Pressure from the new, large, economically-powerful institutional shareholders, like BlackRock, for more corporate social responsibility—on issues like climate change, the environment, and justice—became a major feature of the corporate landscape in this century, with much hope for its success. That hope arose because incentives emanating from America’s shareholding structure had shifted when firm-by-firm investments by large shareholding institutions evolved to market-wide, across-the-economy investments in very large portfolios. Institutional investors of this sort no longer picked stocks; they invested broadly across the stock market and the American economy. Investors with across-the-economy ownership had more reason to make their companies internalize externalities; if one firm in the portfolio profited at the expense of another firm, the new investor’s profit in one would be offset by the loss in the other firm. And turning from government regulation to private pressure was needed, said many analysts and activists, because of our broken government. The new institutional investor class could do—or at least help to do—what government had not. That new shareholder class indeed bought into the new corporate social responsibility playbook and pressed corporate America for more socially responsible action. That effort failed in the first half of this decade; here we analyze the effort’s legal and political premises to see why its odds of success were daunting from the start, with the early hopes for success unrealistic. Its political failure was embedded in its foundational premise, namely the starting thought that dysfunctional government by itself left, and still leaves, a large opening for transformational, shareholder-induced CSR. That premise has been as largely unquestioned as it is incorrect—incorrect because the political forces that defeated direct governmental action constituted latent political forces that could, and did, galvanize political players into action to defeat and reverse the 2010s’ private CSR successes—once they became prominent.

Bankruptcy reformers advocate substituting relative priority for the prevailing absolute priority standard to promote a more consensual restructuring process. In deciding who does and does not get paid when there is not enough value to pay all creditors, bankruptcy's prevailing absolute priority rule lines creditors up in rankorder, compensating highest ranking creditors in full before lower-ranking creditors get anything. By contrast, relative priority would account for the possibility that the firm could recover and become more valuable after the bankruptcy. Relative priority would compensate lower-ranking creditors for that chance of the debtor turning around, thereby reducing both their incentive to delay and seniors' incentive to rush. Relative priority could have these and other potential advantages, but we show here that it would also introduce valuation difficulties. Valuation difficulties are important because under both priority rules the parties have the Coasean incentive to come to a deal that maximizes the total value of the firm, and then split that maximized value; indeed, we show that the absolute priority conflict structure that relative priority seeks to mitigate could readily reemerge under relative priority. A more difficult valuation could make both a deal among the parties and judicial resolution harder. Absolute priority requires point-estimate valuations of the enterprise, like valuing equity of a non-indebted enterprise. But relative priority would require judges, parties, and outside investors to make complex valuations needing additional information, as relative priority valuation requires that decisionmakers assess the chances of multiple future outcomes with more precision than absolute priority needs. Worse, the increased valuation uncertainty from relative priority's added complexity would discourage full-firm sales. Indeed, relative priority could recreate the bargaining problems afflicting absolute priority. Relative priority would, moreover, work poorly with today's population of large business bankruptcies, which increasingly is made up of private firms, for which we show relative priority valuation would be particularly difficult. Today, financial professionals generally do not trade or offer for sale similar financial instruments: stock options requiring substantially similar valuation analyses exist for stable public firms, but rarely for distressed firms. True, relative priority could have other advantages over absolute priority. These advantages, however, must outweigh the costs we identify here: namely, that relative priority entails greater valuation uncertainty for the parties, the courts, and outside investors, leads to more valuation conflict than absolute priority, and, in this dimension, would increase bankruptcy's cost.

In this chapter, I examine the institutions of corporate governance. These institutions primarily deal with two distinct problems, one of vertical governance (between distant shareholders and managers) and another of horizontal governance (between a close, controlling shareholder and distant shareholders). If institutions cannot deal well with both of these problems, then large public firms with dispersed ownership will be relatively more costly and more difficult for an economy to sustain. Some institutions deal well with vertical corporate governance but do less well with horizontal governance. The institutions interact as complements and substitutes, and many can be seen as developing out of a “primitive” of contract law. Arguably a system must first have satisfactory contract enforcement institutions, as well as basic property rights that shield private actors from the state before it embarks on more sophisticated corporate governance institutions.

