The Making of Shareholder Welfare Society

A Study in Corporate Governance

Alexander Styhre

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781351796460
• Edition: 1
• Topic: Business
• Subtopic: Corporate Governance
• Index: Business

The Making of Shareholder Welfare Society traces and accounts for the debates and discussions between law and economics scholars and mainstream legal scholars, management theorists, and economic sociologists. This is done in detail to demonstrate that the shareholder welfare society was built from the bottom up, beginning with theoretical propositions regarding alleged market efficiencies and leading all the way to the idea that a society characterized by economic freedom and efficiency maximization pave the way for uncompromised shareholder welfare, in turn being good for everyone.

This book is of relevance for a variety of readers, including graduate students, management scholars, policy-makers, and management consultants, as well as those that are concerned about how the economic system of competitive capitalism is now in a position where it is riddled by doubts and concern, not the least as the levels of economic inequality is soaring. It addresses the topics with regard to corporate governance, accounting and society and will be of interest to researchers, academics, students, and members of the general public that are concerned about the economic system of competitive capitalism.

Part I
The Making of Shareholder Value Ideology, 1950–1980

1
The 1950s’ Antitrust Legislation and Enforcement Critique and Its Response

Introduction

In the early 1950s, the America economy was burgeoning and the U.S. was indisputably the leading economic, political, and cultural power of the world, making an excellent example of the virtues of competitive capitalism that was brought by the bourgeoisie revolution in Europe in the seventeenth and eighteenth centuries in Europe. At the same time, the New Deal policy was now in place, and it generated a series of changes in competitive capitalism, wherein state regulation and oversight and trade unionism were part of the new socio-economic model. For free-market protagonists, the New Deal policy—regardless of its ability to restore and stabilize the capitalist regime of production after one of its major crises—was a lingering concern that needed to be approached from a variety of angles. Conservatives, libertarians, and the pro-business community were critical of the new “collectivism” and the “post-entrepreneurial” American economy, but they also realized that the upsurge of economic well-being among millions of Americans in the new mass-production economy, couched in a Keynesian welfare state model, could not be ignored. In order to advocate their free-market argument, this heterogeneous group of activists identified antitrust policy, having its roots in the last decades of the nineteenth century but being strongly accentuated in the New Deal era, as a legitimate domain of scholarly critique and policy advocacy.

In the mid-1950s, the emerging so-called second Chicago School of Economics, engaging free-market activists and scholars since the 1930s, started to criticize antitrust policy as a political means that was claimed to reduce overall efficiency and that otherwise imposed limitations on market pricing. In this new line of scholarship, both legislation and regulation were now examined on basis of the proposition that “the burden of proof lies on the regulator to show market misconduct and that antitrust regulation should be limited to clear violations of the law and cases of market domination (i.e., some restraints of trade and a few mergers)” (Wood and Anderson, 1993: 26). In addition to this new assumption, many followers of the Chicago school were explicitly sceptical regarding government intervention in any case being able to provide greater efficiency than available market solutions, testifying to a systemic scepticism towards the role of the state. Eventually, conservative financiers such as the John M. Olin Foundation targeted America’s law school to finance a new approach to legal studies known as Law and Economics: “[C]onservatives in business were desperate to find more legal leverage. Law and Economics became their tool,” Mayer (2016: 107) writes.

While orthodox neoclassical economic theory by and large ignores management theory, which explore the inside of the firm qua a team production function—for neoclassicists, the firm is little more than market transactions bundled in ways to minimize transaction costs—and inscribe little value in, for example, managerial decision making, neoclassicists have a harder time ignoring and surpassing legal theory as, for example, corporate law is a so-called constitutional law in the American common law tradition. Furthermore, legislative practices are constitutionally speaking a matter of congressional decision making, and economists, regardless of potential concerns regarding the efficacy of democratic politics among, for example, free-market protagonists, cannot explicitly eschew democracy altogether. In order to bypass rather than to confront legal scholars head-on, free-market protagonists advocated the idea that legislation should prioritize efficiency enhancing criteria, an objective that was claimed to be socially beneficial as it came at the advantage for all citizens, the argument proposed. Unfortunately, when neoclassicists speak about efficiency, is it something entirely different than it is in the eyes of politicians, policy-makers, legislators, law enforcers (e.g., the courts), legal scholars, and the social scientists more broadly, as, for example, economic inequality is excluded on basis of a loose definition of what is called allocative efficiency, one of two efficiency criteria (productive efficiency being the other). Therefore, what orthodox neoclassical economists regard as a natural state of free markets, devoid of regulatory control and with minimal legislation in place, is not of necessity a desirable state for legislators. Still, the law and economics school was advanced on the basis that the orthodox neoclassical efficiency criterion is the only legitimate contestant for determining the degree of antitrust enforcement and other comparable market legislation enforcement activities.

