Fri, Jun 24, 2011 - Page 9 News List

Unraveling the ambiguities inherent in American capitalism

The US is less capitalist than it is ‘managerialist,’ with managers and corporate directors — not shareholders or owners — making the final decisions

By Mark Roe

US corporate-law reformers have long had their eyes on corporate elections. About a decade ago, after the Enron and WorldCom scandals, the US Securities and Exchange Commission (SEC) considered requiring that companies allow qualified shareholders to put their director nominees on the company-paid election ballot. The actual proposal was anodyne, as it would allow only a few directors — not enough to change a board’s majority — to be nominated and voted on at the company’s expense.

Nevertheless, the directors’ lobbying organizations — such as the Business Roundtable and the Chamber of Commerce — attacked the SEC’s initiative. Lobbying was fierce and is said to have reached into the White House. Business interests sought to replace SEC commissioners who wanted the rule and their lawyers threatened to sue the SEC if it moved forward. It worked: US corporate insiders repeatedly pushed the proposal off the SEC agenda in the ensuing decade.

Then, last summer, after a relevant election and a financial crisis that weakened incumbents’ credibility, the SEC promulgated election rules that would give qualified shareholders free access to company-paid election ballots. As soon as it did, the US managerial establishment sued the SEC, and government officials felt compelled to suspend the new rules before they ever took effect. The litigation is now in US courts.

The lesson is that the US is less capitalist than it is “managerialist.” Managers, not owners, get the final say in corporate decisions.

Perhaps this is good. Even some capital-oriented thinking says that shareholders are better off if managers make all major decisions, and often, the interests of shareholders and managers are aligned.

However, there is considerable evidence that when managers are at odds with shareholders, managerial discretion in US 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.

When it comes to capitalism versus socialism, we know which side the US is on. But when it’s managers versus capital-owners, the US is managerialist, not capitalist.

Mark Roe is a professor of law at Harvard Law School.

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