The Effects of Shareholder Primacy, Publicness, and “Privateness” on Corporate Cultures

Donald C. Langevoort is the Thomas Aquinas Reynolds Professor of Law at Georgetown Law School. This post is based on his recent article, forthcoming in the Seattle University Law Review. Related research from the Program on Corporate Governance includes The Case for Increasing Shareholder Power, by Lucian Bebchuk; The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here); and Can We Do Better by Ordinary Investors? A Pragmatic Reaction to the Dueling Ideological Mythologists of Corporate Law by Leo E. Strine (discussed on the Forum here).

There is widespread belief in both scholarship and business practice that internal corporate cultures strongly affect economic outcomes for firms, for better or worse. In turn, there is also a growing belief that corporate governance arrangements materially affect corporate cultures. If this is true, it suggests an intriguing three-link causal chain: governance choices influence corporate performance, at least in part via their effects on internal culture. This should be important to lawyers and legal scholars because of the symbiotic nature of law and governance: the increasing risk of enhanced corporate criminal and civil liability when cultures are judged to be deficient. Finding the right place for culture in governance is a heavy lift, and the subject of my recent essay for the “Berle XI” symposium.

By many accounts today (though hardly without controversy), the dominant norm in American corporate governance is shareholder primacy—managers are expected as a result of the combined forces of law, culture and economic incentives to act intently for the wealth-maximizing benefit of their shareholders. The theoretical justification for this truncated autonomy is that managers are naturally self-interested, requiring monitoring of various sorts in the name of (if not by) its shareholders in order to minimize opportunism in the exercise of power. To enthusiasts for this principal-agent model of governance, this embrace of the shareholder primacy norm in the last three or four decades has paid off in greater productivity, innovation and capital formation. Many in financial economics and corporate law thus now take it as a normative given, arguing only about whether we need to empower and protect shareholders a bit more, less, or have it about right to achieve optimal shareholder wealth over the desired time frame and unit of measurement.

Against all this, many sociologists and some legal scholars argue that the coupling of shareholder primacy and shareholder empowerment is toxic, with corrosive consequences for society in general and the long-run interests of firms themselves. They worry that corporate leaders have come proudly to self-identify as zealous agents for their shareholders, and attack the myths associated with principal-agent theory insofar as it normalizes unfettered profit-seeking and gross income inequality. Demanding investors who applaud such managers (and the financial markets they drive through active trading in various financial instruments) are, in this portrait, sheep-clothed enemies of the public good. A substantial and increasing amount of popular and public discourse about greedy short-termism gives voice to this. The Business Roundtable’s recent pivot on the purpose of the corporation arguably reflects a growing public embrace of this viewpoint.

Naturally enough, the sociologists and their acolytes in law view these aspects of governance entirely through the lens of culture. To those steeped in neoclassical economics, on the other hand, culture studies are too soft and mushy to have anything of use to offer compared to understanding the rational incentives that drive managerial and investor behavior. But that assumption has been weakening for some time. The particular inspiration for my essay came from reading a recent series of papers in financial economics purporting to find that shareholder empowerment in corporate governance tends, as sociologists fervently predict, to degrade previously ethical corporate cultures. For example, a well-known study by Guiso, Sapienza and Zingales finds a significant positive correlation for publicly traded companies between survey-based indicators of how employees view the integrity of senior management and the firm’s financial performance going forward, value not immediately impounded in stock price. More pointedly, they also find that privately owned firms have higher integrity scores on average than otherwise comparable public ones with large institutional investor block ownership. Culture, they argue, best explains these results, which implies that reducing shareholder empowerment would help restore integrity to corporate cultures.

The conundrum is this: suppose managerialism triumphed in the governance wars so as to gain its desired level of autonomy from shareholder pressures for boards and managers. Would we then expect to see a cultural shift inside corporations toward greater honesty and civil engagement, and if so why? A helpful diagnostic question is to ask how managers currently construe shareholder and market primacy. Have they internalized it as a value, or instead resent the demands? My argument here leans more toward resentment, though my contribution is more about how to develop a credible hypothesis than proving it, which ultimately is an empirical matter. My hypothesis here is that corporate cultures ordinarily reflect an inward point of view wherein the perceived (and maybe mythical) imperatives of organizational survival and success become the dominating values, not serving shareholders or anyone else. It is deeply self-protective. If so, more unfettered managerialism in pursuit of better corporate cultures wouldn’t be quite so appealing a solution, and indeed might just produce a different form of rent-seeking.

This takes us to a second front in the governance wars. Many legal scholars recently (myself included) have written about the increasing demands of “publicness” on highly salient firms, especially those that are publicly-traded. These are external, socially-generated pressures in the name of legitimacy, transparency, accountability, and outsider voice. As to these forces, sociologists and their legal kin are downright enthusiastic. After all, if shareholder primacy degrades corporate culture, then these pressures should have precisely the opposite effect, serving as a channel by which pro-social instincts are infused into them. This, arguably, is what would rush in to freshen the cultural climate once the swamp of shareholder primacy is drained. But for many of the same reasons that I challenge the deep normativity of shareholder primacy, I am skeptical of this inference as well.

To this end, the first part of the essay introduces the battle over corporate cultures as part of a broader contestation about primacy in corporate governance, offering a perspective on the meaning of corporate culture, its place in political debates over corporate responsibility, and its usefulness to corporate law. The first part also tries to define with more clarity the differences between the cultural norms of shareholder primacy and publicness. The second part turns the reader’s attention to the overwhelmingly diverse scholarly perspectives on corporate culture and the place of corporate culture within the overarching canopy of social culture. The essay then moves on to ask about the work being done by corporate culture in terms of both law and governance, and the extent to which this can or should be thought of in functionalist terms. Then comes the main pay-off: an assessment of arguments in light of all the foregoing about the cultural causes and effects about shareholder primacy, publicness and “privateness.” The essay concludes with a closer look at the politics surrounding the corporate culture wars.

The complete article is available for download here.

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