Millstein Center Blog

Corporate Governance in the Context of Global Economic Circumstances: Analysis by Bruce Greenwald

Editor’s Note: This post is part of an ongoing multi-part series covering the Millstein Center’s March 1, 2019 conference, “Corporate Governance ‘Counter-narratives’: On Corporate Purpose and Shareholder Value(s).”

By Brea Hinricks

Is corporate governance a primary cause of the current economic malaise plaguing the U.S. and other parts of the world? Could changes to corporate governance, including a shift by corporations toward serving a broader “corporate purpose” (beyond a myopic focus on short-term shareholder profits), help improve economic growth? These were key questions posed at the Millstein Center’s March 1, 2019 Counter-Narratives Conference.

According to Columbia Business School’s Bruce Greenwald, the answer is emphatically “no.” Instead, a much broader and more systemic force than corporate governance is to blame: a structural economic downturn caused by slow productivity growth.

Professor Greenwald argues that we are in the middle of a depression caused by a global economic transition in the nature of work. As in previous downturns, we are facing the collapse of a once-important and central sector (manufacturing) and another (service) taking its place. In some ways, this is similar to the transition that led to the Great Depression, where we moved from a farming and agricultural-based society to an industrial society, but with some key differences.

Continue reading Corporate Governance in the Context of Global Economic Circumstances: Analysis by Bruce Greenwald

Gaps and Pitfalls in Corporate Purpose: Insights from Jill Fisch and Bruce Kogut

By Brea Hinricks

Last week, the Business Roundtable announced a major shift in their stance on the role of corporations in society. Rather than maximizing profits and prioritizing the interests of shareholders above all others (an idea known as the Friedman Doctrine, which in recent years has prevailed in the business community), the influential group of top CEOs pronounced that their companies share a fundamental commitment to all of their stakeholders, including employees, customers, suppliers, and the communities in which they operate.

There are many theories explaining the cause of this shift in the Business Roundtable’s position, including the somewhat cynical view that business leaders are hoping to provide themselves with a convenient shield against shareholder scrutiny, always able to argue that their actions are serving one group of stakeholders or another. However, it seems likely that there are at least a few other main forces driving us to rethink “corporate purpose,” presciently identified by Jill Fisch of the University of Pennsylvania Law School and Bruce Kogut of Columbia Business School at the Millstein Center’s March 1, 2019 Counter-Narratives Conference. They also warned that focusing on purpose-driven corporations is not likely to produce the results we’re hoping for, and indeed may lead to some unintended consequences.

Continue reading Gaps and Pitfalls in Corporate Purpose: Insights from Jill Fisch and Bruce Kogut

Does (and Should) Delaware Law Allow “Long Term Stakeholder Governance”?

By Brea Hinricks

Over the last fifty years, the concept of “shareholder primacy” espoused by the Friedman Doctrine has been the dominant view of the purpose of business. Under this model, the singular social responsibility of business is to maximize profits for shareholders, constrained only by the limits of laws and regulations.

Lately, however, the Friedman Doctrine is starting to show cracks—academics, politicians, and even business leaders are questioning whether it should be abandoned for a “stakeholder” model in which the interests of non-shareholder constituencies (e.g., employees, customers, debtholders, the company itself, and the community in which it operates) are considered and balanced alongside the sole pursuit of profits.

When considering the practical legal realities of implementing the stakeholder model in the United States, one question looms large: Does Delaware law allow for this type of long-term stakeholder governance? Should it? Given the prominence and influence of Delaware corporate law, the answer to this question is paramount. On May 16, 2019, the Millstein Center for Global Markets and Corporate Ownership at Columbia Law School and Gibson Dunn convened a group of academics, business leaders, and legal practitioners to discuss the current state of Delaware law and debate whether it allows or could be headed toward a more stakeholder-centric model.

Continue reading Does (and Should) Delaware Law Allow “Long Term Stakeholder Governance”?

Mark Roe on Leo Strine and the Big Picture: Is Short-Termism Really to Blame?

By Brea Hinricks

In his remarks at the Millstein Center’s March 1, 2019 conference, Corporate Governance “Counter-narratives”: On Corporate Purpose and Shareholder Value(s), Delaware Supreme Court Chief Justice Leo Strine argued that a major issue facing public corporations and capitalism today is that they are failing to work for the average person (a recurring theme in the Chief Justice’s recent writings).

Mark Roe, in reflecting on Strine’s work for the conference, identified another main narrative espoused by Strine: that “short-termism” is a deep problem which is damaging the U.S. economy. Indeed, the short-termism story is pointed to by many in the legal, political, and business realms as a major threat to economic prosperity. Commentators from Joe Biden to Warren Buffet and Jamie Dimon have argued that there is a problematic pressure on companies to prioritize short-term profits over long-term, sustained growth, in part due to more intense focus from activist investors.

