The basic argument of the revisionists of the 1950s was that managers had tamed capitalism. And they were correct – if only for a few decades – as a new balance of power came into existence due to (a) the new fiscal power Keynesianism gave governments and (b) the collective power industrial society gave the trade unions.
In the immediate post-war period, for example, the ratio between CEO salaries and those of the average worker was about 15 to 1 compared to the present obscene level of 350 to 1 – with Milton Friedman being one of the people responsible
The intellectual godfather of shareholder primacy is Milton Friedman, who wrote in 1970 that “a corporate executive is an employee of the owners of the business [i.e., the shareholders]. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible,” without breaking the law or cheating people.
In 1976 - when CEO pay was less than 40 times what the typical worker earned (the multiple is now more than 350) - Michael C. Jensen and William H. Meckling codified Friedman’s argument with their seminal article, “Theory of the Firm.” The purpose of corporate governance, they argued, is about finding ways to align the incentives of shareholders (whom they referred to as “principals”) and executives (“agents” of the shareholder-owners). This theory has enraptured economics departments and business and law schools for decades and profoundly shaped how corporate officers, shareholders, taxpayers, policy-makers, and even most Americans think about the roles and responsibilities of corporations.
The theory
of the firm may sound a very abstract issue - but is, in fact, one of the
most central issues for all societies. Whose
interests should be served by a company? The managers? Shareholders? Workers?
The wider community?
The sensible answer is a balance of all four. And there was a moment in 1997, at the start of what turned out to be a 13-year period of New Labour, when that seemed possible – when the concept of stakeholder society was a live issue. People like Will Hutton have been preaching for 30 years about this wider concept of the company and Oxford Professor of Management Colin Mayer published this enlightening study in 2013 Firm commitment – how the corporations is failing us and what we can do to restore trust in it. Even the Americans have considered the idea - although The Stakeholder Society came out more than 20 years ago.
Its been making some
headway in recent years – but only in the rhetoric. Noone dares taking the idea
seriously.
Friedman's statement,
ReplyDelete"The intellectual godfather of shareholder primacy is Milton Friedman, who wrote in 1970 that “a corporate executive is an employee of the owners of the business [i.e., the shareholders]. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible,” without breaking the law or cheating people."
is factually wrong. Shareholders are not the owners of businesses, as numerous court cases have shown. Shareholders are only owners of shares, just as bondholders are only owners of bonds. The owner of a share, as with the owner of a bond, can sell it, give it away, or hold on to it, but that gives them, or should give them no more right to control a company than is granted to say a bondholder who also lends money to it, but just in another form, or say a landlord who lends land or property to a company.
Those who lend money to a company, in exchange for say a share, or a bond, can expect to get paid interest/dividends on it, just as someone who lends land/property can expect to get rent, but that is where things end, and the interest/rent will then be determined by competition in the market. If, however, it is the shareholders who also exercise control over how much the company will pay in dividends that is not a function of market competition. It is the fox having control over the hen house.
As Kay and Silberston (https://www.johnkay.com/1996/08/31/corporate-governance-with-aubrey-silberston/) describe, there is no justification for shareholders exercising control over corporations. A shareholder is no different to say a bank that lends you money to buy a house via a mortgage. The bank continues to own the money they lent you, and so is entitled to it back under the given terms of the mortgage, and to get interest on it in the interim. However, the bank does not own the house. You own the house, and its up to you how you use it. The bank just because its lent you money to buy the house cannot tell you what colour to paint it, what furniture to put in it, and so on. In other words, the bank continues to own the money it lent you, not the house you bought with the money, and which the bank has given up temporary possession of so that you could do so, and for which you pay it interest.
The same with the money that shareholders lend to companies. The money continues to belong to them, and they give up temporary possession of it, being paid interest/dividends as the price of doing so. The company itself does not belong to them, but is itself a legal entity. It is technically, the company, that borrows the money, and which then determines the interest/dividends it will pay, and how it will use the money borrowed. But, the company obviously is not an actual human being able to make such decisions, it can only rationally be understood as all those who work for it, at any specific moment, both its workers and managers, or as Marx calls them the associated producers. rationally, its only these associated producers who constitute the company, and who can then determine how its capital - socialised capital as it belongs to no individual or group of individuals - should be used.
That is why, Marx says that this socialised capital be it in the form of a cooperative, or a corporation/joint stock company represents the transitional form of property between capitalism and socialism. It continues to be capital and operates according to all the laws of capital, in terms of needing to maximise profits, as determined by the laws of competition and so on, and yet, now as socialised capital, which requires increasing amounts of planning and regulation that acts to subvert competition and the market, and as means of production that should be controlled by the associated producers it makes them their own capitalist, and creates the conditions under which, it becomes means of production used for their benefit, rather than capital which exploits them.
Of course, Friedman is wrong. That was the point of my quotation - to show how outrageous such arguments are
ReplyDeleteRonald,
ReplyDeleteI know you were saying Friedman was wrong, and that that was the point of your post. I was supporting your contention, but also arguing that the ideas about "stakeholders", and so on by people like Hutton, are wrong too.
