Lenore Palladino weaves together strands of economic theory, issues of corporate governance, and the problem of economic inequality all in the service of debunking a pernicious myth: the notion that corporations are properly—or worse, “naturally”—the sole instruments of those who hold their equity shares. And yet, in her policy recommendations, Palladino seems trapped by the same myth. I will argue here that a broader view and more radical measures are required.
The view that mere ownership conveys exclusive rights is clearly absurd. Try substituting “houses” for “corporations” in the first sentence above. Yes, I own my house. No, I can’t burn it down. I’m subject to zoning, building codes, water restrictions. I can’t even park a wrecked car on my front lawn. Ownership conveys some rights, but these are, always, defined and limited by public purpose.
Though we usually think of “corporations” as businesses, the term is broader. In his excellent 1917 study, Essays in the Earlier History of American Corporations, Joseph S. Davis wrote: “A corporation was then, as now, a group of individuals authorized by law to act as a unit.” The purpose could be “for plantation or town organization, for charitable, religious or literary foundations, for trading or local business purposes.” The original colonies were corporations. So were (and are) the towns therein, as any driver on New England roads knows. So was (and is) Harvard College. Laws and charters govern what a corporation can and cannot do.
In the case of business, should the law give stockholders the natural right to rule? The notion is akin to the divine right of kings. In 1937 the economist J. M. Clark, in Social Control of Business, was emphatic: “With most thinkers today, however, the phrase ‘natural rights’ stands discredited.” Further, whatever Delaware’s legislators may contend, “many legal rights are themselves but the perpetuation and sanctification of moral and social wrongs,” including:
the loot gained in the past by such wrongs as unfair competition and monopoly, corrupt acquisition of public resources, the looting of corporate funds by their guardians and trustees, laborers contracting under the duress of economic compulsion, human lives sacrificed to material commodities and to the increase of employers’ profits, children deprived of a fair start in life, and the crowning wrong of the inheritance of the swollen fortunes gained by all other wrongs . . . in a country where hereditary overlordship was supposed to be a thing of the past.”
Enough said. Or as Clark concludes, “We have been looking for the social stake in private business, and we have found it.”
In his first book, Modern Competition and Business Policy (1938), co-authored with the Boston businessman Henry S. Dennison, John Kenneth Galbraith (my father) first broached the problem of the corporation. Galbraith and Dennison affirmed the reality of shareholder irrelevance: “the de facto control of the modern corporation rests partly with the operating heads of the business and partly with a banker or investment house.” They denied that shareholder-control should be restored: “We do not propose to join the weeping and wailing over the uninformed and helpless stockholder.” And they noted the irrelevance of directors who are appointed by management and naturally well-compensated and grateful. Galbraith’s remedy, reaffirmed in American Capitalism (1952) and The New Industrial State (1967), is not competition or shareholder value, but regulation and countervailing power.
Against this background, as indeed in most of his works, Milton Friedman emerges as one of the great fantasists of all time. Just as he sought to control inflation through the money supply, leaving job creation to the free market, so Friedman sought to re-align the corporation with its shareholders and leave its behavior to the profit motive.
That was the fantasy, invented in part as counterweight to Galbraith’s realism and influence. The effect of attempting to put it into practice was similar to most fantastic schemes: disaster. Management, aligned with finance, contrived to give us Chainsaw Al Dunlap, Jack Welch, Enron, Tyco, Worldcom, the 2008 financial crisis and the bank bailouts, and, more recently, the entire dizzying circus of financial manipulation posing as strategy for economic growth led by the stock market. These ultimately delivered the country to Donald Trump.
In consequence, a managerial-financial class tightened its grip, in part by looting the corporation and its customers, in part by diluting the shares of ordinary investors. As Galbraith had pointed out, these two forms of larceny date at least to the Railroad Era: Vanderbilt respectably stole from customers; Gould and Fisk, disreputably from investors. Palladino is right to tie all of this to the inequalities of our new Gilded Age, but the issue of inequality goes far beyond the stock options and other self-dealing of corporate chieftains. As control is shared with finance—including hedge funds, private equity, and their ilk—so too have been the predatory gains. The problem of inequality is thus even more a problem of finance, and especially of the distribution and inflated valuation of capital assets, than it is strictly of corporate control and governance.
While Palladino correctly points out the failings of the shareholder value fantasy, her leading remedies would mainly bring a corporation’s employees onto the gravy train. She proposes employee stock ownership schemes, profit-sharing, employee boardroom representation, and the like. This is disappointing. Palladino says nothing about unions, who have long resisted such schemes since they create an obvious conflict of interest for workers, whose primary concerns are wages, benefits, working conditions and job security, and not corporate profits. Similarly, the interests of consumers and the broader public, including the environment, would be ignored—or even harmed if workers were to align with bosses on the retrograde side of those issues. How her plans would work with overseas employees of multinationals, and how they might benefit workers in the supply chain, she does not say. It is a measure of the grip of neoliberal thought even on radicals that Palladino reverts, at the end, to the authority of Friedman. Slippery as always, Friedman would have conceded to government the minor role of “umpire” in a most uneven game. Private affluence and public squalor would continue as before.
Meanwhile, the wider world gives us contrasting cases. On our side, we have the Anglo-American model of money-manager capitalism, entrenched for forty years and now largely accepted by bought-and-paid-for political forces in all major parties. Elsewhere, we have countries where, to one degree or another, corporations have remained in contact with public purpose. Leading examples are Germany, Japan, South Korea, and even the People’s Republic of China in its age of reforms. What they have in common, notably, is the enduring influence of one John Kenneth Galbraith, either direct (through his role in the design of the postwar system) or indirect (as in China, through his writings). The benefits of countervailing power and social balance are there for anyone to see.