Despite this widespread rhetoric, Roe argues that economy-wide data simply doesn’t provide clear support for the short-termism story. He identifies four main trends often put forth as evidence of the bad economic effects of stock market short-termism:

cutbacks in capital expenditures;
stock buybacks which starve firms of cash;
reduced R&D investment resulting from the lack of cash (which, in turn, reduces employee welfare); and
a U.S. stock market that does not support longer-term innovation.

Continue reading Mark Roe on Leo Strine and the Big Picture: Is Short-Termism Really to Blame?

Chief Justice Leo Strine on Berle, Friedman, and Corporate Purpose

Editor’s Note: This post is part of an ongoing multi-part series covering the Millstein Center’s March 1, 2019 conference, “Corporate Governance ‘Counter-narratives’: On Corporate Purpose and Shareholder Value(s).”

By Brea Hinricks

Much has changed in the U.S. since Adolf Berle made his case for shareholder primacy in the early 1930s, and since the Friedman Doctrine rose to power thirty years later. Starting in Berle’s time, robust protections for employees came about as a result of the New Deal (passed thanks in part to Berle’s participation) and the rise of labor unions. Employees had enough bargaining power to ensure that they were treated fairly by their employers and were still protected in an environment that extolled the sole pursuit of profits.

Today, says Chief Justice Leo Strine of the Delaware Supreme Court, the Friedman Doctrine and the sole pursuit of profits within the “rules of the game” seems extreme. But in the context of Friedman’s day, where these substantial worker protections were in place and the “rules” were quite robust, it made sense for enterprise to “stick to its knitting” and leave social protections for the realm of government and regulation.

Chief Justice Strine made these observations at the Millstein Center’s March 1, 2019 conference, Corporate Governance “Counter-narratives”: On Corporate Purpose and Shareholder Value(s). (You can find an audio recording of his full remarks here.) He highlighted a vastly different reality facing today’s workers. Globalization, he points out, has given companies the ability to outsource labor to lower-paid and worse-protected workers abroad, and has allowed companies to forego providing benefits to their employees (if they are considered “employees” at all). Workers have worse job security today than they once did, especially due to automation-related layoffs. Companies create fewer jobs in the communities in which they operate, weakening their social ties and the informal expectation that companies should “give back” at the local level. Today, only a relatively minuscule number of private sector workers belong to labor unions. The “rules of the game” look very different than they did in Friedman’s day.

Continue reading Chief Justice Leo Strine on Berle, Friedman, and Corporate Purpose

The Government ‘Match’ to High-Powered Corporate Governance

By Brea Hinricks

Professor Jeff Gordon presents his argument for addressing the economic insecurity faced by today’s employees—a robust government investment program in human capital to subsidize employee retraining and reeducation.

Capitalism and corporate purpose have evolved over the last half century to become increasingly and more narrowly focused on profits and shareholder value. The Friedman Doctrine has firmly taken hold. At the same time, the rise of global product and capital markets have subjected firms to increased competitive pressures, and domestic disrupters in the U.S. such as Walmart, Amazon, Netflix, and the large tech companies have transformed entire industries and resulted in a more dynamic and less predictable domestic economy. The rise of asset managers and index funds have allowed shareholders to hold globally diversified equity portfolios at a low cost. A “high-powered” corporate governance regime has emerged in which managerial performance is closely monitored through shareholder value metrics, and activists tolerate only minuscule amounts of slack. Firms are encouraged to engage in more risk-taking and less diversification of cashflows at the firm level (which is inefficient given shareholders’ diversified portfolios across firms), resulting in shorter company lifespans.

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Corporate Purpose, The New Paradigm, and Unintended Consequences

A panel discussion with Colin Mayer, Mats Isaksson, Martin Lipton, and Ron Gilson at the Millstein Center’s Counter-Narratives Conference.

By Brea Hinricks

In his recent book, Prosperity: Better Business Makes the Greater Good, Oxford Professor Colin Mayer lays out a framework for radically reconceptualizing business for the 21^st century. At the core of his argument is the idea that the purpose of business is not solely to make profits, but to “produce profitable solutions to the problems of people and planet, and in the process it produces profits.”

Mayer’s proposed law and policy reforms, which he detailed in his remarks at the Millstein Center’s March 1, 2019 conference, Corporate Governance “Counter-narratives”: On Corporate Purpose and Shareholder Value(s), would aim to incentivize companies to create and deliver on a corporate purpose that transcends profit alone. (We discuss Colin’s presentation in greater detail here.)

