By William Lazonick and Ken Jacobson and Lynn Parramore, AlterNet
Posted on April 5, 2012, Printed on April 18, 2012
Corporations are not working for the 99%. But this wasn't always the case. In a special 5-part AlterNet
series, William Lazonick, professor at UMass, president of the
Academic-Industry Research Network, and one of the leading expert on the
American corporation, along with journalist Ken Jacobson and AlterNet's
Lynn Parramore, will examine the foundations, history, and purpose of
the corporation to answer this vital question: How can the public take
control of the business corporation and make it work for the real
The wealth of the American nation depends on the productive power of our major business corporations. In 2008 there were 981 companies in
the United States with 10,000 or more employees. Although they were
less than two percent of all U.S. firms, they employed 27 percent of the
labor force and accounted for 31 percent of all payrolls. Literally
millions of smaller businesses depend, directly or indirectly, on the
productivity of these big businesses and the disposable incomes of their
When the executives who control big-business investment decisions place a
high priority on innovation and job creation, then we all have a chance
for a prosperous tomorrow. Unfortunately, over the past few decades,
the top executives of our major corporations have turned the productive
power of the people into massive and concentrated financial wealth for
themselves. Indeed the very emergence of "the 1%" is largely the result
of this usurpation of corporate power. And executives' use of this power
to benefit themselves often undermines investment in innovation and job
These corporations do not belong to them. They belong to us. We need to
confront some powerful myths of corporate governance as part of a
movement to make corporations work for the 99%. To start, we have to
recognize these corporations for what they are not.
They are not "private enterprise."
They should not be run to "maximize shareholder value."
The mega-millions in remuneration paid to top corporate executives are
not determined by the "market forces" of supply and demand.
Let's take a closer look at each of these myths.
1. Public corporations are not private enterprise.
Here's something you'll rarely hear stated by today's politicians and
pundits: Publicly listed and traded corporations are not private
enterprise. As documented by the pre-eminent business historian Alfred
D. Chandler, Jr., in a book aptly called The Visible Hand,
about 100 years ago the managerial revolution in American business
placed salaried managers in charge of running the nation's largest and
most productive business corporations.
This was a peaceful revolution in which a generation of
owner-entrepreneurs who had founded these companies some decades earlier
used initial public offerings on the New York Stock Exchange to sell
their ownership stakes to the public, leaving decision-making power in
the hands of salaried managers. In effect, these corporate employees,
and the boards of directors whom they selected, became trustees of the
immense productive power that these corporations had accumulated.
Even when founders of companies that evolve into major public
corporations become their CEOs, they generally occupy the top positions
as corporate employees, not owners. For example, when the late Steve
Jobs returned to Apple Computer in 1997, 11 years after being denied the
CEO position of the company he had founded, his ascent to the top
position was as a manager, not on owner. When a company founder like
Larry Page of Google gives up private ownership by publicly selling
shares, he may become CEO of the new corporation, but he is occupying
this position as a hired hand, not as a private entrepreneur.
In other words, private owners make choices to transform a private
enterprise into a public company that then needs to be regulated as
such. There are other choices that could have been made. When the
retiring owner of a private company wants to pass on control over a
prosperous company to his or her employees, an alternative to the public
corporation is to establish an Employee Stock Ownership Plan, or ESOP. There are many successful companies in the U.S. that are not public corporations precisely because they are under the collective ownership of their employees.
It is also possible for some investors to agglomerate sufficient
shares to take a public company private (Mitt Romney made his millions
doing just that), but that only emphasizes the point: public
corporations are not private enterprise. We regulate public corporations
far more stringently than private businesses precisely because they are
publicly held. And as U.S. citizens, how we regulate public
corporations (or even private businesses, for that matter) is up to us.
2. Corporations should be run to benefit everyone who contributes to their success - not just shareholders.
It's a myth that corporations have a legal duty to maximize profits to
shareholders at the expense of everyone else. Historically, the
executives and directors of U.S. public corporations understood that
they had a responsibility to other constituencies -- customers,
employees, suppliers, creditors, the communities in which they operate,
and the nation.