This proposition has been contested from the earliest days of law and economics scholarship, and this chapter reviews the literature to demonstrate how free-market advocacy was based on an extensive critique of the legislative centrepiece of the regulation of the corporate system—the antitrust legislation and its enforcement. This critique served as the basis for the forthcoming and gradually expanding scholarship examining constitutional law, for example, corporate law, which eventually formed into the shareholder primacy governance model that today serve as the new conventional wisdom in corporate governance theory and practice. However, between the mid-1950s and the consolidation of shareholder primacy governance in the last decade of the century, much free-market advocacy water has passed under the bridges, and the scene and its actors and their arguments changed considerably over the course of the coming decades. Yet, the law and economics critique of antitrust enforcement served a key role in making economic measures of efficiency a legitimate contestant for the assessment of legislative efficacy.

The U.S. Legal System and the Antitrust Legislation and Enforcement

It is commonplace to remark that in the common-law tradition in e.g., the U.K. and the U.S., there is a difference between the written law and its interpretation made in the courts: “Two courts can interpret and apply the same law in markedly different ways and with very different consequences” (Christophers, 2015: 13). In the case of antitrust enforcement, the legislator (i.e., Congress in the U.S.) regards efficient competition between market participants as a primary social objective as it is assumed to provide societal benefits:

Economic competition limits excessive concentration of power, dispersing benefits broadly along the contours of a market. It provides a mechanism for upward mobility as new market entrants challenge the primacy of old competitors. Economic competition also promotes individualism, innovation, resourcefulness, wider choice, and greater efficiency as participants try to succeed in a competitive environment.

(Wood and Anderson, 1993: 1)

However, the legislator needs to balance the positive and negative consequences of competition. The same forces that drive competitors toward “[i]nnovation, resourcefulness, and efficiency may also push them toward efforts to reduce competition,” Wood and Anderson (1993: 1) say. When being freed from “outside interference,” competitors often “collude or resort to unfair practices to restrict competition” (Wood and Anderson, 1993: 1) suggest. In order to maximize the beneficial effects of competition while curbing regressive activities, leading to the reduction of competition, antitrust enforcement includes a variety of activities and resources including legislation, investigations and litigations (i.e., court rulings), and regulatory control.

The U.S. antitrust legislation rest on two major acts, the Sherman Act of 1890 and the Clayton Act of 1914, and various amendments to these laws have been enacted over the years. The Sherman Act makes illegal “all contracts, combinations, or conspiracies that would result in ‘restraint of trade’ in interstate or foreign commerce, and all monopolization or attempts to monopolize” (Wood and Anderson, 1993: 2). In practice, that means that the legislation has been constructed to proscribe such collusive behaviors as “price fixing, bid rigging, territorial allocation agreements, and resale price maintenance” (Wood and Anderson, 1993: 2). In addition, what Wood and Anderson (1993: 2) refer to as “structural arrangements” that would “tend toward monopolistic practice” are outlawed. The Sherman Act was based on a “pervasive hatred of monopoly and concentrated economic power” and served to demonstrate the political ambition to counteract the advancement of large-scale organization, causing “widespread uneasiness,” Adelstein (1991: 166) argues. Practically speaking, the Sherman Act had originally focused on “illegalizing restraints on trade as committed by the large railroad trusts towards small businesses” (Davies, 2010: 74), but once the legislation was in place, it took on a wider significance as being opposed to monopolies and oligopolies.

