contractual arrangements 123

contractual rule making 143

contractual theory 125–7

contractual theory inconsistencies 127–32

contractual view, consequences of 148–58

corporate control, market for 95

corporate efficiency 118

corporate governance scholarship 196–202

corporate law 18, 29–57

business charters development and 33–5

fiduciary component of 55–6

and innovation 44–7

and regulations 42–7

role of 35–42

corporate leverage 164

corporate proxy machinery 127

corporate restructurings 149–55

corporate system 8, 22, 33, 35, 37, 38, 41, 42, 89, 94, 95, 142, 143, 166, 196, 207, 234

corporate welfarism 65

corporation

defined 37

growth and differentiation of 39–42

incorporators and 109

credit system 61

Daily, Catherine M. 20

Dalton, Melville 89

Dartmouth College 34

Davis, Gerald F. 12, 136, 193

Deal Decade 155

Dearborn Massacre 72

Debt-financed buyouts 155

default rules 37, 199

Delaware Chancery Court 163

Delaware General Corporation Law 39

DeMott, Deborah A. 128, 132

Deutsche bank 188

dialectical relationship 46

distribution rules 37

divine law 30

Dobbin, Frank 51–5

Dodd, Merrick 4

Donaldson, Thomas 183

Dowd, Timothy J. 53, 54

Downer, John 10

Dress to Kill (1998) 231

dual-class voting structures 179

Durcharbeitung 1–6

Easterbrook, Frank H. 123, 124, 127, 141

economic freedom 5, 23–4, 55, 76, 79, 81–2, 84, 126, 143, 209–12, 222, 227, 231, 232