In this chapter, we analyze three instances that illustrate the political economy of corporate governance. First, we examine how the politics of organizing financial institutions affects, and often determines, the flow of capital into the large firm, thereby affecting, and often determining, the power and authority of shareholder-owners. Second, we show how continental European nations have been slow in developing diffusely owned public firms in the years after World War II. The third political economy example deals with management in diffusely owned firms. The chapter also looks at the historical organization of capital ownership in the United States, noting how the country’s fragmented financial system limited the institutional blockholders and increased managerial autonomy over the years. Finally, it discusses the power of labor in postwar Europe, political explanations for the continuing power of the American executive and the board in recent decades, other political economy channels for corporate governance, and the limits of a political economy analysis.

The number of public firms in the United States has halved since the beginning of the twenty-first century, causing consternation among corporate and securities law regulators. The dominant explanations, often advanced by Securities and Exchange commissioners when considering policy initiatives, come from over- or under- corporate regulation of the stock market. The central legal explanation is that corporate and securities law has made the cost of being public too high. Conversely, goes the second legal explanation, capital-raising rules for private firms were once very strict but have loosened up. Private firms can now raise capital nearly as well as small- and medium-sized public firms. Either way, these views see legal imperatives as explaining the sharp decline in the public firm.We challenge the implications of this thinking. While the number of firms has halved, public firms' economic weight has not halved. To the contrary, the public firm sector is bigger by every other measure: total stock market capitalization is up greatly over the past three decades, profits are up, revenues are up, investment is up, and employment is up. Moreover, stock market capitalization, profits, revenues, and investment have not only increased but have all grown faster than the economy.The second challenge we pose is whether the explanation for the changing configuration of the public firm sector lies primarily in legal explanations. In other policy circles—at the Federal Trade Commission or the Justice Department's Antitrust Division, for example—policymakers ask why American industry is so much more concentrated now, with fewer firms in most industries today than there were at the end of the twentieth century. Yet these policymakers bring forward antitrust and industrial organization explanations, not corporate or securities regulation. Little crossover exists between these two policymaking circles, one focusing on corporate and securities regulation (the SEC) and the other on competition (the FTC). We bring forward real economy changes that could readily explain the reconfiguration of the American public firm sector to one that is more profitable, more valuable, and with bigger but fewer firms. These real economy developments are largely tied to industrial organization via changes in antitrust enforcement or changes in the efficient scope of the firm. In a single article, this explanatory effort can only be exploratory. Multiple researchers in multiple efforts will be needed to explain which real economy forces have an impact and which do not. We begin this effort: There are fewer firms, but the firms are bigger, more profitable and often in more concentrated industries. We show why the legal explanation is unlikely to be the complete story for the package of changes over the past quarter-century and probably not even the most important one. Corporate policymakers should adjust appropriately.

Chapter 12 looks at the political support for the stock market short-termism story. Executives and their spokespeople speak of it regularly and sincerely, and it is also often in their self-interest to do so. They are influential in corporate lawmaking.

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Stock-market-driven short-termism is crippling the US economy, according to legal, judicial, and media thinking. Firms forgo the R&D they need, cut capital spending, and buy back their own stock so feverishly that they starve themselves of cash. The stock market is the primary cause: directors and managers cannot manage for the long-term when their shareholders furiously trade their companies’ stocks, they cannot invest enough when stockholders demand rising quarterly profits, they must slash R&D when investors demand that precious cash be used to buy back stock, and they cannot even strategize about the long-term when shareholder activists demand immediate results. The stock market’s short-termism is also blamed for environmental degradation, for contributing to global warming, and for employee mistreatment. This book shows, however, that the purported ills emanating from stock-market short-termism are either not shown, likely to minor, demonstrably false, or due to other pernicious economic causes. The social costs attributed to corporate short-termsim—environmental degradation, mistreatment of stakeholders, riaking climate catastrophe—emanate more from selfishness than from distorted time horizons, as we shall see. Moreover, public and policymaker obsession with stock-market short-termism as upsetting the economy and settled arrangements is explained more by dissatisfaction with the rapidity of technological change, the increasing uncertainty and instability of the workplace, and a dissatisfaction with overall economic arrangements. Lawmakers and pundits can readily miss more likely causes of the underlying issues—like how best to push forward US R&D—by mistakenly aiming at stock-market short-termism. After considering what the evidence tells us, we consider what political and social reasons could explain the issue’s prominence.