The Clayton Antitrust Law of 1914 was a continuation of this policy and proscribed “price discrimination, exclusive dealing contracts, and other predatory tactics that the trusts had used to boost their profits” (Cassidy, 2009: 128). The act served to strengthened the Sherman Act and prohibited “price discrimination” (Section 2), “exclusive dealing and tying contracts” (Section 3), and “corporate mergers” (Section 7)—a key target for the critics of antitrust legislation—when their effect would be ‘substantially to lessen competition’” (Wood and Anderson, 1993: 2–3). In addition, the Clayton Act bans “interlocking directorates” (Section 8) that would restrict competition. (Wood and Anderson, 1993: 2–3). In 1950, the U.S. Congress passed the Celler-Kefauver Act which closed “certain loopholes” in the Clayton Act by “[p]rohibiting mergers accomplished by either stock or asset acquisitions that would substantially lessen competition or ‘tend to create a monopoly in any line of commerce in any section of the country’” (Wood and Anderson, 1993: 3). Therefore, Section 7 of the Clayton Act “became the basis for government challenges of corporate mergers,” regardless whether the mergers were horizontal, vertical, or conglomerate “in style” (Wood and Anderson, 1993: 3).

Many commentators regard these pieces of legislation as being a strictly juridical matter, but the law and economic scholars who started to criticize the antitrust enforcement in the 1950s introduced economic theory to examine whether the antitrust legislation actually played the role it purported to play: to uphold competition for the benefit of consumer welfare. In addition, Wood and Anderson (1993: 2) argue that political factors play a key role in the advancement of antitrust enforcement, but add that much antitrust scholarship tends to underrate the influence of “institutional factors.” In contrast, Wood and Anderson (1993: 2) suggest that politics, not “economics or bureaucracy,” is the best explanation for the “changing vigor and substance of U.S. antitrust regulation through time.” As a consequence, legislative activities and the financial resources committed to antitrust enforcement changes, when either Democratic or Republican presidents hold office, making antitrust enforcement a foremost political matter. The fact that “competition” is one of the key objectives of antitrust legislation and enforcement underline the political nature of antitrust ideology. As Christophers (2015: 54) remarks, “competition” is “[a]n enormously slippery and elusive concept” that has been used in “different ways by different commentators, and for different reasons.” Questions regarding what competition means, how it is to be measured, and how much of it is desirable and needed are thus questions that both legal scholars, economists, political scientists, and management scholars are actively discussing. However, regardless of these legal and econometric intricacies, “the halcyon days of vigorous and effective U.S. competition law enforcement had begun [in the late 1950s], and they were to last until the mid-1970s,” Christophers (2015: 179) summarizes.

The Sherman Act of 1890 and Beyond

After the Wall Street crash of 1929 and the Great Depression that followed, the Roosevelt administration launched a series of programs and reforms aimed to stabilize and rehabilitate the capitalist economy. Among conservatives, this initiative was widely rejected as a form of collectivism kindred to the socialism that had spread in parts of Europe after World War I. The remarkable success of Keynesian economics and the emergence of the mass-production/mass-consumption economy and the accompanying expansion of welfare state provisions, did little to silence such criticism. One particular concern, targeted by the so-called law and economics school developed at the law school at University of Chicago in the 1950s, was the antitrust legislation that was part of the New Deal reforms.

After the Wall Street crash of 1929, foreboded by excessive speculative activity, also involving a novel class of investors, the proverbial man on the street, and the U.S. economy was cast into its most pervasive crisis to date. The policy-makers saw few other possibilities than to pursue an antitrust policy that inevitably led to an “oligopolization” of the American industry, capable of reaping economics of scale while maintaining at least a minimal level of competition, Rowe (1984: 1518) argues that “[i]n the euphoria of the 1920s that sank into the Great Depression of the 1930s, antitrust fervor faded and ultimately died. The alliance of government and business for World War I’s industrial mobilization created a climate of collaboration that lasted for years” (Rowe, 1984: 1518). However, at the end of the 1930s, when some recovery had been made while unemployment and economic hardship was widespread in the U.S., the issue of “economic concentration” reemerged on the Roosevelt administration’s policy agenda:

The Oligopoly Model matched that era’s mood to perfection. The Second New Deal had declared war on ‘business monopoly’ and the ‘concentration of private power.’ In the day’s rhetoric, economic recovery was sabotaged by greedy industrialists, ‘fat cats,’ and ‘economic royalists.’ Big Business was in disrepute; faith in government regulators ran high.