Today, however, the dominant ideology is that a corporation should
"maximize shareholder value." At the most basic level, the rationale for
this ideology is that shareholders own the company's assets, and
therefore have exclusive claim on its profits. A more sophisticated
argument is that that among all stakeholders in the business corporation
only shareholders bear the risk of getting a positive return from the
firm, while all other participants receive guaranteed returns for their
productive contributions. If society wants risk-bearing, so the argument
goes, firms need to return value to shareholders.
This argument sounds logical -- until you question its fundamental
assumption. Innovation, defined as the process that generates goods or
services that are higher quality and/or lower cost than those previously
available, is an inherently uncertain process. Anyone who invests their
labor or their capital in the innovation process is taking a risk that
the investment may not generate a higher quality, lower cost product.
Once you understand the collective and cumulative character of the
innovation process, you can easily see that the assumption that
shareholders are the only participants in the business enterprise who
make investments in productive resources without a guaranteed return is
just plain false. In an innovative economy, workers and taxpayers
habitually make these risky investments.
How do workers make these risky investments? As is generally recognized
by employers who declare that "our most important assets are our human
assets", the key to successful innovation is the extra time and effort,
above and beyond the strict requirements of the job, that employees
expend interacting with others to confront and solve problems in
transforming technologies and accessing markets. Anyone who has spent
time in a workplace knows the difference between workers who just punch
the clock to collect their pay from day to day and workers who use their
paid employment as a platform for the expenditure of creative and
collective effort as part of a process of building their careers.
As members of the firm, these forward-looking workers bear the risk that
their extra expenditures of time and effort will not yield the gains to
innovative enterprise from which they can be rewarded. If, however, the
innovation process does generate profits, workers, as risk-bearers,
have a claim to a share in the forms of promotions, higher earnings and
benefits. Instead, shareholder-value ideology is often used as a
rationale for laying off workers whose hard and creative work has
contributed to the company's success. That's grossly unfair.
Taxpayers also invest in the innovation process without a guaranteed
return. Through government agencies, taxpayers fund infrastructural
investments that, given their cost and the uncertainty of returns,
business enterprises would not have made on their own. It is impossible
to explain U.S. leadership in information technology and biotechnology
without recognizing the role of government in making investments to
develop new knowledge and facilitate its diffusion. As one example, the
current annual budget of the National Institutes of Health
(http://www.nih.gov/about/budget.htm) is about $31 billion, twice in
real terms its level in the early 1990s. Without this government
expenditure on research, year in and year out, we would not have a
medicinal drug industry. Yet shareholder-value ideology is often used to
justify low taxes that deny taxpayers a return on these investments.
So shareholder-value ideology provides a flawed rationale for
excluding workers and taxpayers from sharing in the gains of innovative
enterprise. To turn this ideology on its head, what risk-bearing role do
public shareholders play in the innovation process? Do they confront
uncertainty by strategically allocating resources to innovative
investments? No. As portfolio investors, they diversify their financial
holdings across the outstanding shares of existing firms to minimize
They do so, moreover, with limited liability, which means that they are
under no legal obligation to make further investments of "good" money to
support previous investments that have gone bad. Even for these
previous investments, the existence of a highly liquid stock market
enables public shareholders to cut their losses instantaneously by
selling their shares -- what has long been called the "Wall Street walk".
3. Executive compensation is a rigged game, not the result of the laws of supply and demand.
You often hear that stratospheric executive pay is the result of some
inexorable law of supply and demand. If we don't give top executives
their multimillion dollar compensation, they won't be willing to come to
work and do their jobs. They are supposedly the bearers of "scarce
talent" that demands a high price in the market place. Even Robert
Reich, Secretary of Labor in the Clinton administration and a critic of
U.S. income inequality, has justified the explosion in executive pay,
arguing that intense competition makes it much more difficult than it
used to be to find the talent who can manage a large corporation (Supercapitalism, 2008, pp 105-114).
That is not what determines executive pay. Here is how it works: Top
executives select other top executives to sit on "their" boards of
directors. These directors hire compensation consultants to recommend an
executive pay package, which consists of salary, bonus, incentive pay,
retirement benefits, and all manner of other perks. The consultants look
at what top executives at other major corporations are getting, and say
that, well, this executive should get more or less the same. Since the
directors are mostly these very same "other executives", they have no
interest in objecting -- and if any of them were to do so, they would
find that they are no longer being invited to sit on corporate boards.