In corporate law policymaking, there is considerable attention to stock market short-termism. Public discourse pins some noticeable part of the blame for climate change, environmental damage, and mistreatment of stakeholders on stock market short-termism. Presidential candidates raise the issue and castigate the stock market for short-termism; and it's regularly invoked to justify securities regulation proposals and corporate case-law decisions. Here I examine the extant economic empirical work on stock market short-termism to assess whether it supports making stock market short-termism actionable in a major way for policy purposes. I evaluate it in two dimensions: first to see whether a consensus emerges from the work (none does) and second to see whether the work is conceptually structured to reveal its economy-wide severity. The latter conceptual point - the difficulty in scaling much corporate research to ascertain whether there's an economy-wide problem - affects not just the stock market short-termism inquiry. The typical research effort seeks to measure whether a local treatment induces more local short-termism, not whether the economy-wide impact is severe. But evaluating short-termism's economy-wide impact is essential for policymaking; policymakers must consider whether the economy is failing to invest or cutting back on R&D because of a stock market afflicted with a truncated time horizon. Local findings (of the impact on a subset of firms with a particular characteristic, such as short-vesting stock options, rapid stock market trading, or hedge fund activism) need not scale to economy-wide results; some local results will do so only serendipitously; and, finally, there are structural reasons why for stock market short-termism one should expect economy-wide results not to match local results. More than most corporate law issues, the short-termism problem faces a high failure-to-scale hurdle.

Chapter 11 considers why the short-term narrative is popular. It is simple, powerful, and clear. The short-term has negative connotations—with overtones of disloyalty and unreliability—implying it should be disfavored no matter what. Yet close synonyms to the short-term are positive: short-term could mean that the players are flexible and adaptive. Long-term players could be stubborn and pig-headed in continuing a failed business policy.

Abstract Chapter 6 examines the best evidence pointing to stock market short-termism being only a minor issue, or not a problem at all, and notes research that rebuts some evidence from Chapter 5.

Chapter 5 brings forward the best evidence for stock-market short-termism being a serious problem.

The large American corporation faces ever-rising pressure to pursue a purpose beyond shareholder profit. This rising pressure interacts with changes in industrial organization in a way that has not been comprehensively analyzed and is generally ignored. It’s not just purpose pressure that is rising: firms’ capacities to accommodate that pressure for a wider purpose is rising as well. Three changes in industrial organization are most relevant: the possibility of declining competition, the counter-possibility of increasing winner-take-all competition, and the possibility that the ownership of the big firms has concentrated (even if the firms themselves have not), thereby diluting competitive zeal. Consider competitive decline: In robustly competitive economies, firms cannot deviate much from profit maximization for expensive corporate purpose programs unless they bolster profitability (by branding the firm positively for consumers or by better motivating employees, for example). In economies with slack competition, in contrast, monopolistic and oligopolistic firms can accommodate purpose pressure from their excess profits, redirecting some or much excess profit from shareholders to stakeholders—to customers, employees, or the public good. By many accounts, competition has been declining in the United States. By some accounts, it has declined precipitously. That decline suggests three possibilities: One—the central thesis of this Article— purpose pressure has greater potential to succeed if competition has declined or rents have otherwise grown; in competitive markets, the profit-oriented but purpose-pressured firm has no choice but to refuse the purpose pressure (or to give it only lip service), while in monopolistically-organized industries, the purpose-pressured firm has more room to maneuver. Two, the normative bases undergirding shareholder primacy, although still strong, are less powerful in monopolistic markets. Three, declining corporate competition and rising corporate profits create a lush field for social conflict inside the firm and the polity for shareholders and stakeholders each to seek a share of those profits. The result can infuse basic corporate governance with social conflict, contributing to or exacerbating our rising political and social instability. Expanding purpose pressure is one manifestation of this conflict.

In July 2020, the European Commission published the “Study on directors’ duties and sustainable corporate governance” by Ernst & Young (EY). The Report purports to find evidence of debilitating short-termism in EU corporate governance and recommends many changes to support sustainable corporate governance. In this paper, we point out deep flaws in the Report’s evidence and analysis. We recently submitted the content of this paper in response to the European Commission’s call for feedback. Parallel issues have arisen in American discourse, although none has reached the incipient lawmaking level that it has in Europe. First, the Report defines the corporate governance problem as one of pernicious short-termism that damages the environment, the climate, and stakeholders. But the Report mistakenly conflates time-horizon problems with externalities and distributional concerns. Cures for one are not cures for the others and a cure for one may well exacerbate the others. Second, the Report’s main evidence for an increase in corporate short-termism is rising gross payouts to shareholders (dividends and stock repurchases). However, the more relevant payout measure to assess corporations’ ability to fund long-term investment is net payouts (gross payouts minus equity issuances), which is much lower and has left plenty of funds available for long-term and short-term investment. Third, when the Report turns to other evidence for short-termism, it selectively picks academic studies that support its views on short-termism, while failing to engage substantial contrary literature. Significant studies fail to detect short-termism and some substantial studies show excessive long-termism. Conceptually, some short-termism is an unfortunate but an inevitable side effect of effective corporate governance and may not be a first-order problem warranting wholesale reform. Finally, the Report touts cures whose effectiveness has little evidentiary support and, for some, there is real evidence that the cures could be counterproductive and costly.

