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Tuesday, May 13, 2014

Corporate governance and social welfare policy – what’s the mechanism?

Even if one is inclined to accept, as a general matter, that there is a coherent conceptual fit between shareholder-friendly corporate law and employee-friendly social welfare structures in dispersed ownership systems of the sort that predominate in the common-law world, one might nevertheless reasonably ask: What, precisely, is the mechanism through which the latter impacts the former?  In his recent review of the book for the Texas Law Review, David Skeel asks as much, observing that a “theory that makes causal claims about regulatory evolution must be prepared to address two questions.”  In my case, the questions become, first, “whether shareholder orientation does indeed vary with the scope of a country’s social welfare system,” and second, what “mechanism links an increase or decrease in shareholder orientation with the robustness of a country’s social welfare system.”  Andrew Gold, in his post earlier today, similarly probes the causal link in questioning whether employee-manager coalitions necessarily lead to structures dependably promoting employee interests – a descriptive premise of the social welfare-oriented theory developed in the book.  Brett McDonnell likewise points to Delaware, asking in his follow-up post whether the evolution of Delaware’s takeover law might alternatively reflect “a power grab by managers.”  Brett further asks how corporate governance and social welfare policy interact outside the takeover context.     

Brett is correct that, outside the hostile takeover context, the case for the existence of a causal connection between social welfare policy and the emergence of strong shareholder powers remains more circumstantial.  In the UK, for example, the modern welfare state, the emergence of institutional shareholders as dominant players in equity markets, and the establishment of clear statutory power for shareholders to remove directors without cause by simple majority vote all emerged roughly contemporaneously in the years immediately following World War II.  It is certainly worth observing that the Labour Party was broadly comfortable with corporate reforms such as strong removal power and greater financial disclosure – which the committee generating such reforms evidently thought would reduce opportunities for insider abuses and “accord with a wakening social consciousness.”  More pertinently, however, these developments set the stage for assessment of the social welfare impacts of corporate law by fueling the hostile takeover wave that arose in the UK in the 1950s – fuller financial reports permitting assessment of targets, and clear removal power allowing would-be acquirers to establish governance power through open-market purchases. 

As I suggested in my prior post, hostile takeovers provide a particularly clear window into the social welfare dynamics of corporate law because they so starkly pit the interests and incentives of shareholders against those of other stakeholders, including employees.  Consequently, the development of a given jurisdiction’s takeover regime will often bring social welfare concerns to bear upon the development of corporate law in a quite direct manner – and give rise to illuminating contrasts across jurisdictions.  In the UK for example, a strongly shareholder-centric takeover regime coalesced under the 1964-1970 Labour government of Prime Minister Harold Wilson – notwithstanding the threat posed to Labour’s core constituency, as the party itself had previously emphasized.  As I recount in the book, this occurred both because Labour leaders ultimately concluded that consolidation of British industry could improve stable job opportunities, and that external social welfare-oriented regulatory structures could buffer the downside risks for employees.  In the US, on the other hand, precisely the opposite occurred – a stakeholder-centric regime took shape (or, rather, a patchwork of such regimes at the state level took shape) during the right-leaning years of the pro-takeover administration of Ronald Reagan, reflecting deep concerns regarding the social welfare impacts of takeovers in a country where social welfare protections were (and to a great extent remain) employment-linked. 

Further reflections of the relationship between these policy domains can emerge as a country’s social welfare environment evolves over time.  Australia, for example, adopted a more stakeholder-oriented approach in the 1970s and the 1980s, giving managers substantial latitude to deploy defenses – an approach reflecting concerns stemming from the fact that state-based social welfare remained hotly contested and incomplete during this period.  Since the 1990s, however, Australia has shifted toward a far more shareholder-centric position on takeovers, sharply limiting defenses – a shift that was not inhibited by the sorts of social concerns that arose in prior decades because, by the mid-1990s, Australia’s state-based social welfare programs were firmly established. 

