The book, “Corporate Law and Economic Stagnation: How Shareholder Value and Short-termism Contribute to the Decline of the Western Economies” (Eleven International Publishers, 2013), introduces three hypotheses that put corporate law on the map of the causes of the current economic crisis and introduces a normative legal concept, “Long Governance” that can help take the economy out of the slump. Overall, the author takes a post-Keynesian approach to the theory of the firm and uses political economy analysis to expose corporate law’s contribution to a stagnating economy in the West.
The breakdown of the Bretton Woods monetary order in the early 1970s triggered a chain of political, economic and legal events that incrementally brought about “the Great Reversal in Corporate Governance”, i.e. the reorientation of corporate governance from the institutional logic of “retain and invest” to the logic of “downsize and distribute”, and “the Great Reversal in Shareholdership”, i.e. the shortening of the time-horizons of shareholders.
The first hypothesis of the book posits that the Great Reversal in Corporate Governance coupled with the Great Reversal in Shareholdership have contributed to the low rates of GDP growth that are observed in France, Germany, The Netherlands, the UK and the US since the breakdown of the Bretton Woods system in the early 1970s. This implies the existence of a historical causality chain: the two Great Reversals led to higher equity payout ratios and lower retention ratios in public corporations that in turn caused lower rates of growth of (business) capital accumulation overall that in turn caused lower rates of GDP growth. A series of empirical data back the existence of the trends that constitute the assumed causality chain (inter alia the author presents data on the development of business capital accumulation and on the average holding period of stock since the 1970s), while the tenets of the post-Keynesian theory of the firm are used in order to model the negative influence that shareholder value and shareholder short-termism have upon the accumulation dynamics within a public firm.
The second hypothesis of the book posits that corporate law has been an accomplice for the Great Reversal in Corporate Governance, and thus corporate law is identified as an initiator in the historical causality chain that results in stagnating rates of growth in the West since the 1970s. To expose corporate law’s role in stagnation the book builds a numerical legal index (“the Post-Bretton Woods Shareholder Value Index”) that shows for the first time how each of these five Western jurisdictions’ corporate law (France, Germany, The Netherlands, the UK and the US) scored from a shareholder value perspective at the time of the collapse of the Bretton Woods arrangements in 1973 and then how this score changed over the years until 2007, the year before the ongoing crisis officially started. Eighteen (18) sets of corporate rules globally believed and empirically tested as promoting shareholder value are picked as variables and then each of the five jurisdictions is awarded points on a scale from zero (0) to one (1) for each variable depending on the variation of the rule it has in place. As opposed to other numerical legal indices that have been developed in the past, the Post-Bretton Woods Shareholder Value Index is dynamic in the sense that it allows the observation of the impact of corporate legal reforms over a considerable time-period. The dynamism of the index allows the eventual drawing of a trendline for each of the five jurisdictions; this trendline illustrates the rise of shareholder value to prominence in the legislative sphere over the past four decades.
The third hypothesis of the book posits that corporate law rules have escalated the divestment of structurally long-termist institutional investors from equity positions and have preserved the trend towards shareholder short-termism that other institutions have directly caused. Corporate law has, thus, sustained the Great Reversal in Shareholdership and hence it has contributed to the maintenance of the second factor that brought about the observed low rates of growth over the past four decades. In essence, the third hypothesis shows how corporate law disables corporations from exercising shareholder eugenics, by which they could gear their shareholder structure towards long-term investing. The analysis is based on a selection of corporate legal reforms in the US and the EU over the past decades.
The book closes with the presentation of the normative doctrine of Long Governance, which represents a “third way” in the fundamental debate of corporate governance between shareholder and stakeholder value. Long Governance can develop into a management theory that would call managers to set as a benchmark for their actions the long-run interests of all the shareholders who hold, have held, or will hold stock in the firm. This would require management to take at the same time under account the competing interests of the different stakeholders, because in the long-run shareholders as a class benefit from the protection and encouragement of the firm-specific investments that other stakeholders make. Long Governance can also become a legal concept requiring directors’ duties in the framework of the ordinary course of business to be discharged with a view towards the maximization of long-term corporate welfare, which is most diligently achieved through the pursuance of growth. Out of these principles a specific Long Governance legislative agenda emerges that can serve as a roadmap for future reforms in the field of corporate law.