These days, Americans seem to take their corporate governance model for granted. Shareholder interests are now all that matter. But the author traces the history of corporate governance to show that such models change over time. And they are different in other nations, such as Japan. In his view, American-style corporate governance has resulted in wage inequality and poor management. And financial reforms, despite the recent major scandals, have not gone far enough.
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Corporate Governance and Society
Sanford Jacoby
To cite this article: Sanford Jacoby (2005) Corporate Governance and Society, Challenge, 48:4,
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Corporate Governance and Societ y
Challenge/July–August 2005 69
vol. 48, no. 4, July/August 2005, pp. 69–87.
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ISSN 0577–5132 / 2005 $9.50 + 0.00.
Corporate Governance
and Society
Sanford Jacoby
These days, Americans seem to take their corporate
governance model for granted. Shareholder interests
are now all that matter. But the author traces the
history of corporate governance to show that such
models change over time. And they are different in
other nations, such as Japan. In his view, American-
style corporate governance has resulted in wage
inequality and poor management. And financial
reforms, despite the recent major scandals, have not
gone far enough.
CANS pay little attention, even after the business scandals of
the last few years. Yet corporate governance is of vital impor-
tance to those Americans who work for corporations, own stock in
them, or are affected by their decisions. That includes nearly every-
one, because corporate decisions influence everything from the food
you eat to the air you breathe.
So, what exactly is corporate governance? It comprises the laws
and practices by which managers are held accountable to those who
have a legitimate stake in the corporation. Defining who has a legiti-
SANFORD JACOBY is professor of management, public policy, and history at UCLA and author
of The Embedded Corporation: Corporate Governance and Employment Relations in Japan
and the United States (Princeton University Press, 2005), on which this article is based.
70 Challenge/July–August 2005
mate stake is less straightforward than it sounds. Shareholders are a
key constituency, and in the United States their interests are repre-
sented by the board of directors, who, in turn, supervise manage-
ment. But shareholders include speculators who flip a stock in a single
day as well as long-term investors who hold a stock for years. Do the
two groups have equal stakes in the corporation? And what about
employees? Many employees have spent both time and money in-
vesting in skills that can only be utilized at a particular company
(what economists call firm-specific human capital). Do their human-
capital investments endow employees with a legitimate stake in the
Nations have supplied different answers to these questions, giving
rise to diversity in corporate governance systems. In Germany, the
law insists that employees are stakeholders whose interests must be
represented on corporate boards of directors. This is called co-deter-
mination. Large Japanese corporations balance the interests of share-
holders along with those of employees, banks, and business-group
members. Employees are considered part of the corporate commu-
nity, along with shareholders, although there is no legal requirement
to do so. The United States and other common law nations assign an
exclusive role to shareholders as the only group whose interests must
be considered by boards of directors. This is the “shareholder value
model” of governance.
Shareholder-value systems are designed to produce high returns
for shareholders and the executives whose pay is linked to stock prices.
In 2000, CEOs of the largest U.S. public companies received 531 times
more compensation than their average employee. French CEOs re-
ceived 16 times more; in Japan they received 10 times more.1
Such a system of corporate governance, then, has a direct bearing
on pay inequality. A shareholder-value system also tends to ask ordi-
nary employees to bear more of the risk associated with business.
Corporations are quicker to lay workers off when there is a decline in
demand for the company’s product or service, whereas European and
Japanese companies—and also some privately owned U.S. companies—
carry more of the burden of protecting employee jobs during down-
Corporate Governance and Societ y
Challenge/July–August 2005 71
turns. Because shareholder-value companies view workers more like
commodities than assets, they have higher employee turnover, invest
less in employee training, and are less willing to make long-term fi-
nancial commitments to employees, as, for example, with retirement
benefits. In other words, developments in American society over the
past twenty-five years—greater inequality, greater insecurity at the
workplace—have been fueled, in part, by our corporate governance
It’s important to understand that systems of corporate governance
are not carved in stone. They can and do change as different stake-
holder groups seek to shape the internal balance of power. In other
words, corporate governance is politically constructed and histori-
cally mutable. The current German and Japanese stakeholder systems
are actually rather recent innovations. They emerged in the immedi-
ate postwar years, when enthusiasm for democracy was high and the
status of business leaders and owners—who cooperated with wartime
governments—was low. Both Germany and Japan forged social com-
pacts that included a stakeholder role for labor in corporate gover-
nance. Today those contracts are being renegotiated, due partly to
changing domestic politics and partly to globalization, which makes
corporations more sensitive to fickle foreign investors. Yet change is
slow in Europe and Japan because stakeholders in those countries—as
well as many business executives—remain skeptical that the share-
holder-value model makes sense for them.
The U.S. corporate governance system also has gone through ma-
jor changes over the years. Prior to the 1980s, executives paid atten-
tion to shareholder interests, but they defined those interests
differently than they do today. Allocating corporate resources to re-
tained earnings (for internal expansion) and to employee pension
and health benefits was viewed as being good for shareholders in the
long term, even though it might mean that less money flowed to
shareholders in the short term. CEOs, unlike their contemporary coun-
terparts, were more likely to have come up through the ranks and
more likely to view the corporation as a community of stakeholders
than as shareholder property.
72 Challenge/July–August 2005
The Way It Was
Writing in the early 1930s, economists Adolf Berle and Gardiner Means
observed that large American corporations had ceased being controlled
by their owners and that control had passed into the hands of a new
class of professional managers.2 The separation of ownership and
control had taken decades to occur, as the fortunes of founding fami-
lies were split up and as new shares found their ways into the hands
of millions of individuals. Any one of these individuals did not own
enough stock to sway management decisions, nor did they own enough
to make it worth their time to try. This left executives with discretion
to do what they thought was in the corporation’s best interests.
For many large American companies in the early decades of the twen-
tieth century, a crucial problem was the “labor question”: the threat of
militant unionism and worker unrest. Employers also worried about
taxation—in particular, that the United States might follow Europe in
adopting expensive unemployment, old-age, and health insurance plans.
Gradually, employers crafted a solution. They stopped treating em-
ployees as commodities that could be hired and fired at will and began
to seek worker loyalty through a bevy of programs known collectively
as welfare capitalism. Welfare capitalism ranged from training schools
and safety programs to recreational activities and company housing.
New personnel departments took away the foreman’s power to hire
and fire and made employment more orderly and secure.