They lead to a dilution of actual workers control of their collective property, and, thereby, facilitate continued control over it by other centralised interests, which may be the state, or a powerful bureaucracy within the company itself.
The posts I have written on The Co-op in Britain illustrates the point. Theoretically, its owned by millions of individual consumer members. In reality, those members are atomised individuals with no objective relation to the Co-op itself, other than a membership and card and right to receive divi on purchases. They have no collective viewpoint, in the way that workers within a company have, and no need to take part in day to day decision making.
Consequently, the vast majority take no part in the "democracy" of the Co-op. Everyone is entitled to turn up to the very infrequent meetings, but as I found some time ago, the meetings themselves do not even take place locally, but can be 50-100 miles away. The workers of the Co-op are themselves deprived of taking an active part, and so, what actually happens is that the managerial bureaucracy of the Cop-op exerts control, determines agendas, puts forward and supports candidates for top jobs and so on. Only a few privileged members from outside this sphere, but in reality closely tied to it, take part.
Its pretty similar to the way enterprises functioned in the USSR, or the way local and central government bureaucracy operates. The result is that you get a situation like that a few years ago in relation to the Chief Executive of the Co-op Bank, whose personal actions brought down the entire bank, and led to it being taken over by private investors.
My post did link to a critical review of Hutton’s opus which, I do understand, is too compromised for you. But the same, surely, can be said of John Kay, Colin Mayer and Paul Collier? I do want to understand your comment about cooperatives but couldn’t find the reference even in this link to 62 of your posts
ReplyDeletehttps://boffyblog.blogspot.com/2010/10/co-operatives-index.html
Ronald,
DeleteThe reference relates to a range of posts I have written about the Co-op, and also to the failure of the Co-op Bank. The latter is covered in https://boffyblog.blogspot.com/2013/11/for-political-revolution-at-co-op-part-1.html, which is the first of a long series of posts, you will probably find irksome, other than if you can skim through to the relevant bits. But, I also covered it in a review of Nichole Robertson's book "The Co-operative Movement and Communities in Britain, 1914-60", that I wrote a few years ago for the Weekly Worker. Incidentally, I'd recommend the book, if you are interested in this topic.
To summarise, I point to Kay & Silbertson, only to make the point that, even according to bourgeois property law the capital belongs to the firm itself, not to shareholders, a point I think we agree on. The point then being if the capital belongs to he company, the question becomes what is "the company", who is it that is its personification, and should thereby exercise control? My argument is that it can only be the workers (including managers) who are employed in it at the particular time, just as with a worker co-op, it is such workers, not workers who have left and so on. It is they who, like a private capitalist owner, have to take the decisions that affect the future of the company and live with it for good or ill, which is why I think the idea that not maximising profits is not a viable option currently, but can only arise when society as a whole can proceed on that basis in a planned and regulated manner.
If stakeholders in Company A are given a say, and choose not to maximise profits (at least over the medium to long-term), but Company B has no such limitations, and maximises profits, company B will expand faster, and because of economies of scale etc., will undercut company A. B will grab market share, and become even more competitive. It may expand into other areas such as finance, lending money to A, or into commercial activity, selling A's products, either way, siphoning of a portion of A's profits to itself as interest or commercial profit. Eventually A will go under or be absorbed by B.
Cont'd
Now, on the further point, if I am a consumer, my interest necessarily tens to the idea that I should get the best products for the lowest price, and so as such a stakeholder in such a company that is what I will push for in its policies. If that results in the company being uncompetitive with other companies that is not my immediate concern. If the company goes bust, I will still be employed by whatever copany employs me, and will simply shift my purchases to another company that meets my consumption needs. Not so easy, for the workers in the company that has gone bust, however, which is why its only they that have a real material interest in the long-term success of the company, and why it is they that are its personification and should exercise control over its capital.
ReplyDeleteSimilarly, as I've said, the stakeholders in a company cannot exercise day to ay control over it, they have their own jobs to do or other companies, their own lives to lead. Stakeholders at best turn up every so many weeks or months to a meeting on company policy, and like all such meetings the agenda for it is controlled by a full-time bureaucracy which develops its own interests and agenda. We both know that is what happens having worked in public administration, and for my part having been an elected councillor. I know from personally trying to get involved in Co-op democracy as an ordinary member that it is very hard to do, because although I live in North Staffordshire, when I came to find out where such a meeting was going to be held, I found it was in Wales! But, even besides that, as with many other such forms of democracy, either they are in working hours meaning workers can't get to them, or else in the evenings, workers who have already done a day's work, are not likely to be enthused at having to go to them. Its not like being a Councillor where you get allowances for attending meetings to cover loss of pay.
As Robertson describes in relation to the St Cuthbert's Co-op in Scotland, it was landlady's who had a great incentive to take part and exercised a significant influence over its proceedings. But, any such democratic involvement can only be at a higher level. In practical terms, decisions on production etc. have to be taken every day, and the only way of having real functioning democracy is to have those actual engaged in that production, and in situ being the ones who make the decisions. Engaging with other stakeholders is fine, and necessary, but the actual democratic control can only be effectively undertaken by the produces themselves.