The corporate governance obsession.

Author:Pargendler, Mariana
  1. INTRODUCTION II. THE RISE OF THE CORPORATE GOVERNANCE MOVEMENT III. THE PHASES OF THE CORPORATE GOVERNANCE OBSESSION A. Problem #1: Unbridled Corporate Power and Economic Failure 1. Strengthening the Board: Independent Directors and the Monitoring Function 2. The Promise of Shareholder Democracy B. Problem #2: Promoting Financial and Economic Development C. Problem #3: Corporate Fraud D. Problem #4: Financial Crisis of 2008 E. Problem #5: Inequality and Other Social Issues 1. Rising Inequality 2. Gender Inequity 3. Other Social Issues IV. EVALUATING THE TURN TO CORPORATE GOVERNANCE A. The Shareholder Value Channel 1. The Link Between Corporate Governance and Shareholder Value 2. The Link Between Shareholder Value and Social Welfare B. Other Channels C. Corporate Governance and Its Alternatives V. CONCLUSION: THE FUTURE OF CORPORATE GOVERNANCE "The future may see the economic organism, now typified by the corporation, not only on an equal plane with the state, but possibly even superseding it as the dominant form of social organization. The law of corporations, accordingly, might well be considered as a potential constitutional law for the new economic state, while business practice is increasingly assuming the aspect of economic statesmanship." Adolf Berle Jr. & Gardiner Means (1)


    Corporate governance has become a constant fixture of the academic and policy debates of our time. (2) It not only figured prominently in the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act of 2010, the sweeping regulatory reforms of the last decades, but its reach has been far broader at both domestic and international levels. (3) For a vast array of economic and social problems--from economic development and systemic risk to rising inequality--corporate governance reform has surfaced as a favored policy response. (4) As evidence of its popularity in academic circles, by 2015 there were over 11,000 papers on the website of the Social Sciences Research Network (SSRN) that make explicit reference to "corporate governance" in their title or abstract, up from about 3500 in 2006. (5)

    Yet despite its extensive usage, there is no canonical definition of what corporate governance means. (6) At one extreme, corporate governance is viewed as "[a]nything and everything that influences the way that a corporation is actually run." (7) This would encompass external constraints on corporate behavior (such as those provided by credit markets, competition, and the market for corporate control), as well as internal ones. (8) Most works on corporate governance, however, focus primarily on internal governance, which relates to the balance of power among shareholders, boards of directors, and managers. (9) And most policy efforts in corporate governance since the 1970s have emphasized variations on the same formula--the independence of corporate directors, on the one hand, and the empowerment of shareholders, on the other--to address very different problems over time.

    Such overt emphasis on corporate governance is relatively new. As depicted in Figure 1, the very expression corporate governance did not exist in the English language until the 1970s, but its use has exploded since. (10)

    To be sure, such growing usage in part merely reflects the advent of new terminology--with "corporate governance" providing a different vocabulary to describe otherwise familiar themes. (12) Nevertheless, the very appearance of this neologism is likely not fortuitous, but rather indicative of a new mindset: one that assumes that the particular balance of power, organizational structure, and decision-making processes within the corporation matter deeply for economic and social life. What, then, explains this growing interest in corporate governance?

    Even though the rise in prominence of corporate governance is well documented, (13) the driving forces behind it have not yet received systematic attention. There is, however, an important literature offering different accounts about the degree and direction of corporate governance change in the last few decades. For instance, Ronald Gilson ascribes the transformation of U.S. corporate governance in the last decades of the 20th century to changes in the operation of product and capital markets. (14) Jeffrey Gordon, in turn, attributes the rise of independent directors in the United States to the greater informational content of stock market prices--which, he argued, made it possible for outsiders to monitor the pursuit of shareholder value by corporate management. (15) There is also an established connection between calls for greater shareholder involvement in corporate governance and the drastic expansion of institutional (in lieu of individual) ownership of corporate stock since the mid-20th century. (16) Relatedly, Martin Gelter has argued that the gradual shift in pension systems from defined benefit to defined contribution plans has tied the fortune of workers to the performance of stock markets, hence increasing popular interest in corporate governance and legitimizing the pursuit of shareholder wealth maximization. (17)

    Although illuminating in many ways, these accounts nevertheless fail to fully capture the growing grip of the corporate governance agenda during this period. Crucially, corporate governance change did not result from the invisible hand of the market alone. It instead resulted from the visible hand and voice of policy entrepreneurs advocating for corporate governance reform in its different stripes. (18) The contemporaneous emergence of a corporate governance industry only accentuates the self-reinforcing character of the corporate governance agenda. (19) There is, in fact, an observed disjunction between economic forces and corporate governance policy. Not only is the link between certain corporate governance best practices and desired outcomes tenuous in many instances, (20) but the corporate governance movement assumes that market forces alone do not lead companies to adopt optimal corporate governance structures. (21)

    This Article offers a complementary political account of such a turn to corporate governance as an all-purpose remedy. The ascent of the corporate governance movement in the United States since the late 1970s coincided with the wave of deregulation and suspicion of government intervention. Such overlap is likely not accidental. If "government is not the solution to our problem; government is the problem"--as Ronald Reagan's famous slogan went--the cure for economic woes had to lie in the private sector.

    If markets fail, and so do governments, (22) corporate governance appears as an attractive alternative. As in a hydraulic system, governance may partly substitute for government, at least in the level of discourse. (23) Figure 2--which plots the incidence of the terms "corporate governance" and "government regulation" in books between 1970 and 2008--shows an inverse relationship between the usage of both terms in the last decades. (24)

    Whether such skepticism of the government's ability to enhance welfare reflects sound analysis or misguided ideology is a question on which reasonable minds will differ. Either way, the growing concern with corporate governance partly compensates for the misgivings about government intervention in the policy arena. (25) Ironically, it does so by treating the corporation as a metaphor for government in two ways. First, it transposes to the corporate form the same traditional formulas for controlling and legitimizing power in the political sphere--"checks-and-balances" through strong independent boards and (shareholder) democracy--in the hope of tackling numerous economic and social problems. Second, the internal workings of the corporation become the focal point of public debate, as well as the presumptive remedy. Indeed, a key promise of the corporate governance movement is that, once the proper decision-making processes internal to the corporation are in place, external substantive regulation of corporate action will become increasingly superfluous, as corporations will be in the position to govern themselves.

    In sum, the central claim is that focus on corporate governance as a solution to problems both within and without the corporation reflects contemporary political culture. This is, of course, a speculative proposition--a question of interpretation of culture--that is difficult to prove or disprove as an empirical matter. Other developments over the past 40 years have also contributed to turning corporate governance into a serious focus of academic and public discourse.

    Beyond the factors identified in the literature, (26) one could also think of other exogenous forces that likely contributed to the surge in interest in corporate governance. For instance, the decline of unions in the 1970s removed the clash between management and labor as the dominant political issue involving large corporations, thus arguably clearing the way for the focus on internal governance. On the technology front, the emergence of easily available computing power allowed both for better pricing of securities and for the use of those prices to test the effects of different aspects of corporate structure and behavior, generating an explosion in the number of corporate finance scholars looking for variables to compare with stock prices. Corporate governance variables became attractive candidates in this context, hence fueling the growing interest in the field, which has many contributing factors.

    Moreover, corporate governance is by no means the only institutional response to an era of disillusionment with traditional modes of government intervention. In the public law arena, "new governance" approaches arguably reflect the other side of the coin. Whereas "new governance" incorporates into government action forms of decentralization, collaboration, and experimentation more commonly associated with markets, (27) corporate governance makes the...

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