economic growth 85–7

economic ideas 13–22

corporate governance and 15–22

economic sociology view 17–19

management studies view 19–22

neoclassical economic theory view 15–17

policy-making and 13–15

economic organization 64

economic rationality 53, 224, 234

economic reasoning 220–22

economics, in books and real life 9–13

economic sociology 17–19

The Economic Theory of ‘Managerial’ Capitalism (Marris) 90

The Economist 150, 151, 153

Edelman, Lauren B. 48–50

efficiency theory 78, 109

efficient market hypothesis (EMH) 77, 112–14, 120, 134, 145, 169, 230, 231

Eisenberg, Melvin A. 37, 38, 41, 112, 114–16, 120, 128, 129, 133–7, 182

Elijah complex 74

elite rule 142–5

Emergency Economic Stabilization Act (EESA) 43

enabling rules 37

The End of History for Corporate Law (Hansmann and Kraakman ) 170

enforcement rules 92, 93

Englander, Ernest J. 154

English law 34, 38

Enron 43, 55, 58, 197, 213

Enron bankruptcy 43, 55

Enronitis 58

epistemic communities 31

epistemocratic fallacy 210, 211

epistemocratic sociodicy 210

Euclidean axiom 76

European feudalism 2

A Failure of Capitalism (Posner) 3

Faludi, S.C. 152

Fama, Eugene F. 111, 116–18

Family and Medical Leave Act (1993) 53

Faulkner, Alex 44

Federal Reserve 4

Feldman, Martha S. 21

fiduciary duties 128, 130, 131

fiduciary law 129

fiduciary rules 37, 129, 134, 135

finance industry collapse 196–202

finance industry growth 184–9

finance market expansion 189–92

finance market pricing mechanism 135

finance sector, growth of 184–202

financial innovations 45–6

financial logic 56

financial market regulation 19

Financial Services Modernization Act 191

FIRE (Finance, Insurance and Real Estates) sector 185

firm, governance 8–25

firm, nature of 8–25

first oil crisis of 1973 100

Fisch, Jill E. 200

Fischel, Daniel R. 123, 124, 127, 141

Fleck, Ludwik 76, 219

Fligstein, Neil 5, 18, 181, 191

Food and Drug Administration (FDA) 143, 144

Ford, Henry 65

Ford Motor Company 72

Fortune 79

Fortune 1000 companies 162, 206

Frame, W. Scott 45, 46

Franco-Prussian war 1

free market advocacy 60–103, 211

free market advocators 166

free-market capitalism 84

free market protagonists 107, 108, 110, 135

free-rider problems 146

French revolution 1

Friedman, Milton 82, 101

Fukuyama, Francis 170

Funk, Russell J. 46

Galbraith, John Kenneth 97

Gantt, H.L.L. 69

Gay, Peter 2

General Motors 60, 72

The General Theory of Employment, Interest and Money (Keynes) 209

Glass–Steagall Act 40, 46, 47, 110, 191

golden parachutes 156, 157, 199

Goldwater, B.M. 99

The Good Society (Knight) 73, 80

Google 179

Gordon, Jeffrey N. 88, 155, 165, 170

Gospel of Work 2

Gouldner, Alvin 89

Graebner, William 66

Gramm–Leach–Bliley Act 191

The Grapes of Wrath (Steinbeck) 68

Great Recession 1–6, 216, 230

Greenspan, A. 4, 188

Greenwood, Robin 187

Grocott, Chris 76

Habinek, Jacob 191

Hall, Bronwyn H. 205

Halliday, Terence C. 47, 48

Hambrick, Donald C. 20, 21

Handlin, Mary F. 34

Handlin, Oscar 34

Hansmann, Henry 170–74, 177, 179, 181

Hanson, Norwood 10

Harriss-White, Barbara 210

Hart, Oliver 16–18

Hawley, Ellis 69

Hayek, F. von 24, 73–83, 101, 102, 107–8, 166, 209

Hegel, G.W.F. 67

Heracleous, Loizos 182, 183

Herbert Simon tradition 19, 158

Hermalin, Benjamin E. 16

Hilt, Eric 41

Hirschman, Daniel 46

Hofstadter, Richard 66

holdup 125, 160

homo economicus 55

Hoover, Herbert 69

hostile takeovers 139, 148, 149, 155, 175

Howard, John L. 131

Hughes, Everett 89

human resource management 52–3

ideologies 14, 24, 25, 43, 62, 69, 74, 75, 97, 98, 100, 102, 137–9, 170, 183

Ideology and Utopia (Mannheim) 219

ideology of utopian capitalism 97

ING 188

Initial Public Offerings (IPOs) 37, 179, 199

institutional economic theory 30

institutional innovations 30–31

institutional investors 16, 151, 154, 206

institutional theory 109

insurance companies 151, 206

internal control systems 119

intraorganizational control 92

investor capitalism 13, 21, 22, 24, 165–211

advancement of 184–202

consequences of 203–7

Izzard, Eddie 233

Jacoby, Sanford M. 88

Jaques, Elliott 89

Jensen, Michael C. 111–14, 116–21, 169, 182

Jones, Daniel Stedman 83

junk bonds 149–51, 153, 154, 157, 159, 167

juridical contract 112

Kahneman, Daniel 92

Kaufman, Allen 36, 70, 122, 125, 126, 154, 156

Kaufman, Jason 33, 35

Kelly, Erin L. 51–3, 55

Kepler, Johannes 10

Kerr, Ron 56

Keynes, John Maynard 14, 81, 82–5, 102

Keynesian economic model 103

Keynesian economic policy 74, 80–101

Keynesianism 85

anti-statist critique of 99

decline of 98–101

see also Keynesian economic policy

Klausner, Michael 198, 199

Knight, Frank 73

Kogut, Bruce M. 20

Kohlberg Kravis Robert & Co (KKR) 149–51, 154

Kolodny, Robin 46

Konzelmann, Suzanne J. 77, 83

Kraakman, Reinier 170–74, 177, 179, 181

Krier, Dan 196

Krippner, Greta R. 189, 191

Kristal, Tali 86

Labor omnia vincit improbus 2

labour law 19

labour relations managers 89

Lambert, Drexel Burnham 150, 153

Lamoreaux, Naomi R. 34, 124, 125

Lan, Luh Luh 182, 183

Langston, Thomas S. 69

La Porta, Rafael 16

Lazonick, William 203

Le Colloque Walter Lippmann 73, 75

legal ambiguity 53

legal environment 18, 29–57, 107, 124

legal field 48

legal texts 49

legislation, empirical studies of 51–5

Lenglet, Marc 45

Le Roy Ladurie, Emmanuel 1

leveraged buyouts (LBOs) 119, 135–6, 149–58

managerial responses to 155–8

limited liability 38, 57, 58

LinkedIn 179

Lippmann, W. 72–4, 79–80, 104

Lipton, Martin 154

Locke, John 29

Long, Michael S. Sr. 155, 156

L’organization industrielle 64

Los Angeles Times 87

Lubatkin, Michael H. 182, 183

Macey, Jonathan 201

‘Magna Carta of Liberalism’ 74

management-centric system 168

management theory revision 181–3

managerial capitalism 11, 21–2, 25, 36, 87–98, 102, 103, 110, 111, 117, 148, 153, 159, 166, 168, 169, 180, 184, 190, 195, 196, 207–10

