At first it looked grim for one of the most important institutions in the capitalist system. Two recently released, ambitious academic treatises appeared to be, put bluntly, slamming it. That institution being the corporation, and those books being Firm Commitment by Oxford University’s Colin Mayer and Business Persons by Wharton’s own Guardsmark Professor Eric Orts. I had the pleasure of attending an authors panel discussion on campus, where Orts and Mayer both presented quick synopses of their work. Their gist: The corporation is broken.
Mayer said the notion that the corporation is intended to maximize shareholder value is “fundamentally wrong.” Corporations are meant to provide services and make goods for the betterment of society. They should be “Alice in Wonderland,” he said, but instead it’s “Frankenstein in Transylvania.” The Dr. Frankenstein in this case is the short-term investor, who prods the corporation to take more and more risk in the name of the investor’s quick gain.
Orts agrees: “The model is seriously wrong,” he told an audience made up mostly of fellow Wharton faculty. His book is as much a legal treatise as a business book, so his enemy is the concept of the corporation as a bundle of contracts. Gone is the trust within the company and without. And gone is the notion that corporations have a bigger role to play in society than just making profits for shareholders. As the faculty director of the Initiative for Global Environmental Leadership, Orts believes corporations must have a role in ensuring sustainability.
Along with short presentations by the authors, the event featured commentary by William Bratton, deputy dean and Nicholas F. Gallicchio Professor of Law at Penn Law, and by Wharton’s William and Jacalyn Egan Professor of Management, Michael Useem.
Leave it to Useem to inject a positive and historical spin on books that essentially bashed the institutions that thousands of Wharton alumni work for.
Useem appreciated both books’ “optimistic direction,” though. (It should be noted, both Orts and Mayer agree that the corporation can be fixed).
He stressed that institutional investors have all but conquered the public corporation on Standard & Poor’s 500 index and have made sure all that achieving maximum shareholder value is “built into the woodwork.” Top executives have surrendered at “their Appomattox,” he said, referring to the surrender of General Lee’s Confederate Army in the U.S. Civil War.
But the optimism comes from the irony, Useem continued, that in taking over the corporation, those institutional investors commit the corporation to being a better institution through that board. At least with the S&P companies, boards keep execs’ “feet to the fire.”
Again Useem turned to history. To illustrate why changes to the corporation will come from the board—the changes that Mayer and Orts are calling for—Useem pointed to Apple and nonexecutive director Ed Woolard Jr.’s role in saving the company by bringing back Steve Jobs.
Far be it from me to doubt Useem’s positivity.
The full titles of Mayer’s and Ort’s books are Firm Commitment: Why the Corporation Is Failing Us and How to Restore Trust in It and Business Persons: A Legal Theory of the Firm. The Carol and Lawrence Zicklin Center for Business Ethics Research sponsored the April 7 authors panel discussion.