Wed Jun 3rd, 2009 at 07:15:34 AM EST
The directors of such [joint-stock] companies, however, being the managers rather of other people's money than of their own, it cannot well be expected, that they should watch over it with the same anxious
vigilance with which the partners in a private copartnery frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master's honour, and very easily
give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.
-- Adam Smith, The Wealth Of Nations (1776)
It's on the basis of Adam Smith's distrust of managers that Adolf Berle and Gardiner Means, in The Modern Corporation and
Private Property (1932) provided their critique of the development of the modern corporation run by managers rather than proprietors with, according to them, deleterious effects.
The Modern Corporation and Private Property - Wikipedia, the free encyclopedia
Private enterprise ... has
assumed an owner of the instruments of production with complete property rights over those instruments... Whereas the organization of feudal economic life rested upon an elaborate system of binding customs, the
organization under the system of private enterprise has rested upon the self interest of the property owner - a self interest held in check only by competition and the conditions of supply and demand... Such self interest has
long been regarded as the best guarantee of economic efficiency. It has been assumed that, if the individual is protected in the right both to use his own property as he sees fit and to receive the full fruits of its use, his
desire for personal gain, for profits, can be relied upon as an effective incentive to his efficient use of any industrial property he may possess.
Shareholder capitalism, argued Berle and Means from this classical perspective, destroys efficiency because shareholders delegate responsibility to managers, who do not share the motives of the property owner, posing a
problem both of diligence in the protection of the interests of "those who have ventured their wealth" and of distribution of the returns. In other words, managers, after taking power in the concentrated remains of
nineteenth-century family firms, deviate the Invisible Hand from its normal utilitarian workings.
The story is outlined in an article by Philippe Delvalée on the Alternatives
Economiques website. Delvalée explains that this classical view of the dangers of the "managerial revolution" became the conventional wisdom until the 1960s and early 1970s. At that point they were challenged by
new ideas that purported to reconcile management with the magical efficiency of property ownership. These new ideas, especially pioneered by Jensen and Meckling in Theory of the Firm : Managerial Behavior, Agency Costs and Ownership Structure (1976) (pdf), concerned agency theory. They posited that it was possible to align the interests of the agent (manager) on those of the principal (shareholder), in spite of the following
- asymmetric information: the managers know what is going on in the enterprise and will naturally use their knowledge to further their own interests;
- contracts will never cover all potential events and issues and are therefore insufficient;
- the issue of lawsuits concerning managers' non-acquittal of their responsibilities is most uncertain;
- the threat of selling shares is weakened by the fact that it reduces the share price for the shareholders themselves.
The way to deal with the "principal-agent problem", said the agency theorists, was to use the carrot rather than the stick:
- pay managers high basic salaries to be sure to attract the brightest and the best;
- offer bonuses for performance in the interest of shareholders;
- tie managers strictly to shareholder interests by making shareholders of them via stock-options.
And this is the new CW that replaces the classical view as Thatcher and Reagan come into power. Delvalée explains:
|Salaires des patrons : comment en est-on arrivé là ?
|Bosses' Salaries: How Did We Get Here?
|...dès lors que des incitations adéquates sont mises en place, les managers ont eux aussi intérêt à
maximiser les profits des détenteurs de titres. Ce qui, plus largement, est censé permettre d'allouer les capitaux de façon optimale aux utilisations les plus efficaces. La boucle est bouclée : on retrouve la main
invisible chère à Adam Smith...
|...once adequate incentives are
implemented, managers share the profit-maximising interests of stockholders. Which, more broadly, is supposed to permit optimal capital allocation to the most efficient uses. We have come full circle: we're back with the
invisible hand dear to Adam Smith...
| Dans un tel contexte, que les dirigeants
s'enrichissent beaucoup n'est donc pas un problème puisque cela profite à tout le monde. Aux actionnaires bien sûr, mais aussi à l'économie dans son ensemble, car la hausse du cours des actions de telle ou telle entreprise
n'est que le signe de la bonne utilisation des capitaux mis à sa disposition. C'est pourquoi les diatribes mettant en cause le caractère exagéré des rémunérations perçues sont repoussées d'un revers de la main par les
théoriciens de l'agence. Pour eux, il n'est d'ailleurs même pas besoin non plus de chercher à justifier ces rémunérations par d'hypothétiques écarts de productivité entre les dirigeants et les salariés
« normaux ».
|In such a context, it's not a problem
when top managers get very rich because it benefits everybody. The shareholders of course, but also the overall economy, because the rise in the share price of this or that company is only the sign of the correct use of the
capital made available to it. This is why rants against exaggeratedly high remuneration are brushed aside by agency theorists. According to them, there isn't even any need to bother justifying this remuneration by
hypothetical productivity gaps between top managers and "normal" employees.
So the miracle CEO who manages - one way or another - to keep quarterly profits up and rising, determining a high share price, can claim absolutely as much as s/he likes, because magical economic theory says that s/he is
maximising utility. That this system favorises risk-taking, flexibility with regard to accountancy rules, and (to put it mildly) pro-cyclical activity, could not possibly be relevant. Neither could the fact that there is no check on the use of asymmetric information to further managerial interests which are protected by golden parachutes, while shareholders can and do find themselves in free fall. This huge gift to upper management has been one of the causes of the "long bull market" bubble and the current crisis, and of the increasing concentration of income in the hands of a small group.
So, yes, taxing very high income at a very high level could usefully make its return (see Maxed-Out Incomes (1)), but agency theory has to bite the dust, and new forms of corporate governance, new corporate forms, have to see the light of day.