Some shareholders were leery of companies that were spending
money on workers that could instead have been paid as dividends. So
managers were at pains to point out that these expenditures more
than paid for themselves by reducing employee turnover and union
activity. As one manager said after World War I, “In dollars and cents
it pays to treat employees as they deserve.” While there was a lot of
hype attached to welfare capitalism, it did establish the principle that
corporations had an obligation to shelter employees from certain
kinds of risk—injury on the job, unemployment, illness—and that this
might require allocating resources away from shareholders in the
short term in order to secure loyalty—and profits—in the long term. A
pioneer in welfare capitalism, medical company Johnson & Johnson,
Corporate Governance and Societ y
Challenge/July–August 2005 73
formalized this principle in a credo stating that shareholders would
get a fair return only after the company had ensured outstanding
treatment of customers, employees, and the communities where it
operated. Today those principles are etched in stone at the company’s
New Jersey headquarters.
Come the 1930s, however, employers found themselves in a diffi-
cult situation. The Great Depression had forced companies to fire
millions of employees and cut back on welfare capitalist programs.
Feeling that employers could not be trusted, workers turned to unions
and to government to protect them from future catastrophes. The
ranks of organized labor swelled, while Congress enacted European-
style programs such as old-age and unemployment insurance (social
security) and minimum-wage laws. But the United States took a dif-
ferent approach than the European welfare states. The Social Secu-
rity Act provided only modest pension and unemployment benefits,
leaving the door open for employers—and some unions—to supple-
ment these benefits with spending of their own. That kind of ap-
proach was the legacy of welfare capitalism, and it became the basis
for America’s “mixed” (government- and employer-provided) ben-
efits system.
Before the New Deal, American business had no serious contender
for power and influence. Now it competed with a vigorous labor
movement and a vastly expanded federal government. During and
after World War II, business groups and corporate executives worked
hard to develop a new philosophy that would bolster their standing
in the eyes of the American people. What businessmen came up with
included rhetorical assaults on “big labor” and “big government,”
more generous spending on employee benefits, and an application of
the Johnson & Johnson credo to corporate governance.
In 1956, a group of Harvard social scientists led by Francis X. Sutton
published a classic study of postwar business ideology called The
American Business Creed.3 In it the authors observed that “corporation
managers generally claim that they have four broad responsibilities:
to consumers, to employees, to stockholders, and to the general pub-
lic . . . each group is on an equal footing; the function of management
74 Challenge/July–August 2005
is to secure justice for all and unconditional maxima for none. Stock-
holders have no special priority; they are entitled to a fair return on
their investment, but profits above a ‘fair’ level are an economic sin.”
This was a stakeholder philosophy of governance, in which sharehold-
ers were just one of several groups recognized by managers. It would
be viewed as heretical by today’s proponents of shareholder value.
According to the Harvard st udy, managers in the 1950s insisted on
their right to make decisions independent of shareholder pressure,
within “a sphere of unhampered discretion and authority which is
not merely derivative from the property rights of owners.” Manag-
ers also asserted their authority to plow surplus cash back into the
enterprise rather than pay it to shareholders, a practice that they
defended as “the way the American system works.” Apportioning
profits between dividends and retained earnings (and other spend-
ing purposes) was viewed as “one aspect of the general function of
balancing competing economic interests which devolve on corpo-
rate management.”
The new stakeholder philosophy had ideological purposes, but it
was more than mere words. The years from the 1950s through the
1970s were the high point of corporate social responsibilit y in the
United States, as evidenced in the fact that by the 1970s, forty-eight
states had passed laws permitting corporations to give funds to chari-
ties without specific charter provisions. Courts conceded that these
social activities might hurt shareholders in the short run. But respond-
ing to the needs of various stakeholders was, in the words of legal
scholar Margaret Blair, thought to be “good for the shareholders ‘in the
long run’ because the health and well being of the communities in
which companies operate was considered important for business.”4
Did the loose coupling of management and shareholders have con-
sequences for employees? The post war decades were far from being a
golden age of industrial democracy. But it is hardly a coincidence
that the era was one in which large corporations treated workers as
stakeholders in the enterprise—not on a par with shareholders, to be
sure, but definitely having a stat us in the corporate family. Employ-
ment was construed as a quasi-permanent relationship that endured
Corporate Governance and Societ y
Challenge/July–August 2005 75
through bad times and good. Corporations sheltered employees from
risk in a variet y of ways: through health and pension benefits, by
smoothing wages rather than raising and lowering them in response
to business fluctuations, and by avoiding layoffs during downt urns
(for white-collar employees) or rehiring them immediately after a
temporary layoff (for blue-collar workers). In the industrial sector,
collective bargaining was accepted as a legal and social responsibil-
ity, although usually with little enthusiasm. One indicator of how
these changes affected resource allocation within corporations was
the rising share of national income going to wages and salaries, which
trended upward from the end of World War II through the 1970s.
Buffering employees from risk and treating them as stakeholders
had an economic rationale. Companies were spending heavily on
corporate training, transforming employees from commodities into
investments that employers were loath to part with prematurely. Be-
cause employees paid for some of this training too (as forgone wages),
they also had become corporate investors. While the legal system did
not recognize them as such, executives informally treated employees
as stakeholders. They kept employees apprised of key developments;
in unionized companies, labor leaders occasionally participated in
key strategic decisions. As the finance scholar Gordon Donaldson says
of this era, the typical mindset of senior management was “an intro-
verted corporate view . . . focused on growth, diversification and op-
portunity for the ‘corporate family.’ . . . As career employees
themselves, it was natural for management to identify with all con-
stituents who were long-term investors in the enterprise and to view
shareholders in the same light.”5
Shareholder Value
After 1973, the U.S. economy began to grow more slowly than in the
postwar years. Part of the problem was growing competition from
the rebuilt economies of Europe and Japan. Inflation was also partly
responsible for slow growth, implicating those who had pricing power:
regulated industries (transportation and communications) and some
76 Challenge/July–August 2005
labor unions. Investors were unhappy with the economic situation
and the way business was responding to it. They felt that company
executives had grown too complacent and were not doing enough to
squeeze value out of corporate assets. Another investor complaint
was that companies had spent too much money acquiring companies
in unrelated industries where they had no particular competence, the
most egregious example being conglomerates like ITT and Textron,
which operated in dozens of sectors. Investors argued that cash from
mature businesses would be better spent on share repurchases or divi-
dends, since investors could earn a higher return on those funds than
the companies themselves could.