Mayer debated these ideas during a panel discussion with Mats Isaksson, Head of the Corporate Affairs Division at the OECD, Martin Lipton, a founding partner of Wachtell, Lipton, Rosen & Katz LLP, and Ron Gilson, Professor of Law at Columbia Law School and Stanford Law School. (A full recording of Mayer’s remarks and this panel discussion is available here.)

Continue reading Corporate Purpose, The New Paradigm, and Unintended Consequences

Colin Mayer’s ‘Prosperity’ and the Future of the Corporation

By Brea Hinricks

In the more than fifty years since the enshrinement of the Friedman doctrine as fundamental business canon, the conventional view has been that the singular purpose of a corporation is to increase profits (and therefore, shareholder value) to the maximum extent possible within the rules of the game. Oxford Professor Colin Mayer (and more than 30 other academics who collaborated with him on the British Academy’s Future of the Corporation project) would like that to change.

Under the Friedman doctrine, corporations have been a source of great economic prosperity and growth, but also great inequality and environmental degradation. As companies have become increasingly focused on profits and detached from a broader public purpose, Mayer says, they have engendered in society a “profound, pervasive, and persistent” distrust of business leaders and corporations.

In his work on the Future of the Corporation and in his recent book, Prosperity: Better Business Makes the Greater Good, Mayer seeks to determine how business needs to change over the coming decades in order to address this distrust, ameliorate inequality and environmental impacts, and grapple with the many other social, political, and economic challenges we face today. Mayer presented his views at the Millstein Center’s March 1, 2019 conference, Corporate Governance “Counter-narratives”: On Corporate Purpose and Shareholder Value(s). (A full recording is available here.)

Mayer proposes an alternative, alliterative, and, to some, radical theory of the purpose of business: rather than producing profits for their own sake, “[t]he purpose of business is to produce profitable solutions to the problems of people and planet, and in the process it produces profits.” While this “counter-narrative” is certainly a significant departure from the Friedman doctrine, Mayer argues that it is hardly a novel concept. He points out that corporations were originally established under Roman law to undertake public functions such as collecting taxes, minting coins, and building infrastructure. It is only over the last 60 years that the Friedman doctrine and shareholder primacy have taken hold, and public purposes have become detached from the corporation.

The purpose of business is to produce profitable solutions to the problems of people and planet, and in the process it produces profits.

Continue reading Colin Mayer’s ‘Prosperity’ and the Future of the Corporation

Corporate Governance “Counter-Narratives”: Remarks by Ira M. Millstein

Opening remarks from Ira M. Millstein presented at the Millstein Center’s March 1, 2019 conference, Corporate Governance “Counter-narratives”: On Corporate Purpose and Shareholder Value(s).

While I wish I could personally be with all of you today, I am pleased that so many of you are here to discuss this very important topic.

Today we live, and work, in a very complex and constantly evolving capital market system filled with uncertainty―political uncertainty and economic uncertainty. This means that corporations need to be able to evolve with the changing times.

The corporation has three legs―management, the board of directors and shareholders. Management’s role has been vital from the beginning as the engine of corporate performance, at one time in control. Boards, once passive, are now embracing a more active role in oversight and planning. Over the past decade, a coalescence of economic power has reinvigorated shareholders to become actively involved. Once faceless, groupings of shareholders of different varieties now have more significant concentrated power, particularly the ability and inclination to wield considerable influence over the corporation through its directors.

Today’s reality is that shareholders play a critical role in the longevity of a company. They are the capital on which the corporation thrives. Corporations cannot turn a blind eye to shareholders or their demands for faster and visible so-called shareholder value. Continue reading Corporate Governance “Counter-Narratives”: Remarks by Ira M. Millstein

How My Board Made Me a Better CEO

Editor’s Note: This piece was written in July 2018.

By William E. McCracken with Jonathan B. Kim

When Bill McCracken joined CA, Inc. (NASDAQ: CA) crisis management was at the forefront. The company was recovering from a serious case of fraud—one that called into question the organization’s future. During his initial tenure as Chairman, Bill’s primary concern was rebuilding the company’s board. Later, as CEO, the course CA charted would shape his view on activist board governance.

Sometimes an experienced coach needs all the backing he can get to turn the fortunes of a struggling team. In 2005, I joined the Board of Directors of CA after 36 years at IBM. Shortly thereafter I was elevated to Non-Executive Chairman. At the time the company was operating under the burden of a deferred prosecution agreement with the U.S. Department of Justice, including an outside monitor to oversee its compliance.

I quickly realized we were at a critical stage in the never-ending lifecycle of the board. As a result of mandatory retirements and term limits, nearly half of our directors had departed or were reaching the end of their tenures.

Continue reading How My Board Made Me a Better CEO