Such dynamics are similarly reflected in “natural experiments” arising elsewhere. For example, stockholdings in Japanese companies have de facto dispersed over the last couple decades (due to the unwinding of “keiretsu” cross-shareholding structures, as the deteriorating economy forced banks to sell in order to meet their regulatory capital requirements), a development giving rise to hostile takeover attempts in the 2000s.  In response, policymakers had to decide whether to adopt a UK-style hands-off approach, or to permit use of Delaware-style poison pills to inhibit such transactions.  Tellingly, they chose the Delaware route.  While not investigated in great depth (a matter of scope to be discussed in a subsequent post), I do note in the book that their decision is entirely comprehensible from the social welfare perspective; having relied heavily on promises of lifetime employment as a core element of their social safety net, hostile takeovers threatened to undermine Japanese social welfare stability in a profound way. 

As the foregoing cases suggest, in some instances the impact of social welfare structures upon the development of the takeover regime will be more overt, and in others less so.  Developing the causal case more fully requires grappling with the role of coalitions, which (as I suggest in my prior post) loom large in this arena.  In the book I describe 1980s-era anti-takeover laws as a product of employee-manager coalitions favoring discretion to interfere with hostile bids that premium-seeking shareholders presumably want the freedom to accept.  Andrew is quite right to question whether managerial discretion in this domain necessarily redounds to the benefit of employees and other stakeholders – and to observe that (elsewhere in the book) I question the descriptive power of the team production theory’s “mediating hierarch” conception of the board on this very basis.  There is a difference, however, in the nature of our claims.  The team production theory advances a descriptive account of corporate law as it exists, and that conception literally requires a stakeholder mandate – which does not exist.  I, on the other hand, at the relevant point in my argument, seek to develop an account of political coalition formation.  That the employee-manager coalition of the 1980s did not result in (say) literal employee participation in corporate decision-making is not fatal to the claim that employee interests impacted the path of takeover regulation, as I think Andrew acknowledges.  In any event, it is critical to recognize that such a coalition-based account does not require that managers sought to advance employee interests, as such, but rather that their interests and incentives coincided, which will often be the case as between employees and managers in the takeover context. 

As Brett suggests, the causal mechanism is less clear in Delaware (a point that David Skeel raises in his review as well).  This reflects the fact that Delaware’s response to takeovers took shape through judicial decisions – meaning there is no legislative history to look to in discerning what political factors might have loomed in the minds of the relevant decision-makers.  As I discuss in the book, we do have judicial references to non-shareholder “constituencies” (in Unocal and progeny), signaling awareness of contemporaneous statutory developments in other states, as well as (academic) writings by Delaware judges expressing awareness of the social and political impacts of takeovers.  Beyond this we are left to speculate.  I’d add, however, that I do not think the narrative toward which such clues point us is inherently in tension with federal preemption concerns, which could readily arise simultaneously.  Indeed, I draw upon the literature toward which Brett directs us – including Mark Roe’s important work on Delaware’s competition with DC – in my account of post-crisis corporate governance reforms later in the book.  I could certainly imagine such pressures playing an operative role in the emergence of the takeover cases as well, establishing an additional (if less direct) link back to employee interests - as both Brett and David suggest.  I readily concede, however, that the causal link I’m after will inevitably be more difficult to establish in the judicial sphere than in the legislative sphere.

Ultimately I acknowledge that lawmakers and regulators remain entirely free, in any given country, to increase shareholder powers without increasing social welfare protections; to diminish social welfare protections without increasing board discretion to accommodate employee interests; and even to increase shareholder powers while diminishing social welfare protections.  Such moves can be – and have been – made in the countries investigated in my book.  My claim is not, however, that these two policy domains always move in tandem.  Rather, the bottom-line claim is that the sustainability of strong shareholder powers in a time of social and economic crisis will be substantially impacted by the degree of social welfare protection available to employees.  As I’ll discuss in a subsequent post, the theory developed in my book prompts predictions regarding the sustainability of various policy packages adopted in these domains in the wake of the crisis, providing opportunities to assess my causal claims further moving forward.  

Posted by Christopher Bruner on May 13, 2014 at 08:49 PM | Permalink

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