Investors became more vocal in the 1970s because the structure of
shareholding had changed since the time of Berle and Means’s study.
A growing number of shares now were concentrated in the hands of
giant institutional investors: chiefly pension funds, but also mutual
funds, trusts, and insurance companies. Whereas instit utional inves-
tors held less than 10 percent of shares in the early 1950s, by the early
1980s this proportion had risen to almost 45 percent. Institutional
investors were different from households in at least two ways. First,
they owned or managed significant chunks of a corporation, not
enough to give them outright control, although sometimes this could
be achieved through alliances with other institutional investors. Sec-
ond, because their holdings were so large, they were illiquid, mean-
ing that when institutional investors were dissatisfied with a
company’s performance, they were likely to use “voice” (pressuring
corporate executives), not just “exit” (selling their holdings).
The 1980s saw the advent of the corporate raider: individuals like T.
Boone Pickens and investment groups like KKR, which promised that
by taking a company private, they would make it more profitable
than under its incumbent management. Hostile acquisitions, rare
before the 1980s, became increasingly common, in part because in-
stitutional investors provided the margin of shares necessary to ef-
fectuate a takeover. Raiders made money by selling off parts of the
company—“stripping” a conglomerate of its assets—and also by load-
ing companies up with debt (including junk bonds), which conferred
Corporate Governance and Societ y
Challenge/July–August 2005 77
enormous tax advantages. The remaining company was left more fo-
cused, but also less stable and riskier.
Another way to produce value out in a company was to squeeze its
workforce. This became easier during the 1980s as unions lost mem-
bership and political clout. High and persistent unemployment sapped
their bargaining power and that of unorganized employees. A wave of
layoffs hit blue-collar workers in the early 1980s and then was ex-
tended to white-collar workers—including middle management—in the
early 1990s. These force reductions occurred not only at troubled
companies but also at profitable firms. The latter sought to restruc-
ture themselves so that more of their resources went to shareholders
and executives and less to ordinary employees. Some of the work
formerly done by full-time employees was taken up by cheaper part-
time workers; some of it was outsourced. “Survivor” employees car-
ried much of the remaining workload, leaving them with longer hours
and more work—and more stress—than before.
Meeting investor demand for higher returns entailed not only re-
source reallocation but also a redistribution of risk. Over the past t wenty
years, companies have shifted more of the risk burden that they had
carried during the postwar decades onto employees’ shoulders. De-
fined benefit pension plans, which assured employees of a guaranteed
benefit, are being converted to riskier defined contribution plans.
Employees have taken on more of the risks associated with health in-
surance, through higher copayments and other refinements. Wages and
employment today are more sensitive to business conditions, mean-
ing pay cuts and layoffs happen more rapidly than before. The greater
volatility of income is occurring at the same time as corporate earn-
ings are higher. In other words, risk has risen and has been shifted to
employees, yet most of them have not shared in the returns associated
with greater risk. Moreover, the impact is magnified by the fact that
public spending on health, pensions, and unemployment insurance
was relatively meager in the United States to begin with.
These changes were inconsistent with the old stakeholder-gover-
nance credo and required a new philosophy to justif y them. Enter
the shareholder-value model, promulgated by Wall Street and its al-
78 Challenge/July–August 2005
lied attorneys and economists. Now, what had previously been latent
and fluid in corporate law was made rigidly manifest: corporations
were the propert y of shareholders; boards and executives had the
solitary charge of maximizing share prices. To ensure that boards did
their job, it was recommended that they be small and independent of
the company’s senior management. Management’s job was to con-
centrate every day on boosting the company’s share price. But to do
this, executives needed incentives to make sure that they did the share-
holders’ bidding.
Executive compensation was completely changed, with pay now
tied to stock performance through options and similar devices. The
growth of options was phenomenal: fewer than a third of CEOs re-
ceived them in 1980, whereas twenty years later almost all CEOs had
them. Although options sometimes were paid to middle managers or
even ordinary employees, the bulk went to a firm’s top executives,
for whom they eventually dwarfed base salary. When hiring CEOs,
corporate boards increasingly rejected insiders in favor of tough out-
siders who had no sentimental loyalty to the workforce. As competi-
tion for talent heated up, executive compensation rose ever higher,
and the average tenure of corporate leaders declined (to about three
years, on average).
It may seem obvious—a tautology, really—that shareholder value is
good for shareholders, if not for employees and the environment. But
even for shareholders, problems arose in the way the shareholder-
value model incentivized executives to produce value. Executives
realized that they could get rich under the new system by pumping
up share prices. But with only three years available, they had to act
quickly. These circumstances were ripe for abuse, and in some cases
they led to the corporate scandals we associate today with Enron.
One way to get rich quick was to manipulate stock option formu-
las. Many companies did so in ways that were inimical to shareholder
interests, as when options rewarded executives for general market
movements or when they were repriced after a slide in the company’s
stock. Another approach was to pursue quick, dramatic restructurings
through acquisitions or downsizings, the kind of tactics pioneered
Corporate Governance and Societ y
Challenge/July–August 2005 79
by corporate raiders. Restructuring was accompanied by a lot of chest-
thumping about getting lean and mean, rhetoric that gave a boost to
share prices. But only now, years after it all started, are we discover-
ing that restructuring often failed to produce lasting value. Take merg-
ers and acquisitions. An analysis by Business Week showed that, while
there were some successful M&As during the period 1995–2001, the
majority resulted in a reduction in share prices several years after the
acquisition. As for downsizing, a recent Russell Sage Foundation study
finds that downsizing in the 1980s and 1990s did increase profits—
and executive pay—but that it did not boost productivity, contrary to
Wall Street’s claims that it did.6
Sometimes it takes an insider to tell the truth, a CEO who knows
other CEOs and has watched corporate America from up close. James
Goodnight, the CEO of software manufacturer SAS, is one such per-
son. SAS is a privately held company; Goodnight personally owns
about two-thirds of its stock. The company is famous for treating its
employees lavishly—it has an on-site health center and flexible work
schedules—which gives it one of the lowest employee turnover rates
in the technolog y industry. When asked why his company paid such
high benefits to its employees and refused to lay them off during
slack periods, Goodnight said, “At many companies the focus is not
on the employee or the customer but on the shareholder. The out-
look is not for long-term growth but for the next quarter. In today’s
Wall Street-driven business environments, I think it’s difficult for
many people to see how employee turnover or employee morale can
impact a company’s performance over a long period of time. . . . It all
comes back to the fact that I don’t need to justify SAS’s benefits to
thousands of shareholders.”7
Goodnight’s words echo those of the Russell Sage study: the share-
holder-value model is fundamentally about the distribution of re-
sources and risk. Its adoption is one reason that labor’s share of
national income started to plummet in the 1980s from the level where
it had stood during the preceding three decades. But not everyone
who works for a living has seen their incomes grow more slowly than
profits. Corporate executives made out fabulously in the 1990s.
