Managerialist America

By W.W. | IOWA CITY

MARK ROE, a professor at Harvard Law School, asks how capitalist America really is in a stimulating Project Syndicate piece. Mr Roe suggests that the level of state ownership of capital, or the level of government intervention in the economy, may offer a misleading picture of America's political economy. By these measures, one might infer that America is very capitalist, in the sense that capital largely controls the economy. However, as Mr Roe points out, ownership of capital is often extremely diffuse, spread over many thousands of shareholders. While a scattered body of shareholders collectively own much or most of public corporations, they generally have little control over the firms in which they have a stake. The people with real power are the class of managers and executives. Mr Roe writes:

American law gives more authority to managers and corporate directors than to shareholders. If shareholders want to tell directors what to do – say, borrow more money and expand the business, or close off the money-losing factory – well, they just can't. The law is clear: the corporation's board of directors, not its shareholders, runs the business.

While shareholders are in principle free to nominate and elect new directors, the deck is stacked against them. The election process is expensive and incumbents generally win. Proposed reforms that would make it easier for shareholders to elect their nominees to boards have wilted under the fierce resistance of the incumbent managerial class. "Firms and their managers are subject to competitive markets and other constraints," Mr Roe says, "but not to shareholder authority." But even from market forces managers are somewhat insulated. After the early-80s wave of "hostile takeovers", managers lobbied successfully to strengthen regulatory bulwarks against open-market coups by competing managers.

The upshot, according to Mr Roe, is that America "is less capitalist than it is 'managerialist.' Managers, not owners, get the final say in corporate decisions." One among many problems with this state of affairs is that

there is considerable evidence that when managers are at odds with shareholders, managerial discretion in American firms is excessive and weakens companies. Managers of established firms continue money-losing ventures for too long, pay themselves too much relative to their and the company's performance, and too often fail to act aggressively enough to enter new but risky markets.

To my mind, all this suggests a structural antagonism not between the rich and the not-rich, but between the corporate managerial class, the diffuse crowd of individuals who actually own the companies the managerial class so jealously control, and the rest of us, who are harmed by the knock-on effects of the sorts of managerial malfeasance enabled by the regulatory reinforcement of the separation of ownership and management, and the amplification of agency problems that reinforcement entails. An "ownership society" worth the name would both increase shareholders control in corporate governance and make it much easier to push out incumbent managers by means of "hostile" takeovers. Sometimes a little hostility is warranted.