Behind Henry Ford’s business decisions that led to the widely taught, famous-in-law-school Dodge v. Ford shareholder primacy decision were three relevant industrial organization structures that put Ford in a difficult business position. First, Ford Motor had a highly profitable monopoly and was starting a major expansion—Ford’s River Rouge facility was reported to be the world’s largest factory when completed. Second, to stymie union organizers and to motivate his new assembly line workers, Henry Ford raised worker pay greatly; Ford could not maintain his monopoly without sufficient worker acquiescence. And, third, if Ford pursued monopoly profit in an explicit way, the Ford brand would have been damaged with both his workforce and the company’s consumers. The transactions underlying Dodge v. Ford should be reconceptualized as Ford Motor Company and its auto workers splitting the “monopoly rectangle” that Ford Motor’s assembly-line produced, with Ford’s business requiring tremendous cash expenditures to keep and expand that monopoly. Hence, a common interpretation of the litigation setting—that Ford let slip his charitable purpose when he could have won with a business judgment defense—should be reconsidered. Ford had a true business purpose—spending on labor and a vertically-integrated factory to solidify his monopoly profit and splitting that profit with labor—but he would have jeopardized the strategy’s effectiveness by articulating it.The existing main interpretations of the corporate law decision and its realpolitik remain relevant—such as Ford seeking to squeeze out the Dodge brothers to deny the Dodge brothers cash for their own car company. But they must take a second-tier, as none fully encompasses the industrial setting—of monopoly, incipient union-organizing, and a restless workforce. Without accounting for Ford Motor’s monopoly, the River Rouge expansion, and the related labor tensions, we cannot fully understand the Dodge v. Ford controversy. Stakeholder pressure can more readily succeed in a firm having significant economic rents, a setting that seems common today and was true for Ford Motor Company in the 1910s.

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To investigate the widespread claim that stock market “short‐termism” is a major drag on U.S. corporate investment and the broad economy, the author examines the evidence on long‐run trends in corporate capital investment, buybacks, and R&D. As critics of market‐driven corporate short‐termism have pointed out, U.S. corporate investment in capital equipment and other tangible assets has been falling steadily since the late 1970s and buybacks are rising. But if the story of economy‐wide decline due to short‐termism were valid, we would expect to see the following: (1) investment spending in the United States declining faster than in Europe and Japan, where large companies depend less on stock markets for capital and shareholder activists are less influential; (2) cash from all the large share buybacks bleeding out from the U.S. corporate sector; and (3) economy‐wide declines in corporate R&D spending.What the author reports, however, is that real U.S. corporate R&D spending, has been steadily rising since the 1970s and rising faster than the economy is growing. And even as corporate distributions of capital through dividends and buybacks have also been rising sharply for decades, corporate cash holdings (as a percentage of total assets), are at near record‐high levels. The explanation for such high cash holdings together with record‐high payouts—and perhaps the author's most striking finding—is that such distributions, which tend to be concentrated among larger, mature companies, are closely matched by new corporate borrowings and stock issuance—the latter often by smaller (non‐S&P 500) companies. What's more, while there's an outflow of cash from the S&P 500 from net buybacks and borrowing, there's a substantial cash inflow into the non‐S&P 500 from net stock issuances and borrowing.Finally, the fact that capital spending by European and Japanese companies—which face neither U.S.‐style quarterly‐oriented stock markets nor aggressive activist investors—has been falling more rapidly than in American companies suggests that U.S. capital markets are not a major reason for declining capital investment. And, while there's good reason for further R&D support, the author suggests in closing, reversing the U.S. government's sharply declining spending on R&D since the global financial crisis is the low‐hanging R&D fruit that should be bolstered first.