managerial efficiency 19

managerial inefficiency 135

managerialism

bounded rationality 92

collectivism concept and 72–80

decisions, framing of 92

firm and 62–80

free market advocacy 60–103

neoliberal thought community 72–5

New Deal and managerial capitalism 64–71

ownership and control 62–4

principal–agent relations 60–103

Roosevelt’s New Deal 66–71

trust versus contract 87–98

managerialist view 114

managerialization of law 49–51, 55

managerial malfeasance 157

managerial welfare hypothesis 155, 156

mandatory rules 37, 41, 129, 143, 145

Manne, Henry G. 94–6, 103

Mannheim, Karl 25, 29, 30, 219

market-based price system 92

market competition, virtues of 80–81

market efficiency 42

market failure, modality of 113

market for corporate control 57, 95, 96, 116, 121, 197, 200

market romanticism 210

Marris, Robin 11, 90, 92, 94, 97

Marshall, John 35

Martinez-Moyano, Ignacio J. 44–5

Massachusetts 34, 53, 104

Masten, Scott E. 127

Mayo, Elton 89

Means, Gardiner C. 62, 63, 102, 111, 116

Meckling, William H. 112–14, 116, 182

M-form 88

Mian, Atif 43, 44

Milken, M.R. 149–51, 153–5, 167

Mills, Charles Wright 97

mimetic isomorphism 53

Minsky, Hyman 14, 192

Mirowski, Philip 75, 76, 78, 99

Mises, Ludwig von 82, 108

Mizruchi, Mark S. 63

The Modern Corporation & Private Property (Berle and Means) 62, 63

modus tollens 117

money management capitalism 184, 192–6

finance market actors 192–5

sustainability of investor and 195–6

money trust, the 60, 101

Mont Pèlerin Society (MPS) 75, 82, 103

Moore, Marc T. 17, 62, 121

moral hazard 57, 58, 92–4, 175–7, 188, 189, 230

mortgage-backed securities (MBS) 186, 191, 193

Moss, David A. 87

Mullainathan, Sendhil 174–7

Müller, Julian 195

mythical transcendence 29

narcissistic leaders 56

National Industrial Recovery Act (NIRA) 67, 69, 107

Neeman, Zvika 202

neoclassical economic theory 15–17, 31, 122, 219–34

theoretical realism of 227–30

neoclassicists 19

neoliberal thought collective (NTC) 76, 77

New Deal 22, 40, 47, 61, 63–72, 76, 79–81

New Deal programmes 61, 81, 110

Newell, Sue 45

New Hampshire 34

The New Industrial State (Galbraith) 97

nexus of contracts 109, 121, 133–7

ideology of 138–42

investor capitalism and 165–211

nexus of firm-specific investments 147

Niezen, Maartje G.H. 45

Nixon, Richard M. 100

Nobel, Alfred 75

non-infrastructure businesses 34

normalization of deviance 44–5

normative ideas 31, 32

North, Douglass 30

oligarchic managerial capitalism 168

operating rules 92, 93

option pricing theory 178

Orange County, California 99

organization routines 21

organized action 78

O’Sullivan, Mary 17, 18, 203

overbanking 184–202

ownership, separation of 118

ownership capitalism 65

Paine, Thomas 29, 30

Panglossian claim 141

pareto-efficiency 143

pareto-efficient rules 143

paternalistic elitism 142, 144–5

Peck, Jamie 3

pension funds 151, 174, 206

Pentland, Brian T. 21

performative theory 180

personal administration legislation 52

personal capitalism 65

Philippon, Thomas 185, 187

Philips-Fein, Kim 80, 81, 99

Phillips, Wendy 44

Pinochet, Augusto 77–8

poison pills 155, 156, 199

policy-making 13–15, 31, 32

policy paradigms 47

political liberalism 72

political mobilization 46

political rent-seeking 161

portfolio planning 110–112

positional conflicts 133, 137

Posner, Richard A. 3, 4, 6, 42

postcorporate economic organization 12

power balance 1

price function 76

price system 12, 92, 93, 161

price theory 77, 123, 124, 126, 165, 169, 201, 210, 212, 231, 232

price volatility 193

principal–agent relations 60–103