80 Challenge/July–August 2005
While there are many theories about what has caused widening
income inequalit y in the United States, surely a contributing factor
has been changes in corporate governance that boosted incomes at
the top. Among the advanced societies, Canada, Britain, and the United
States—all countries with shareholder-value models of governance—
saw top income shares increase substantially over the past twenty-
five years, rising back up to levels not observed since the 1920s. The
rich have become very rich indeed, with the share of the top 1 per-
cent doubling in the last twenty years in the United States. On the
other hand, top income shares have barely changed since 1980 in
continental Europe and Japan, countries that continue to embrace
some form of stakeholder governance.8
Taking It on the Road
In the 1990s, U.S. investors were intoxicated by what the shareholder-
value model apparently had wrought. The U.S. economy and its stock
market were booming, while Europe and Japan languished. Investors
leapt to the conclusion that changes in corporate governance had
produced the U.S. boom. They reasoned that if European and Japa-
nese companies could be persuaded to similarly revamp their gover-
nance practices—and get lean and mean—their shareholders would
reap ample rewards. Greater corporate efficiency and a rising stock
market would bring an end to economic stagnation, as it had in the
United States. That was the message delivered to Europe and Japan in
the 1990s by a bevy of American investors, government officials,
economists, and journalists.
Unfortunately, the message was wishful thinking. The causal links
between governance, productivity, and growth are vague and un-
proven. Research by Dan Dalton and others shows that even the most
basic elements of shareholder-value governance—independent boards,
small boards of directors, use of stock options—are not statistically
associated with better corporate performance. In the wake of Enron,
this should come as little surprise. Moreover, if shareholder-value
policies produce higher profits by redistributing resources rather than
Corporate Governance and Societ y
Challenge/July–August 2005 81
raising productivity, those profits—and share prices—will not keep
growing in the future.
A great leap was involved in inferring that a nation’s growth—or
lack of it—has something to do with its dominant governance model.
Japan and the United States boomed in the 1960s without the share-
holder-value model. The evidence is lacking that corporate gover-
nance affects a nation’s growth and productivity rates.
Yet U.S. investors preached the shareholder-value gospel abroad.
Some, like the giant union pension fund CalPERS, were true believ-
ers. Others hoped that changes in governance would stimulate M&A
deals and generate juicy fees for lawyers and investment bankers.
Nowhere was the shareholder-value credo pushed more aggressively—
and met with greater skepticism—than in Japan.
Japanese corporate governance in the postwar decades was a form
of stakeholder capitalism, in which corporate boards balanced the in-
terests of employees, business-group members, banks, customers, sup-
pliers, and shareholders. At Japanese companies, according to sociologist
Ronald Dore, “nobody gives a great deal of thought to owners. Firms
are not seen as anybody’s ‘propert y.’ They are organizations—bureau-
cracies much like public bureaucracies that people join for careers, be-
come members of. They are more like communities.”9 The community
was run by its board of directors. Boards were larger than those of
U.S. and British firms, some of them having thirty to forty (or more)
members, and almost all directors were company managers who had
made a slow ascent to the top. At large companies, enterprise unions
represented all regular employees, up through the middle-manage-
ment ranks. Not infrequently, board members and even company
presidents were former union officers. Regular employees spent their
entire career with the company, with substantial training expendi-
tures and fringe benefits for both blue-collar and white-collar em-
ployees. In many respects this system was similar to large U.S.
nonunion companies of the pre-1980s era (firms like IBM, Kodak,
and Motorola), which combined welfare capitalism with a stakeholder
Although there was an active market for shares in Japan, most shares
82 Challenge/July–August 2005
were not traded. Instead, a system of cross-shareholding existed, in
which a company and its suppliers, banks, and customers held stock
in each other’s company. Cross-holding made it nearly impossible for
hostile acquisitions to occur. Also, it gave contracting parties a stake—
and a nose—in each other’s business. Moreover, because reciprocal shares
were rarely traded, their owners looked at long-term rather than short-
term performance. So-called patient capital permitted companies to
pursue projects with long payouts, such as building market share and
operating a career employment system. This is not to say that Japanese
companies were indifferent to shareholders. When a company did
poorly—with sagging stock and reduced cash flows—its main bank might
initiate a financial workout. Company presidents would be sacked.
After white-hot growth in the 1980s, Japan’s economy plunged into
prolonged stagnation. By the late 1990s, even defenders of the Japanese
system had begun to waver. After all, the facts advanced by advocates
of the shareholder-value model seemed convincing, even if no one
could actually prove that U.S. growth and Japanese stagnation had any-
thing to do with corporate governance. Foreign investors—especially
from the United States—lost nary a chance to criticize Japanese gover-
nance. These investors saw opportunities to make a killing in Japan if
only its companies would reallocate internal resources to favor share-
holders and shed their inhibitions about hostile acquisitions.
At the behest of American investors, the U.S. government began
to pressure the Japanese to change their governance practices. The
latest initiative is the U.S.-Japan Economic Partnership for Growth,
launched in 2001. It seeks to facilitate U.S. investment in Japan by
having the Japanese adopt the shareholder-value model and U.S. ac-
counting standards.
The Japanese took the message to heart, despite the hubris of the
messengers. Various Liberal Democratic Party governments in the
1990s opened Japan’s markets and promoted sectoral and financial
deregulation. They changed commercial law to encourage—but not
require—American-style corporate governance: corporate boards com-
posed of outsiders, stock options for executives, stock repurchases to
boost share prices, and the like. The intent was to elevate “share-
Corporate Governance and Societ y
Challenge/July–August 2005 83
holder value” above other criteria for strategic decisions. Gradually
change began to occur at the corporate level, especially in companies
that had substantial foreign ownership, like Sony. In the late 1990s,
Sony adopted a U.S.-style board with outsiders, shrank employment
at its domestic factories, and beefed up its investor relations efforts.
