For whom should corporations be run?: An economic rationale for stakeholder management

Throughout the first eight decades of the twentieth century, the idea that corporations should be run in the interests of all of their "stakeholders", rather than just for their shareholders, s lowly but steadily gained acceptance and credibility in academia, in the courts and in boardrooms in the U.S.A. Then, in the space of a few years in the 1980s and early 1990s, legal scholars, finance scholars and other academic elites rejected that idea and legal advisors to corporations began advising managers and directors to justify everything they do in the name of share value. These scholars and legal advisors have, in effect, resurrected an old view of corporat ions-the idea that a corporation is a bundle of assets that belongs to shareholders-a l though they have wrapped it in clever new neoclassical economic theory. The economic theory they appeal to is that managers and directors should be v iewed as the hired "agents" of shareholders who are the true "owners ." The "bundle of assets" view of firms is attractive to scholars of law and economics because it fits much more neatly into neoclassical economic theory than either managerialist or stakeholder models of the firm do. It also seems, at first blush, to be consistent with lessons learned from the collapse of communism in the 1980s about the importance of private property for economic efficiency and sustained economic growth. The importance of private property is that it aligns incentives. If the party who controls the use of an asset also reaps the benefits from using it efficiently-and bears the costs of its misuse-tha t party has a significant incentive to see that the asset is used well. Hence institutional arrangements that bundle the right to control and benefit from assets together with the responsibil i ty for bearing the risks associated with the use of those assets will, according to property rights theory, lead to efficient use of society's resources. But while private property rights are surely important, property is not the only institution that matters for economic development. In fact, corporations, which are surely some of the most important institutions for wealth creation in capitalist economies, regularly violate the private property axiom. It is in the very nature of publicly-traded corporations that property rights are unbundled and carved up among the many participants in the corporate enterprise. Control rights are separated from income rights and from the responsibil i ty or liability for misuses of property. The corporation itself (a fictional legal entity), rather than any individual participant or group of participants in the enterprise, is the legal "owner" of assets used in production and of the output of the enterprise and control over a wide range of decisions about the use of the assets is vested in the board. For many economists and legal scholars, the "separation of ownership from control" in corporations has long been troubling. Theorists argued that crippling governance problems should arise as soon as decisions are made and control rights are exercised by parties who do not bear all the risk associated with the use of the assets. According to a number of leading financial scholars, in fact, the poor profit performance of the corporate sector in the U.S.A. in the 1970s was the result of empire building and self-serving strategic choices by lazy and incompetent managers who were