Transcript Business History Conference European Business History

Corporate governance & innovation
Mary O’Sullivan
University of Geneva
[email protected]
Knowledge dynamics, industry
evolution, economic development
July 10, 2014
Structure
• Theoretical debates on corporate governance
• Institutional typologies & institutional change
• Capital as a crucial theoretical & empirical blind spot
• Historical studies of capital, industrial dynamics and
innovation
Why do we care?
• Contemporary debates about corporate governance stem from the
recognition by economists of the importance of corporate
enterprises for allocating resources in the economy
• In most economies, corporate enterprises play a critical role in
shaping economic outcomes through the decisions they make about
investments, employment and trade
• How major corporations allocate their vast revenues is a matter of
strategic choice and the strategic choices of corporate decisionmakers can have profound effects on the performance of the
economy as a whole
What is corporate governance?
• The governance or control of a corporate enterprise can be
understood, in a broad sense, as the distribution and organisation of
its decision-making power
• A corporation's governance is comprised of the structures and
processes, formal and informal, that influence which actors have
influence within an enterprise and how they exercise it to determine
the corporation's strategic direction
• Although it is possible to conceive of the governance of a particular
corporation, economists and other social scientists tend to speak of
corporate governance in more systemic terms
System of corporate governance
The institutions that influence how business
corporations allocate resources and returns.
System of corporate governance
Specifically, a system of corporate governance
shapes:
• WHO makes corporate investment decisions
• WHAT types of investments and disinvestments
they make
• HOW the costs of, and returns from, corporate
investments are distributed
Multiplicity of perspectives
•
What makes social sense? What system encourages corporations to
act in a way that enhances welfare and equity in accordance with
prevailing social values (e.g. soccer balls and child labour)?
•
What makes economic sense? What system of governance
stimulates corporations to participate in a process that creates longterm economic value?
•
What makes political sense? What system encourages corporations
to act in a manner consistent with dominant political values (e.g.
democracy versus oligarchy)
•
What makes philosophical sense? What system encourages
corporations to act in a way that is consistent with a particular
philosophy (e.g. liberalism and property)
Multiplicity of perspectives
•
What makes social sense? What system encourages corporations to
act in a way that enhances welfare and equity in accordance with
prevailing social values (e.g. soccer balls and child labour)?
•
What makes economic sense? What system of governance
stimulates corporations to participate in a process that creates longterm economic value?
•
What makes political sense? What system encourages corporations
to act in a manner consistent with dominant political values (e.g.
democracy versus oligarchy)
•
What makes philosophical sense? What system encourages
corporations to act in a way that is consistent with a particular
philosophy (e.g. liberalism and property)
•
etc…
Standard economic theories of
corporate governance
• Corporations should be run to maximise shareholder value
• Corporations should be run in the interests of a variety of
stakeholders
• Managers need some autonomy from demands of capital and
labour
Standard economic theories of
corporate governance
• Corporations should be run to maximise shareholder value
because shareholders bear the risk of the corporation’s earning
a residual (shareholder)
• Corporations should be run in the interests of a variety of
stakeholders because the performance of the corporate
enterprise depends on their contributions and not just on the
input of the shareholders (stakeholder).
• Managers need some autonomy from demands of capital and
labour to make strategic commitments of resources to “longterm” investments (managerial/technocratic).
For shareholder theory…
• The crucial governance mechanisms are those that
influence the relationship between corporate
shareholders and managers
• “Good” governance depends on creating carrots and
sticks that “encourage” managers to maximise
shareholder value
• These governance mechanisms can be internal or
external to the corporation
Mechanisms that (in theory) promote
the maximisation of shareholder value
Internal Mechanisms
External Mechanisms
• Capital allocation process e.g.
hurdle rates of return
• Incentive systems e.g. stock
options
• Board composition
• Company charter
•
•
•
•
•
Shareholders’ Meetings
Proxy Fights
Institutional Investor Activism
Hostile Takeovers
Legal/ Regulatory Framework
that determines rights &
obligations of shareholders,
directors, executives
Standard economic theories of
corporate governance
• Corporations should be run to maximise shareholder value
because shareholders bear the risk of the corporation’s earning
a residual (shareholder)
• Corporations should be run in the interests of a variety of
stakeholders because the performance of the corporate
enterprise depends on their contributions and not just on the
input of the shareholders (stakeholder).
• Managers need some autonomy from demands of capital and
labour to make strategic commitments of resources to “longterm” investments (managerial/technocratic).