Japanese corporations conceded that giving more importance to
shareholders was necessary, especially since many if not most of
Japan’s actively traded shares were now held by foreigners, particu-
larly Americans. (Troubled banks have been unwinding their cross-
holdings, making more shares available for foreign purchase.) Large
companies put an outsider or two on their boards and beefed up
their investor relations departments. They also adopted more trans-
parent accounting procedures. But in my interviews with senior ex-
ecutives in Japan, I found them doubtful that stakeholder governance
was responsible for Japan’s problems or that a shift to American prac-
tices would cure what ailed the Japanese economy. Instead executives
placed the blame on other—more “macro”—factors such as botched
fiscal policies, the Bank of Japan’s monetary stringency, and a tor-
toise-like resolution of Japan’s banking mess.
Until recently, these doubts were expressed quietly. But dissenting
voices have grown louder since 2001 as the U.S. economy has been hit
by corporate scandals and the collapse of its own financial bubble.
Business leaders like Fujio Mitarai of Canon and Hiroshi Okuda of
Toyota are two leading Japanese executives who refuse to accept the
idea that there is one best way—the American way—of organizing a busi-
ness corporation. Instead, companies like Canon and Toyota continue
to staff corporate boards largely with insiders, to pay executives mod-
estly, to consult enterprise unions, and to avoid layoffs of “lifetime”
employees. Adjustments occur instead through early retirement or re-
duced wage growth and hiring (except of part-timers). Large corpora-
tions continue to shoulder more risk for employees and share resources
more equitably with them than American companies do.
The other recent development has been the recovery of the Japa-
nese economy over the past two years. Since the beginning of 2002,
Japan’s gross domestic product (GDP) has grown more rapidly than
84 Challenge/July–August 2005
America’s GDP for six of the eleven quarters covered. Although growth
has been slower this year than last, a key sign of health is the recent
Bank of Japan prediction that Japan will experience modest inflation
in 2005, after years of falling prices. If the recovery continues, as is
expected, it will make Japanese companies more assertive in their
rejection of the shareholder-value model. It’s not that Japanese ex-
ecutives are altruistic social democrats. Rather, their views are much
like Jim Goodnight’s: that treating employees well pays off in the
long term with better products, better customer service, and harder-
working employees. Adopting the shareholder-value model runs the
risk of undercutting Japan’s comparative advantage in global compe-
tition, which is based, in part, on its high levels of employee train-
ing, skill, and effort.
The Japanese also don’t want the levels of inequality that have sur-
faced in the United States in the last t wenty years. Japan remains an
almost homogeneous society, where the upper-middle class and the
working class still live and commute in relatively close proximity.
True, there has been some growth of income inequality since the
1980s, and with it phenomena like middle-class flight to private
schools. But Japan remains egalitarian as compared to the United
States. Ranked by income inequality, its standing has changed little
among the Organization for Economic Cooperation and Development
countries since the 1980s, putting it between the welfare states of
Northern Europe and the Anglo-Saxon nations, such as the United
States, the United Kingdom, and Canada.
Back at the Ranch
America’s corporate scandals—and recent academic research—have
revealed various defects in the shareholder-value model. True believ-
ers claim that the defects stem from just a few bad corporate apples,
yet the truth is that the barrel contains a great deal of rot. Enron is
now four years behind us, yet Eliot Spitzer’s investigations show no
signs of slowing down. The reforms adopted in the wake of Enron
have been extensive—-the Sarbanes-Oxley law, new rules at the major
Corporate Governance and Societ y
Challenge/July–August 2005 85
stock exchanges, and additional requirements from the SEC. There
has also been voluntary reform by corporations, especially on stock
options, which are now less likely to be offered and, if they are, more
likely to be expensed for tax purposes.
Yet despite all this, many of the assumptions behind the share-
holder-value model remain in place: that outsiders are better than
insiders as CEOs and board members; that executives need substan-
tial compensation to motivate them; and that shareholders are the
only group whose interests executives should serve. Hence for most
employees, it remains a mean season. Risk continues to be shifted to
the workforce or, as in the case of pension plan terminations, to the
U.S. taxpayer. Downsizing and outsourcing continue, causing re-
sources to be reallocated from labor to capital. On the other hand,
executive compensation remains at stratospheric levels.
Part of the problem has to do with boards of directors. Even when
directors are nominally independent (as most in the United States
are), they are unwilling to question the need for huge salaries and
options grants. These directors are themselves current or former
business executives. They conform to and reinforce each other’s
ideas about corporate governance, a phenomenon that psycholo-
gists label “groupthink.” They also are themselves beneficiaries of
the executive compensation approach that emerged in the 1980s.
Another part of the problem is institutional investors, who tend to
be equally rigid in their thinking about corporate governance. Many
were passionate advocates of the shareholder-value model in the
1980s and 1990s. Those major investors find it difficult now to ad-
mit that the model’s virtues were oversold and caused problems for
shareholders as well as other stakeholders. However, many of them—
including CalPERS—are in favor of a recent proposal from the Securi-
ties and Exchange Commission that might revolutionize U.S. corporate
Last year, the SEC proposed a rule permitting long-term sharehold-
ers to nominate candidates for a company’s board of directors. So-
called proxy access is opposed by much of the business community,
yet supported by several large pension and mutual funds. These funds
86 Challenge/July–August 2005
hold their shares for long periods and therefore would meet the
participation thresholds in the SEC proposal. (The proposal says
that only shareholders holding 5 percent of shares for at least two
years may nominate directors, and only if there is evidence of oppo-
sition to nominees proposed by management.) If adopted, the rule
would be a major change from the present situation, in which
boards are not obligated to act on shareholder resolutions and
shareholders have no right to nominate board candidates. The pres-
ence of shareholder-nominated directors would promote greater
independence and accountability in the boardrooms of poorly gov-
erned companies.
