Corporate power and its accountability and legitimacy is evidently an issue that any economic outlook should take seriously in order to be taken seriously by serious economists. In this necessarily short paper, we seek to set forth some salient aspects of this issue and examine whether it provides a terrain upon which various heterodox groups might tread upon convergent paths.
Corporate Power and Legitimacy
Do large corporations have power, and, if so, is it legitimately exercised? We take power to be the ability to issue an order with a reasonable expectation that it will be obeyed (Takata 1995). This may seem narrow, but a brief reflection is persuasive to the contrary. The order given may be to seek to change the attitudes of consumers or voters or to influence political figures or jurists and change the formal rules and cultural norms that govern organizations in their pursuit of their goals. Power is exercised legitimately when it is deployed within the bounds of dominant rules and norms, that is, when it is transparently deployed such that information is available to those who must hold its use accountable.
The forces of market competition no doubt bear upon the large corporations to some degree, but apparently an absence of strategic information and tactical instruments severely limits legitimation of corporate power by market forces. Heterodox economists would agree that the large corporation is a complex organization operating in complex and changing historical situations. By definition, complexity means information is incomplete and the cognitive capacities of economic agents are inadequate. Thus agents necessarily employ habitual rules of thumb, pattern recognition, or experimentation in order to act in the face of uncertainty. Importantly, this means that subjective mental models are critically important, especially for those who hold powerful positions within the institutional structure of powerful organizations. The ideology and analytic reach of powerful people is important; the ethics they apply to uphold social norms and rules are important. This is all the more so if the exercise of such power is capable of changing the attitudes or mental models of other people. If such discretion exists, accountability and legitimation require that it be exercised transparently so that the operative mental models and rules and norms can be critically evaluated by outside interests and observers.
The complex, interactive context is ever-changing as some powerful agents seek to change rules and norms just as surely as others resist. Changes in science and technology are correlated instruments that are often used to implement these changes in the face of resistance born of current status, trepidation of the unknown, or social and ecological concern. This further underscores the importance of individual and organizational mental models. Successful organizations, be they families, businesses, or state agencies, are agglomerations of individual psyches and hence have psychological or cultural profiles similar to individuals. A psychologically healthy individual must have integrity or coherence, a working self-image that presents and places the person in the world. Those who can change personas willy-nilly because they lack an integral self-image are sociopathic. But individuals must also have some capacity to change in response to feedback to past behavior. So it is also with organizations large and small; they must be adaptively efficient but also retain and reapply their core competencies (Loasby 1986).
In the past three decades, the discourse on corporate power has been preoccupied with the principal-agent problem in recognition that corporate officials have discretion and that incentives and success criteria must be devised to cement their accountability to the stockholders of the company. Compensation committees designated by boards of directors are charged with overseeing the operation of these incentives and success criteria. Their existence is further evidence of discretion. Criticism of compensation committees and the spectacular rise in American executive compensation in recent decades seems to point toward discretion; indeed the idea of a market for executive talent seems rather ludicrous.
The whole matter is greatly enlarged if we recognize the incomplete character of the standard principal-agent discussion. A much older literature has insisted that various stakeholders, not merely stockholders, must be considered in appraising the large corporation. This is linked to another long-standing literature which suggests that a managerial revolution has occurred so that a professional managerial stratum operates the corporation in a socially...