Critiques of Shareholder Value
• Theory of shareholders’ contribution: other stakeholders in the
corporation also take substantial risks for the economic benefit of
corporations
• Theory of the firm: “the attempts of the new institutional economics
to explain organizational behavior solely in terms of agency,
asymmetric information, transaction costs, opportunism… ignore key
organizational mechanisms like authority, identification, and
coordination and hence are seriously incomplete (Perrow)
• Theory of governance mechanisms: all depend for their
effectiveness on the stock market’s efficacy in assigning prices to
corporate securities. Although the efficient markets’ hypothesis was
once described as one of the best-proven facts in the social
sciences, it’s taken a bit of a beating recently!
Theoretical debates on corporate
governance
• Recognition of the importance of the “theory of the firm”
that underlies theories of corporate governance
• And the limits of dominant theories for understanding
how enterprises really operate
• Various efforts to develop a theory of the firm that
recognises characteristics of innovation as central to
process through which corporations allocate resources
and distribute returns
• Possibilities and problems of these new directions
Theoretical debates on corporate
governance
•
•
•
•
•
•
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•
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Jensen, M. C. and Meckling, W. H.,1976, “Theory of the Firm : Managerial Behaviour, Agency
Costs, and Ownership Structure”, Journal of Financial Economics, 3 (2), 305-360.
Fama, E. and Jensen, M., 1983, “Separation of Ownership and control”, Journal of Law and
Economics, 26 (2), 327-349.
Berle, A. and Means, G.,1932, The Modern Corporation and Private Property, New York.
Blair, M., 1999, “Firm-specific Human Capital and Theories of the Firm”, in Blair, M. and Roe,
M. (eds), Employees and Corporate Governance, Brookings Institute, Washington, 58-90.
Blair, M. M. and Stout, L. A., 1999, “A Team Production Theory of the Corporate Law”, Virginia
Law Review, 85 (2), 247-328.
Zingales, L., 2000, “In Search of New Foundations”, Journal of Finance, 55 (4), 1623-1653.
Chassagnon, V. and Hollandts, X., 2014, “Who are the Owners of the Firm? Shareholders,
Employees or No One?” Journal of Institutional Economics. 10 (1), 47-69
O’Sullivan, M., 2000, “Innovation, Resource Allocation, and Governance”, chapter 1 in Contests
for Corporate Control: Corporate Governance and Economic Performance in the United States
and Germany, Oxford, Oxford University Press.
Lazonick, W. and O’Sullivan, M., 2000, “Maximizing Shareholder Value : a new Ideology for
Corporate Governance”, Economy and Society, 29 (1), 13-35.
Krafft, J. and Ravix, J. L., 2009, “The Governance of the Knowledge-Intensive Firm in an Industry
Life Cycle Approach”, in Morroni, M. (ed), Corporate Governance, Organization and the Firm,
Edward Elgar, Cheltenham and Northampton, 48-62.
Structure
• Theoretical debates on corporate governance
• Institutional typologies & institutional change
• Capital as a crucial theoretical & empirical blind spot
• Historical studies of capital, industrial dynamics and
innovation
Institutions of corporate
governance
• A division of labour between scholars interested in understanding
institutions that influence
– Capital & corporate governance (ownership, finance, profits)
– Labour & corporate governance (participation, work, wages &
benefits)
• In both cases, a great deal of effort devoted to developing typologies
of capitalism that highlight comparative similarities and differences
in systems of corporate governance across countries
• And, more recently, in trying to explain the origins of these
comparative patterns of corporate governance
Capital Institutions
• Patterns of corporate financing
– market-based systems (e.g. US & UK)
v.
– bank-based systems (e.g. Germany & Japan)
• Patterns of corporate ownership
– insider systems (most of continental Europe, Japan & ROW)
v.
– outsider systems (US & UK)
Capital Institutions
& Legal Origins
• Patterns of corporate financing
• Patterns of corporate ownership
& their FOUNDATIONS
• Patterns of corporate and bankruptcy law
– common-law systems (e.g. US & UK)
v.
– civil-law systems (e.g. Germany & France)
Rafael La Porta, Florencio Lopes-de-Silanes, Andrei Shleifer & Robert Vishny, “Legal
determinants of external finance”, Journal of Finance, 52 (July 1997), 1131-50; idem.,
“Law and finance”, Journal of Political Economy, 106 (December 1998), 1113-55.
