Bruner Book Club, continued: Mechanisms, Institutions, & (In)coherence

 

I am delighted to have been invited to participate in the book club devoted to Chris Bruner’s recent volume.  The commentary and discussion have been by turns illuminating, insightful, and provocative.  These entries have helped sharpen my thinking on subjects I’ve been thinking about for years.  Several of the posts, including Chris’s responses, have spurred me to comment on a few issues I left out of my original comment.

I had noted that employees and labor may be losing across the board such that political (and economic) losses in the domain of corporate governance, narrowly defined, are not offset or even cushioned by other forms of legal protection or social welfare policies. In response to this suggestion, Chris notes that the scenario I proffered is not “inherently in tension with [his] core claims.”  I completely agree, and this is why I read his book as opening up broader developmental possibilities for both stakeholder and more shareholder-centric corporate governance regimes.  I do not read Chris to argue for a causal relationship in which stronger protection of stakeholder interests outside of the confines of corporate governance necessarily lead to pro-shareholder governance reforms (or vice versa).  Rather, politically speaking, these stronger protections for stakeholder interests may—depending on the structural character—may allow for adoption of pro-shareholder and pro-finance reform policies while dampening the likelihood and likely intensity of political backlash against them.  In fact, we have seen examples of this in practice. 

One apparent anomalous feature of Thatcherism, for example, was the resilience of the British welfare state despite the ideological zeal with which organized labor was assailed and assaulted, and the ways in which the interests of the financial sector were vindicated in policy and practice.   In the end, this wasn’t contradictory at all, and for reasons consistent with the Bruner thesis.  Leaving the welfare state intact supplied a cushion to absorb the shock and economic harms inflicted by Thatcher’s neo-liberalism.  It blunted the backlash that might have cost the Tories their governing majority.  At the same time, the policy changes wrought by Thatcher and British conservatives of that era systematically favored managers over labor (and employees generally), and finance over managers.  And these biases were (mostly) quite deliberately embodied in and institutionalized by law to effect structural reallocations of power and wealth (arguably even more radical than they first appeared).

Conversely, German corporate governance and financial system reforms of the 1990s and early-2000s were adopted in a context in which employee and labor interests were far more comprehensively protected in comparison with British labor during the 1970s and 1980s.  Like the pro-shareholder agenda Chris describes under Prime Minister Harold MacMillan during the 1960s, successive German governments, most notably the SPD “Red-Green” coalition under Gerhard Schroeder, embraced pro-finance and pro-shareholder without resistance from the country’s powerful unions.  In fact, German industries’ push to restore export competitiveness was not achieved via the blunt instrument of financial market pressures and shareholder capitalism, but through the Hartz reforms of employment and social welfare law along with wage restraint accomplished through established mechanisms of sectoral collective bargaining. 

However, we should remain mindful of the differences between these two situations.  British policy of the 1960s may have favored shareholder interests in some instances, but within a context of other policy commitments, legal rules, and institutional arrangements that made those pro-shareholder rather marginal and non-disruptive.  Likewise, the more recent German reforms were designed—politically and institutionally—to preserve the existing architecture of the German economic model outside of finance.  In contrast, Thatcher’s reforms were designed to undermine and transform the post-war status quo and were exceptionally successful in doing so. 

A number of implications flow from the comparison and consideration of these cases.  The first, following up on my original comment, is that the analysis of legal and economic reforms must be temporally framed and bounded.  The significance and effects of reforms—even identical ones—may be very different as historical circumstances and political economic contexts change, just as they may differ cross-nationally.  A pro-shareholder policy agenda during the post-war era up to and including the 1970s did not have the same political, economic, ideological, and ultimately systemic implications that they did during the 1980s, 1990s, and 2000s.

The second implication follows from this recognition of the import of historical context, on the one hand, and the substantive character of policy and legal reforms, on the other.  Pro-shareholder policies and reforms within a political economic regime that effectively protects and empowers other stakeholder groups may be largely irrelevant in practical and political terms.  Comparative and historical analysis shows us how changing contextual factors over time may transform the significance and longer-term effects of even seemingly minor policy changes. (Paul Pierson's work, to cite an influential example, has been conerned with these types of causal relationships.)

A third implication, building on comments regarding the identification of mechanisms through which social preferences and structural conditions are causally connected to actual policy outcomes.  An argument (or assertion) that public preferences somehow will find their way into politics and policy not only doesn’t tell us much, it is also in many cases empirically questionable.  Political mechanisms include, most importantly, the institutional structures of the state, parties, electoral systems, but also non-state institutions such as firms, unions, and private, professional, and para-public associations.  These institutions, singly and in concert, effectively filter issues that become politically salient and subject to policy reform. 

Even more fundamentally, these institutional arrangements perform an even more profoundly constitutive role in shaping the interests, norms and values, membership, and relative power of political economic constituencies.  (That these constitutive effects of institutional contexts may be entirely unintended or unexpected makes them no less important in the development of social order.)  The earlier emergence of a legalistic regulatory state during the Progressive Era and New Deal made market reinforcing transparency regulation more politically viable despite corporate law federalism that arguably favors corporate managers (though less than many, and some posters here, have suggested).  The German economic model embodies corporatist bargaining arrangements at the levels of national, sectoral, and firm governance that use law to constitute and reinforce these bargaining relationships and fora in ways that tended to preclude or displace legalistic regulation.  Lacking a well-developed regulatory state apparatus along American lines, the U.K. beginning with Thatcher began to develop one, almost on the fly and not very successfully, as British capitalism took what might be called its financial turn in the 1980s.  Because Thatcher and her allies were antagonistic to labor and forms of governance premised on (non-market) relationships of countervailing power, no attempt was made to appropriate German-style forms of governance. 

The structural character of reforms therefore matters.  Reforms may vary in their short-term and long-term consequences, and those that target political and economic power relations, particularly those that alter their foundational legal rules, tend to have the most substantial impact over time.  This is another reason why corporate governance has become more politically salient and economically important, especially in countries where non-market forms of economic governance and social welfare programs are less comprehensive or well established—it is one of the foundations of power relations in any capitalist economy.  Pro-shareholder reforms became particularly consequential as other competing constituencies weakened and other forms and mechanisms of governance eroded.  Ironically perhaps, the short-termism characteristic of actual existing shareholder capitalism became highly consequential for the longer-term development of national political economies and of the global economy as a whole. 

Finally, notwithstanding Chris’s well argued case for more nuanced and realistic analysis of the common law (or liberal market) countries, we should remain mindful of the apparent differences between them as a group and non-liberal countries such as those of continental Europe.  Chris advances complementary arguments that common law countries vary widely in the degree and forms of protection granted to non-shareholder groups, and that greater protection for these stakeholder groups may enable the adoption of more pro-shareholder corporate governance.  Quite right, I think.  However, the prevalence of market-reinforcing regulation and market-based economic governance and coordination in the common law countries is striking when compared to the non-liberal political economies.  VOC and other theories of comparative political economy have their weaknesses and problems, but they do pick up on and are preoccupied by some very important differences in the structural characteristics of national political economies and patterns of common and distinguishing structural characteristics.  The degree to which non-liberal features have persisted over time has always been an important subject of study.  Today, understanding how they have withstood and whether they can continue to withstand neo-liberal globalization along with the political and economic consequences of global financial crisis is of paramount importance not only for comprehending our world, but also for shaping the one in which we will live in the future.