With President Bush in his second term, the SEC is under intense
pressure from business to shelve the proposal. (In fact, CalPERS’s
support for the proposal has incensed the business community and
is one reason that California Governor Arnold Schwarzenegger has
proposed terminating CalPERS in favor of a defined-contribution
pension plan for state workers.) Yet the SEC proposal is a modest
step in the right direction, one that would help to counteract con-
formity and cronyism on corporate boards. By giving shareholders
a real opportunity to be represented on boards, it would repair de-
fects in the crude shareholder-value model. Combined with other
recent changes—the de-emphasis of stock options and quarterly re-
sults, the explosive growth of socially responsible investing—it would
push U.S. corporate governance toward a more balanced approach,
one that recognizes that shareholders are not the only group with a
financial stake in corporate decisions. Ironically, this change would
come at the same time as Japanese corporations are being pressured
to move in the opposite direction.
We are only just now beginning to appreciate the myriad links
between decisions made in the rarified atmosphere of corporate head-
quarters and major social outcomes such as equality, risk bearing,
and environmental quality. Japan right now is engaged in a debate
over the corporation’s societal role and responsibilities. The United
States is ripe for a similar, wide-ranging debate; if not now, then surely
in 2008.
Corporate Governance and Societ y
Challenge/July–August 2005 87
1. Louis Lavelle, “Executive Pay,” Business Week Online, April 16, 2001.
2. Adolf A. Berle and Gardiner C. Means, The Modern Corporation and Private
Property (New York: Commerce Clearing House, 1932).
3. Francis X. Sutton, Seymour E. Harris, Carl Kaysen, and James Tobin, The Ameri-
can Business Creed (Cambridge: Harvard University Press, 1956).
4. Margaret M. Blair, Ownership and Control: Rethinking Corporate Governance for
the Twenty-First Centur y (Washington, DC: Brookings Institution, 1995).
5. Gordon Donaldson, Corporate Restructuring: Managing the Change Process from
Within (Boston: Harvard Business School Press, 1994).
6. David Henry and Frederick F. Jespersen, “Mergers: Why Most Big Deals Don’t
Pay Off,” Business Week (October 14, 2002); William J. Baumol, Alan S. Blinder, and
Edward N. Wolff, Downsizing in America: Reality, Causes, and Consequences (New
York: Russell Sage Foundation, 2003).
7. Tricia Bisoux, “Corporate Counter Cult ure,” BizEd (November–December
2004): 16–21.
8. Emmanuel Saez, “Income and Wealth Concentration in a Historical and In-
ternational Perspective,” working paper, University of California–Berkeley Depart-
ment of Economics, 2004.
9. Ronald Dore, Stock Market Capitalism: Welfare Capitalism; Japan and Germany
Versus the Anglo-Saxons (Oxford: Oxford University Press, 2000).
To order reprints, call 1-800-352-2210; outside the United States, call 717-632-3535.
... Since the agency problem was formalized [1], following prior proposals [2], the body of knowledge known as corporate governance has achieved a substantial scale focused on the management practices of organizations. In a modernistic way, corporate governance has been oriented towards guaranteeing the well-being of all organization stakeholders and not only their shareholders [3]. ...
... According to [3], corporate governance is not vague jargon used only by firms to emphasize their management activities. Jacoby [3] pointed out that corporate governance is a set of actions that must be in line with the interests of society, and only through this path can it be legitimated by stakeholders including students. ...
... According to [3], corporate governance is not vague jargon used only by firms to emphasize their management activities. Jacoby [3] pointed out that corporate governance is a set of actions that must be in line with the interests of society, and only through this path can it be legitimated by stakeholders including students. ...
Full-text available
This paper aimed to better understand business students’ expectations of Brazilian corporate governance after recent scandals, focusing on capturing their perceptions after the Lava Jato (Car Wash) police investigation. Adapting a prior survey applied to business students, data were collected from three colleges in São Paulo, the largest city in Latin America, with a total of 328 responses. The data were initially submitted to confirmatory factor analysis (CFA), after which we employed a structural equation model (SEM). Our main finding indicates that students are skeptical of an increase in Brazilian corporate governance after this police operation. This result is supported by the prior literature and denotes student consciousness of the need for deep reforms in the business environment and compliance rules. Furthermore, strategic human resources management is the most prominent corporate governance tool today, and the survey revealed disbelief that the Board of Directors and internal audits will act as potential inhibitors of fraud and corruption. These findings are associated with a broad view related to sustainability which denotes that future firm leaders, who are currently business students, comprehend that an ethical business environment needs to be built by professionals who are able to understand the role of corporate governance mechanisms. This paper contributes to the literature by offering a holistic assessment of business student perceptions and encourages a discussion of current models and instruments of Brazilian corporate governance. The scarcity of studies involving education and governance can be considered a constraint to building sustainable companies from a long-term perspective. Comprehending business students’ perceptions about corporate governance mechanisms can be considered a path to increasing the number of business courses with topics aligned with practical effects on environmental, social, and governance subjects, mainly when these mechanisms are evaluated from an integrated perspective.
... na zapewnianiu pracownikom: szkoleń, atrakcyjnych form rekreacji czy nawet mieszkań, zacieśniając więź między pracodawcą a pracownikiem. [Jacoby, 2005] Wielki Kryzys w latach 30-tych XXw. spowodował masowe zwolnienia oraz radykalne cięcia w wydatkach na programy pracownicze. ...
... ustawa Glass Steagall Act ograniczająca możliwość angażowania się przez banki kredytowo-depozytowe w działalność inwestycyjną. [Kroszner, Rajan, 1993] 2. Nadzór korporacyjny w USA po II wojnie światowej Lata powojenne w Stanach Zjednoczonych to w kontekście nadzoru korporacyjnego znaczący wzrost niezależności menedżerów od akcjonariuszy, okres rozwoju idei społecznej odpowiedzialności biznesu oraz stopniowej zmiany struktury właścicielskiej korporacji [Jacoby, 2005]. Ustanowiona na początku lat 50-tych XXw. ...
... na podstawie The Employee Retirement Income Security Act pozwolono funduszom emerytalnym i ubezpieczeniowym inwestować w papiery wartościowe korporacji [Jerzemowska, 2002] rozpoczynając tym samym proces stopniowego zwiększania się zaangażowania kapitałowego inwestorów instytucjonalnych na rynku. Na początku lat 50-tych XX w. inwestorzy instytucjonalni posiadali mniej niż 10% wszystkich akcji, podczas gdy 30 lat później w ich rękach znajdowało się już około 45% [Jacoby, 2005] Dane dotyczące 1000 największych amerykańskich spółek pokazują, że na początku XXI wieku w posiadaniu inwestorów instytucjonalnych znajdowało się już ponad 61% a prawdziwy rekord padł w 2007r., kiedy to w posiadaniu tej grupy inwestorów znajdowało się 76% akcji. Dane z końca 2006r. ...