Law & Corporate Governance
•
Legal rules that protect minority investors and the quality of their
enforcement determine patterns of corporate finance and ownership
•
Legal systems differ systematically in the quality of protection they
provide minority investors
•
Common law is more protective of minority investors than German and
Scandinavian civil law which is more protective than French civil law
•
And so countries’ legal families explain comparative patterns of
corporate finance and ownership
– Corporate finance: in countries with better legal protections,
companies will have easier access to external finance from capital
markets
– Corporate ownership: countries with poor protections have more
highly concentrated ownership of shares
Institutional typologies &
institutional change
• Typologies may be useful for capturing comparative patterns in
corporate governance at a point in time
• However, they tend to ignore institutional change or treat it in highly
simplified terms (capital markets develop or do not if a key factor
(e.g. legal family) is present)*
• Recent evidence suggests that there is considerable change over
time in main characteristics of systems of corporate governance
• And that it is not related in any simple fashion to “key” causal factors
that have been identified in literature
* O’Sullivan, Mary, “A Fine Failure: Relationship Lending, Moses Taylor & the Joliet
Iron & Steel Company, 1869-1888,” Business History Review, forthcoming
Public Share Issues
proceeds as a % of GFCF*
Country
1913 1929 1938 1960 1980 1990 1999
US
0.04
0.38
0.01
0.02
0.04
0.04
0.12
UK
0.14
0.35
0.09
0.09
0.04
0.06
0.09
Germany
0.07
0.17
0.06
0.04
0.01
0.04
0.06
France
0.14
0.26
0.03
0.05
0.06
0.02
0.12
Japan
0.08
0.13
0.75
0.15
0.01 24.78
0.08
Italy
0.07
0.26
0.03
0.08
0.04
0.04
0.12
Sweden
0.08
0.34
n.a.
0.03
0.00
0.03
0.10
* Gross fixed capital formation
Source: Rajan and Zingales, 2000, p. 38
Public Share Issues
proceeds as a % of GFCF*
Country
1913 1929 1938 1960 1980 1990 1999
US
0.04
0.38
0.01
0.02
0.04
0.04
0.12
UK
0.14
0.35
0.09
0.09
0.04
0.06
0.09
Germany
0.07
0.17
0.06
0.04
0.01
0.04
0.06
France
0.14
0.26
0.03
0.05
0.06
0.02
0.12
Japan
0.08
0.13
0.75
0.15
0.01 24.78
0.08
Italy
0.07
0.26
0.03
0.08
0.04
0.04
0.12
Sweden
0.08
0.34
n.a.
0.03
0.00
0.03
0.10
* Gross fixed capital formation
Source: Raghuram Rajan and Luigi Zingales, “The Great Reversals: The Politics of Financial
Development in the 20th Century,” Journal of Financial Economics 69 (July 2003), p. 16.
Institutional typologies &
institutional change
• Growing body of historical research on origins and evolution of
institutions of corporate governance
• With a particular focus on historical evolution of
• ownership of corporate shares
• markets for corporate securities
• As well as efforts to propose explanations that account for historical
& comparative patterns
– Political Dynamics (Mark Roe; Peter Gourevitch & James Shinn)
– Trends in Economic Openness (Raghuram Rajan and Luigi
Zingales)
– Dynamics of Economic Development (Mary O’Sullivan, Dividends of
Development, forthcoming, 2015)
Institutional analysis
& economic dynamics
• Empirical links between institutional analysis and economic
dynamics usually drawn in loose terms e.g. shareholder value
orientation of U.S. corporate sector makes Silicon Valley innovative!
• Even in the most careful institutional analyses, there is typically little
connection between institutional patterns of corporate governance
and the behaviour of corporate enterprises
• It is not surprising, therefore, that we know little in empirical terms
about the links between institutions of corporate governance,
innovation and economic dynamics
Structure
• Theoretical debates on corporate governance
• Institutional typologies & institutional change
• Capital as a crucial theoretical & empirical blind spot
• Historical studies of capital, industrial dynamics and
innovation
Capital as a blind spot
•
The theoretical murkiness of capital’s role
– standard theories of the firm (financing capital formation?, waiting? riskbearing?)
– heterodox traditions (Schumpeterian innovation versus Keynesian
speculation)
•
And very little empirical research that would allow us to distinguish among
more or less plausible arguments
•
A survey of historical research reveals just how little we can say with
confidence about the role that capital played in the process of economic
development
•
Canonical example is Britain’s Industrial Revolution but even if we focus on
capital-intensive industrialisation (e.g. steel)
Source: O’Sullivan, Mary, 2004, « Capital: The Blind Spot of Capitalism”, a review of Capital
in the 21st Century by Thomas Piketty, American Historical Review, forthcoming
Structure
• Theoretical debates on corporate governance
• Institutional typologies & institutional change
• Capital as a crucial theoretical & empirical blind spot
• Historical studies of capital, industrial dynamics and
innovation
Motor Cars on the
U.S. Securities Markets, 19071929
Corporate governance &
innovation
•
The links between corporate governance, innovation and economic
dynamics are promising
•
From a theoretical perspective (dynamic theories of the firm as basis for
conceptualisation of corporate governance)
•
And an empirical perspective (links between institutional patterns and
economic dynamics)
•
Crucial blind spots to be overcome but research strategies to do so
•
Already apparent from new studies that standard theories of corporate
governance are lacking
•
But still an open question of how much we can generalise about links
between corporate governance & innovation