From Institutional Theories to Private Pensions

I recently posted my forthcoming book chapter, From Institutional Theories to Private Pensions (in Company Law and CSR: New Legal and Economic Challenges, Ivan Tchotourian ed., Bruylant 2014) on SSRN.

Corporate governance is sometimes described by political scientists as a three-player game between capital, management, and labor. Yet, in most contemporary debates about corporate governance among lawyers and economists, especially in the English-speaking world, the agency problem and conflicts of interest between shareholders and management seem to be single conflict of interest to which much attention is paid. In this chapter, which builds on previously published law review articles, I attempt to put this observation into a larger historical context, arguing that the nearly exclusive focus on the concern of shareholders is historically and geographically contingent. Differences between conflicts of interest in different corporate governance systems have long been recognized in the scholarly literature. Most obviously, it is well known that the majority-minority agency problem is more salient than the one between shareholders and managers in countries where concentrated ownership is more common. However, it is also worthwhile to look at other conflicts in the tripartite structure of corporate governance that may be equally relevant, at least under certain circumstances. Most importantly, the interests of employees are often relegated either to employment law, or are interpreted as an aspect of corporate social responsibility and thus dismissed as an issue promoted by “sandals-wearing activists” that are effectively only a distributive concern.

Our understanding of corporate conflicts of interest is closely linked to debates about the nature and purpose of the corporation. The chapter takes a comparative and historical perspective and focuses on the US, France, and Germany. I begin with traditional debates about the nature and purpose of the corporation, which oscillated between contractarianism and institutitionalism in all three countries. The institutional view, which tends to reflect a concern about excessive influence by shareholders on corporate decision-making, took shape in the Weimar Republic period in Germany and reverberated in the US with the Berle-Dodd debate. Against the backdrop of different ownership structures, the political significance of the different theories is not entirely the same. While in Continental Europe strengthening the corporate “institution” against shareholders meant reducing the influence of large shareholders, in the US it helped to entrench powerful management, given the apathy of typically dispersed shareholders. In the 50s and 60s, corporate management was often aligned with organized labor, while shareholders were left on the sidelines.

In the United States, the debates about corporate law took a different turn from the 1980s onwards. Companies began to shift their pension plans from the defined benefit to the defined contribution system, which made individuals more directly dependent on the capital markets. The interests of shareholders thus progressively began to play a greater political role that sometimes stood in contradiction with the same individuals’ roles as workers. Firm-specific human capital of workers apparently began to play a smaller role, while financial investment became more significant. The 1970s and 1980s thus resulted in an economic and political realignment in US corporate governance that changed the dominant coalition, and that changes in the pension system that aligned the interests of workers with those of capital were a catalyst for this change.

Starting from a different point, during the 1990s and early 2000s Continental Europe saw an incipient realignment that seemed to resemble that in the US. The shareholder model of corporate governance became more attractive, and scholars began to identify a trend toward convergence in corporate governance based on shareholder primacy. It is not clear, however, whether a permanent trend has actually been set into motion. The recent financial crisis apparently has reduced the attractiveness of the US model and sheds doubt on the possibility of full convergence in corporate governance. The political appeal of shareholder wealth maximization also seems low: In spite of attempts during the 1990s and 2000s to push Europeans toward private defined contribution pensions, the typically Continental European still depends primarily on government-run pay-as-you-go systems for their retirement. Hence, Continental Europeans are not as dependent on the capital markets as Americans are, and company-funded pensions, such as those provided by German firms, are usually of the defined benefit variety. While the expansion of the Anglo-Saxon pension sector (including both defined benefit and defined contribution pension wealth) has been an important factor driving for shareholder rights outside of the US and the UK, the pro-shareholder position has still not reached the same political salience. Consequently, it appears that Continental European systems have for now resisted the pressure to converge to shareholder-oriented corporate governance norms.

The full paper is available for download here.