private equity firms 150, 151, 217

progressive era legal reform 64–71

propositions 8–9

public choice theory 227

public corporation 12

public good 29, 35, 138

Rafferty, Michael 193

railroad systems 53

rational choice theory 222–6

tragic failure of 226–7

R&D investment 204–7

Reagan, R.W. 87, 99–101, 150, 189, 190, 212

real-life economics 9–13

Rebérioux, Antoine 17, 62, 121

regulatory environments 46, 49

rentier capitalism 209

Reshef, Ariell 185, 187

residual cash flow 16, 18

residual claimants 116–18, 124, 177–9

Rhode Island 34, 104

RJR Nabisco 153

The Road to Serfdom (Hayek) 74, 76, 78, 79

Robbins, Lionel 74

Roberts, Robin W. 43, 44

Robinson, Sarah 56

Rock, Edward A. 168

Rockefeller Foundation 89

Roe, Mark J. 139, 140, 142

Rogier, Louis 73

Roman law 38

Roosevelt, F.D. 61, 63, 66–72, 76, 79, 80, 102, 107

Röpke, Wilhelm 73

Rosett, Joshua G. 175

Roy, William G. 109

rules, categories of 37

Safeway 152

Saint-Simon, C. H. de 64, 66–7

salaried managers and directors 109–12

Samuelson, Paul 84

Sarbanes–Oxley Act 43, 197

savings and loans associations 190

scepticism 71

Scharfstein, David 187

Schmidt, Vivien A. 31

Schumpeter, Joseph 64

Securities Act of 1934 110

Securities and Exchange Commission (SEC) 40, 110, 143

securities industry 186

self-regulating contractual arrangement 125

Selznick, Philip 50

sexual harassment 51

shadow banking system 6, 7

shareholder democracy view 114

shareholder primacy 23, 169–70

shareholder primacy governance 172

shareholder primacy protagonists 170

shareholder welfare 170–74

consequences of 203–7

shareholder welfare arguments 177–81

shareholder welfare hypothesis 155

shareholder welfare model 167

Sherman Antitrust Act 40

Shleifer, Andrei 15

Simon, Herbert 92

Simon, William E. 112

situation-specificity 132

Skilling, J.K. 58

Smith, A. 64, 65, 104, 190

Smith, George David 152

social democracy 139, 140

social democratic policy 139

Social Responsibilities of the Businessman (Bowen) 55

Social Security Act (1935) 79

Somers, Margaret R. 82

S&P 500 companies 194, 204

Spinoza, Benedict de 30

stagflation 87

stakeholder opportunism 20

Stalin, J. 72

state-level anti-takeover legislation 174–7

statutory corporate governance rules 131

Steinbeck, J.E. Jr. 68

Stigler, George 42

Stout, Lynn A. 55, 145, 147, 148, 177–82

Stout, Suzanne K. 136

structural rules 37

The Structure of the Corporation (Eisenberg) 112

Suárez, Sandra 46

Suchman, Mark C. 48

suppletory rules 37

Swedberg, R. 50, 51

systemic shock absorbers 193

Tabb, William J. 195

Taylor, F.W. 69

team production theory 145–8

Teece, David J. 9

theory-laden observations 10

Thornburg, Steven 43, 44

totalitarianism 100

tout court 119

Tversky, Amos 92

Two Treatises on Government (Locke) 29

Ulysses 224

Urofsky, Melvin I. 65

Useem, Michael 155

US Supreme Court 34, 35

utopian capitalism 97

utopian ideas 25, 219

varieties of capitalism literature 18

Veblen, Thorstein 60–61

vertical integration 97, 110

Vishny, Robert 15

Volcker, P.A. Jr. 189

Wachter, Michael L. 64

Walkling, Ralph August 155, 156

Wallace, D.F. 210, 211

Wall Street crash 6, 40, 61, 62, 64, 72, 101–2

Wall Street Journal 43, 152

Watkins, Sherron 55

Weber, Max 9, 10

Weinstein 180

Weinstein, Olivier 183

Weisbach, Michael S. 201

welfare capitalism 64–71

welfare state expansion 85–7

Werder, Axel von 20

Western capitalism 8

When the Music Stopped (Blinder) 3

White, Lawrence J. 45, 46

Williamson, Oliver 219

Winter, Sidney G. 9

Xiong, Wei 194

Zacharias, Lawrence 36, 70, 122, 125, 126, 156