Is corporate governance a first-order cause of the current malaise?

Abstract: The US has evolved a regime of high-powered corporate governance in which managerial performance is disciplined through shareholder value metrics. This paper argues against over-stating the importance of this regime in creating problems of inequality, greater economic insecurity, and slower economic growth. Corporate governance acts principally as the transmission mechanism to the behaviour of the particular firm of changes in the global and domestic competitive environment. The critical problem is a risk-shift from shareholders, who now have access to robust diversification against firm-specific risks, and towards employees, whose concentrated firm-specific investments are hard to protect or diversify. The paper argues that we need a different government–private sector ‘match’ for the development of human capital, shifting away from a purely k-12 (or k-16+) model of government subsidy to a model that takes account of the need to replenish human capital over a lifetime. Such a strategy is not only distributionally appealing, but also pro-growth, since it revitalises human productivity.

Keywords: Corporate governance, shareholder value, human capital, inequality, economic insecurity.

Article posted to Journal of the British Academy, volume 6,
supplementary issue 1 (Reforming Business for the 21st Century).