W wyniku rozproszenia struktury właścicielskiej oraz świadomych działań antymonopolowych w Stanach Zjednoczonych stosunkowo wcześnie zaczęto obserwować negatywne skutki odseparowania inwestora od zarządzania podmiotem. Ze względu na rozbieżność interesów menedżerów i właścicieli wynikła konieczność stworzenia systemu ochrony interesów akcjonariuszy, głównie mniejszościowych przy jednoczesnym zapewnieniu ochrony interesu innych grup uczestniczących w funkcjonowaniu przedsiębiorstwa. System ten podlegał znaczącej ewolucji, zaś w obecnej formie jest zorientowany na właścicieli. Głównym zadaniem stawianym jego mechanizmom jest stanie na straży jakości operacji korporacji, tak by maksymalizować wartość dla akcjonariuszy przy akceptowalnym dla nich poziomie ryzyka. System nadzoru korporacyjnego w USA bazuje zarówno na regulacjach prawnych jak i wymogach narzucanych przez organizatorów i uczestników rynku kapitałowego, a kierunki jego rozwoju są swego rodzaju wzorcem dla krajów zarówno rozwiniętych, jak i rozwijających się. W artykule przedstawiono główne etapy rozwoju systemu nadzoru korporacyjnego w USA od XVIII w. na tle gospodarczych i społecznych wydarzeń, kluczowych dla dyspersji własności korporacji i ochrony mniejszościowych akcjonariuszy. Szczególną uwagę poświęcono zmianom legislacyjnym wprowadzonym w ostatnich dziesięciu latach, takim jak Dodd-Frank Wall Street Reform and Consumer Protection Act, czy też Public Company Accounting Reform and Investor Protection Act, a ponadto inicjatywom w zakresie ładu korporacyjnego podejmowanym przez uczestników rynku kapitałowego, jak na przykład The California Public Employees’ Retirement System.
... The system in the United Kingdom was motivated by high-level corporate failures (Sanford, 2005), while in South Africa it was motivated by the desire of the business community to be competitive in an international business arena after the democratisation of South Africa (Mallin, 2006). This is important, since the United Kingdom is an economy of the developed world, while South Africa an emerging market economy. ...
Full-text available
This study describes the political-economic dimension of corporate governance reform in South Africa. It then investigates the relationship between corporate governance institutions and systems on the one hand and the political, economic and historical context of South African society on the other. The study establishes the political, economic and historical determinants of corporate governance reform as they evolved in the course of South African corporate history. The study concludes that South African corporate governance reform and such reform in the Commonwealth economic systems have a lot in common in terms of their historical evolution. This is despite the reasons for such reform being vastly different. The outcome of the political process in South Africa, for very specific reasons, is that a specific shareholder model of corporate governance became the corporate governance system in South Africa.
... 51 In contrast to the shareholder approach, this perspective takes into account the public services rendered by a large firm in view of employment capacities and overall socio-economic spin-off. 52 These two definitions lie at the base of a debate over different patterns of corporate organization, which was for the longest time driven by an almost overwhelming belief in what some recognized as nothing less than the`end of history in corporate law', 53 namely, the eventual triumph of the shareholder value theory. The present crisis appears to have seriously undermined this credo. ...
This paper contends that the challenging nature of the regulation of global corporate conduct requires an adequately differentiated approach towards the identification and analysis of the norms in question. In part I, I review the context of 'state intervention' and 'market self-regulation', in which the current discussion of regulatory responses to the economic/financial crisis and the role of self-regulation occurs, before laying out the concept of 'transnational legal pluralism' in part II. In part III, I argue that an exemplary area such as corporate governance can best be understood as an instance of transnational legal pluralism, a field that becomes visible through a particular methodological lens. In part IV, I conclude by suggesting how the lessons of such a case study can contribute to an ongoing theoretical investigation into the nature of global regulatory governance, using the concept of 'rough consensus and running code'.
... 51 In contrast to the shareholder approach, this perspective takes into account the public services rendered by a large firm in view of employment capacities and overall socio-economic spin-off. 52 These two definitions lie at the base of a debate over different patterns of corporate organization, which was for the longest time driven by an almost overwhelming belief in what some recognized as nothing less than the`end of history in corporate law', 53 namely, the eventual triumph of the shareholder value theory. The present crisis appears to have seriously undermined this credo. ...
The paper is part of a larger research project on transnational private regulation, carried out under the auspices of Hague Institute for the Internationalisation of Law [HiiL] at University College Dublin, the European University Institute and Tilburg University. It addresses the regulatory challenges arising from a fast-growing body of norms produced by non-state actors in the transnational arena. Focusing on the example of corporate governance codes through a legal pluralist lens, the paper investigates the arguments that qualify corporate governance codes as either ‘soft’ law or as non-law and rejects this categorization with reference to the wide-ranging evidence of new forms of regulatory governance both within and outside of the nation-state. The creation of corporate governance codes is seen as example of indirect regulation in politically sensible regulatory areas, where state law makers engage in forms of collaborative norm creation for example in the form of private code drafting and subsequent public endorsement. In the case of the German corporate governance code, however, the drafting of the Code occurred in a non-exclusively private sphere, which raises important questions as to the adequacy of the public-private distinction with regard to the assessment of the existence or the lack of legitimacy of contemporary norm-making processes. This type of norm creation illustrates the challenges of what Calliess and Zumbansen refer to as ‘Rough Consensus and Running Code’, which constitutes a procedural and substantive theory of transnational private law creation.
... Where a company has failed, claims of secured creditors are met before unsecured creditors, including employees (albeit employees have priority amongst these groups). Jacoby (2005) notes that in US public companies, the risks associated with business have been shifted over time to ordinary employees. ...
Full-text available
Stakeholders are everywhere. By most accounts, employees are stakeholders. But what does classifying a group of individual employees as stakeholders mean? This paper explores the labelling of employees as stakeholders by considering a number of issues: the ubiquity and power of the stakeholder heuristic; threats to the pluralist underpinnings of stakeholder theory; the manner in which employees are identified as stakeholders; and the implications of labelling employees as stakeholders. It is argued that act of labelling and treating employees as stakeholder may well serve the interest of the organisation rather than the interests of employees.