Meanwhile, given the preponderance of stock-based compensation
(especially stock options) in executive pay, whenever there is
speculative boom in the stock market, top executives of the companies
with most rapidly rising stock prices make out like bandits. The higher
compensation levels then create a "new normal" for executive pay that,
via the compensation consultants and compliant directors, ratchets up
the pay of all the top dogs. And, when the stock market is less
speculative, these corporate executives do massive stock buybacks to
push stock prices up.
What we have here is not "market forces" at work but an exclusive club
that promotes the interests of the 0.1%. All too often executives
allocate corporate resources to benefit themselves rather than to invest
in innovation and job creation. It is time that the 99% see through the
ideology, break up the club, and get the U.S. economy back on track.
Corporate power for the people!
Business corporations exist as part of the collective and cumulative
development of our economy. The investments in innovation and job
creation that these corporations make or decline to make are key to our
future prosperity. Public shareholders, the supposed owners of these
corporations, are in general only willing to hold shares in a company
because of the ease with which they can terminate this relation by
selling their shares on the stock market. Yet, almost unanimously,
corporate executives proclaim that they run their companies for the sake
of shareholders. In fact, their personal coffers pumped up with
stock-based compensation, our business "leaders" have increasingly run
the corporations for themselves.
The real corporate investors are taxpayers and workers. Through
government agencies at federal, state, and local levels, taxpayers
supply business corporations with educated labor and physical
infrastructure. Through their interaction in business organizations,
workers expend the time and effort that can generate innovative
products. In the name of shareholder value, however, taxpayers and
workers have been losing out. It's time to confront the myths of
"private enterprise", "shareholder value", and "market-determined
executive compensation" with arguments about how the innovation process
actually works with sustainable prosperity as the result.
What will it take to build a movement that can make the business corporation work for the 99%?
We have to elect politicians who will take on corporate power rather
than shill for corporate power-brokers. We have to support labor leaders
who recognize that gaining a voice in corporate governance is the only
way to ensure that corporations will invest in workers and create good
jobs. We need teachers at all levels of the education system who
understand what business corporations are and what they are not. We need
the responsible media to escape from the grip of corporate control. And
we have to put in place business executives who represent the interests
of civil society rather than those of an elite egotistical club.
- April 25: National Day of Action Against Student Debt
On April 25th, the total amount of student loan debt in the U.S. is due
to top 1 trillion dollars. This staggering economic milestone marks a
momentous victory for Wall Street and the 1% against two generations of
students and families. A day of action will target big banks and student
lenders, as well as increasingly corporatized universities.
-May 1st: May Day
Recognized worldwide as International Workers' Day, May 1st marks the
Haymarket Massacre of 1886 in Chicago, where workers were fighting for
the eight hour workday. Look for rallies and gatherings across the
country that will draw attention to the needs and concerns of workers.
-Move Your Money
The Move Your Money campaign was launched in 2010 to take on the power
of the megabanks that helped cause the financial crisis and continue to
wreak havoc on our economy. Numerous ongoing actions around the country
are calling attention to the need for fairness and accountability in the
banking industry (read about the latest: "Move Your Money" Goes Nationwide As Cities Pull Their Money")
-Occupy Wall Street
The leaderless resistance movement continues to take on the greed and
corruption of the 1%, including a recent day of action for public
transit workers. Check the website for gatherings and actions in your
William Lazonick is professor of economics and director of the UMass
Center for Industrial Competitiveness. He cofounded and is president of
the Academic-Industry Research Network.
His book, "Sustainable Prosperity in the New Economy? Business
Organization and High-Tech Employment in the United States" (Upjohn
Institute, 2009) won the 2010 Schumpeter Prize.
Jacobson is a journalist covering business, economics and technology. He
served as an investigator on the Democratic staff of U.S. House of
Representatives' Science and Technology Committee between 2007 and 2011.
He is currently acting as senior editor for the newsletter Manufacturing & Technology News.
Parramore is an AlterNet contributing editor. She is cofounder of
Recessionwire, founding editor of New Deal 2.0, and author of 'Reading
the Sphinx: Ancient Egypt in Nineteenth-Century Literary Culture.'
Follow her on Twitter @LynnParramore.
- 2012 Independent Media Institute. All rights reserved.
View this story online at: http://www.alternet.org/story/154873/