(Rowe, 1984: 1544–1545)

This “revival of antitrust” came from the failure to establish economic growth and prosperity. In the 1937–38 recession, which “pushed production and employment down to distressing levels” (Rowe, 1984: 1520), including strikes, unrest, and even the killing of unarmed laid-off demonstrators at the Ford plant in Dearborn, Michigan (known as the “Dearborn Massacre”), the Roosevelt administration “[s]witched course and turned on Big Business as the culprit of the intractable malaise” (Rowe, 1984: 1520).

As the post–World War II economy started to take off, much of the sentiments of the late nineteenth century vanished, and novel concerns emerged, for example, the widespread presence of oligopolies in a number of industries, potentially indicating that antitrust legislation did not work as intended. In practical terms, the restrictive enforcement of antitrust laws incentivized managers to “consider acquisitions only in unrelated businesses,” where the firm‘s core skills add little economic value,” Kaufman and Englander (1993: 54) remark. As a consequence, the cash flow generated in the post-war era of economic boom led to the creation of conglomerates including heterogeneous industries exploiting few synergies. In the 1950s, the critique of antitrust legislation and enforcement were articulated in scholarly communities (addressed shortly). By the 1960s, the antitrust enforcement had regressed to become a kind of lawyers’ game in court cases dealing with mergers (made legally suspect or illegal within the present legislation) to define markets at the advantage of their paying clients; that is, the antitrust legislation became more of a legal services industry matter than a factor that promoted economic growth and that secured market competition:

As enforcement of the new anti-merger law gained stride, oligopoly-based legal norms promised clear rules and quick results. Streamlining the tasks of lawyers and judges, presumptions predicted the prospects of mergers from market shares and market structures, and obviated proof of anti-competitive purpose or effect. In concept, then, the law could stop all mergers that combined high market shares of the leading producers, and thus stem the ‘tide of concentration’ or roll it back. But … this bright promise proved delusive, as anti-merger policy became a Procrustean regimen that fostered large conglomerations while hounding trivial acquisitions in ‘numbers games.’

(Rowe, 1984: 1524)

In the period, the antitrust legislation led to an “antitrust craze” and the Federal Trade Commission initiated antitrust enforcement activities “[a]gainst mergers threatening to raise concentration in markets for frozen pizza, for carburetor kits, for urological catheters, and for ‘knockdown casket parts,’ and attacked local acquisitions of eleven grocery stores and three credit-reporting bureaus” (Rowe, 1984: 1528). Again, it was the lawyers that benefitted the most from being able to participate in “market creation activities” on basis of juridical reasoning and calculative practices that served to define markets on basis of interests rather than factual and indisputable conditions:

In concept, counting market shares seemed quick and easy, but the market itself became mirage … Opposing lawyers fought to make the market look smaller or bigger, in order to bloat or to shrink the defendant’s percentage share within. Thus, du Pont escaped breakup by convincing the Supreme Court that it held not a monopolistic seventy-five percent share of the cellophane market, but a modest twenty percent of a broader ‘flexible packaging materials’ market including other ‘reasonably interchangeable’ products.

(Rowe, 1984: 1536)

In terms of the legal practice of court rulings, the legal procedures that aimed to uphold the competitive nature of markets could not catch up with the swiftly changing nature of the markets. Like in Aesop’s fable, the tortoises of the legal practitioners had a hard time competing with the hares of the market participants and market makers in industry, but unlike in the fable, it was not the tortoises that were ultimately successful (and, needless to say, the fable’s morals regarding the virtues of persistency and self-discipline were lost). As the market “invites manipulation,” market structure becomes a “delusive norm,” Rowe (1984: 1537) says. The tragedy of the antitrust legislation and its ambition to optimize market competition to both enable economies of scale and secure the interests of smaller market participants, not controlling funds sizeable enough to hire lawyers to define markets at their advantage, is that “[a]mid shifting technology and global contests, markets move faster than antitrust suits for their reorganization”—“Antitrust’s Big Case is doomed to a tragic cycle: by the ...

Table of contents

• Cover
• Title
• Copyright
• Contents
• Preface
• Acknowledgements
• Introduction: The Financial Crisis, the Great Recession, and the Question of Corporate Governance
• PART I The Making of Shareholder Value Ideology, 1950–1980
• PART II Into the Wild: The 1990s and Into the New Millennium
• Bibliography
• Index