With enhanced global scrutiny in the backdrop of climate change, we attempt to identify the importance of the ESG framework during Covid-19 pandemic to produce guidelines for future sustainability practices. A comprehensive review of literature on ESG regulatory frameworks for sample developed and developing country was performed leading to undertaking of a cross-country comparative ESG analysis. It was revealed that a country's social and governance disclosure were driven by either voluntary or by mandatory codes that could not be a standalone factor for uplifting the country's overall ESG level. Other governance measures like sustainability reporting and integrated reporting practices need to be considered in order to uplift the ESG practice. Country-level environmental commitment was vital for both developed and emerging markets for solving information asymmetry issues and establishment of resilient business operations and reporting practices, leading to an emerging sustainable practice which needs to be adopted. Our findings offer valuable insights for regulators, institutional investors and policymakers in terms of considering ESG practices adopted by developed countries and bridging the gap from unsustainability to sustainability in countries with least developed emerging ESG countries. The study encourages the regulators to devise disclosure policies as per the Triple ‘C’ framework namely policies that are convenient, credible and comparable with the flexibility to encompass black swan events like Covid-19. The purpose of such disclosures should be to resolve the information asymmetry problem which primarily exists when regulations are non-mandatory.
The 1990s were a ‘lost decade’ for the Japanese economy. The asset price bubble burst in the early 1990s. Collapsing land prices caused a spike in the number of non-performing secured loans. The financial sector was beset by high-profile collapses and consolidations. The ensuing corporate credit crunch sapped business investment and confidence. Insolvencies reached record levels. Unemployment soared (Citrin and Wolfson, 2006; Cook and McKay, 2006). Having lost its edge as one of the world’s most dynamic economies, Japan also waned in global influence. After being admired for its economic success in the 1970s (‘Japan-admiring’) and then criticized for the structural barriers to trade in the 1980s (‘Japan-bashing’), a new phenomena emerged in the 1990s: ‘Japan-passing’ (Drysdale, 2004; Stockwin, 2003). Japan was largely forgotten as world leaders, policy-makers and academics rushed to engage with the emerging economic powerhouses of China and India. In the 1990s, Japan was not just ‘lost’; it was slipping into irrelevance.
This study aims at examining the impact of organizational politics and corporate governance on leadership effectiveness/ineffectiveness in the Nigerian banking sector. This study culminates in the building of organizational politics, corporate governance and leadership effectiveness/ineffectiveness and good corporate performance/poor corporate performance model. While good corporate governance elements will enhance good corporate performance, poor corporate governance elements will impair leadership effectiveness and hence poor corporate performance. In this study, I found that as a result of crime of obedience, those who occupy sensitive positions who are products of distributed advantages/disadvantages only serve the interest of their principals. Thus, the objective of monitoring, independence and control instituted for the enhancement of corporate governance are subverted. Although the crime of obedience is within the rubrics of organizational politics, it is found in this study as a catalyst which triggers/acts on the elements in corporate governance. The enhancement of good corporate governance in the Nigerian banking sector cannot be dependent on self-equilibrating mechanism. To mitigate the harsh effect of organizational politics and enhance the elements of monitoring, independence and control in corporate governance, employees and their representatives must be allowed to exist to constrain the ability of the leadership to act arbitrarily. The attainment of this goal and a synergy between employees and their representatives and strong private sector empowerment regulation will enhance effective corporate governance in banks. This study reflects the stance of interpretivism. Interpretevists are more liable in using action research. The adoption of action research is predicated on this premise. Although interpretivism is weak on ground of subjectivity, the strongest argument of the interpretivist is the necessity to discover the details of the situation and understand the reality working behind them. This research will create the needed understanding of the extent to which organizational politics is a determinant of corporate governance configuration and hence leadership effectiveness/ ineffectiveness in the Nigerian banking sector.
This paper summarizes the main findings of the recent studies that have constructed top income and wealth shares series over the century for Northern American countries (the United States and Canada), and a number of European countries (the United Kingdom, France, the Netherlands, and Switzerland) using tax statistics. All countries except Switzerland experience a dramatic drop in top income shares in the first part of the century due to a precipitous drop in large wealth holdings. A plausible explanation is that the development of very progressive tax systems, by reducing drastically the rate of wealth accumulation at the top of the wealth distribution, has prevented large fortunes from recovering from the shocks of the World Wars and the Great Depression. Over the last 25 years, top income shares have increased substantially in English speaking countries but not at all in continental Europe countries. This increase is due to an unprecedented surge in top wage incomes starting in the 1970s and accelerating in the 1990s. As a result, top wage earners have replaced capital income earners at the top of the income distribution in English speaking countries. We discuss the proposed explanations and the main questions that remain open.
This is a book about Washington Consensus capitalism and the controversies its encroachment causes in Japan and Germany. Many people in both those countries share the assumptions dominant today in Britain and America-that managers should be intent solely on creating shareholder value and that shareholders' financial logic alone should determine who buys what company on the stock exchange. That way efficiency (and hence global welfare) will be maximized. The Japanese and German advocates of full-bloodied market capitalism are not having it all their own way, however. In both countries there are articulate defenders of what they consider to be a better way of life, informed by a more human, more social-solidary, set of values. Dore traces the fascinating debates which ensue on corporate governance, on worker rights, on supplier relations, on cartels and anti-trust, on pensions and welfare. He also analyses actual changes in economic behaviour-an essential means of sorting out a lot of the muddle and double-talk not just in the internal debates themselves, but even more in the foreign reporting of them. These accounts of the battle for the national soul in Japan and Germany constitute one of the finest contributions to the 'diversity of capitalism' debate. Dore's account should be read by anyone who is interested to know whether, for all the talk of globalization, that diversity is going to survive.
Mergers: Why Most Big Deals Don't Pay Off
  • David Henry
  • Frederick F Jespersen
David Henry and Frederick F. Jespersen, "Mergers: Why Most Big Deals Don't Pay Off," Business Week (October 14, 2002);
Corporate Counter Culture
  • Tricia Bisoux
Tricia Bisoux, "Corporate Counter Culture," BizEd (November-December 2004): 16-21.