Corporations And The 99%: Team Production Revisited by SSRN
Tel Aviv University – Buchmann Faculty of Law
April 21, 2015
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“We Are the 99%” is a political slogan used by the Occupy Wall Street movement, referring to the prevailing wealth and income inequality, and claiming a divergence of corporate America from the public. This essay explores the interaction between the general public and the public corporation, and its legal manifestation.
Stakeholder theory portrays the corporation as a sphere of cooperation between all stakeholder constituencies, including the general public. Revisiting team production analysis, the essay argues that while several constituencies indeed form part of the corporate team, others are exogenous to the corporate enterprise. Employees, suppliers and financiers contribute together to the common corporate enterprise, enjoying a long-term relational contract with the corporation, while retail consumers contract with the corporation at arm’s length, and other people living alongside the corporation do not contract with it at all. Under this organizational model, the general public may participate in the team forming the corporate enterprise by providing public financing. Indeed, corporate law was developed to protect public investors.
However, evidence shows that most of the listed equity is no longer held by the general public directly. The new shareholders are institutional investors. The essay analyses the impact of institutionalization on the interaction of corporations with the general public, outlining three main differences between retail and institutional investors. First, not all institutional investors are investing on behalf of the public. While some institutional investors are providing professional asset management services to the general public and investing on its behalf, other institutional investors are obliged towards the general public in its consumer constituency, but invest to their own accounts. Moreover, shareholder empowerment platforms are frequently mobilized by intermediaries representing only the wealthiest 1%. Second, when shareholders are mostly institutional investors, the likelihood of distributional conflicts between various stakeholder groups is higher, because the institutional thought and decision making patterns do not match those of the general public. The objectives of institutional investors are significantly narrower than, and potentially divergent from, those of the general public. Third, the technology used for trading by institutional investors, algo-trading, potentially imposes externalities on retail investors, and ultimately widens the gap between corporations and the general public. It may often be the case that the institutional interest aligns with that of the general public, but the law does not necessitate it.
There are also converse trends towards convergence. Socially responsible investments and impact investments put social considerations on the table in forming the investment portfolio. The corporate social responsibility movement, sustainability reporting, and the growing interest of corporations in customer voice are converging initiatives.
The essay analyses these trends and raises policy implications. Corporate law is to face the challenge of aligning the interests of shareholders with those of the general public. The implications of institutionalization suggest that protecting investors may not always serve as a good heuristic for aggregate social welfare.
In addition, to reach the general public, the platform and audience for sustainability reporting should not be restricted to the public’s investor capacity in public corporations; rather, it should apply to corporations with strong public interaction in other stakeholder constituencies, serving public roles or providing public services, even when funded privately.
Corporations And The 99%: Team Production Revisited – Introduction
“We Are the 99%” is a political slogan used by the Occupy Wall Street movement, referring to the prevailing wealth and income inequality, while also claiming a divergence of corporate America from the public. Corporations are arguably the most significant legal institution in our societies. Corporations accommodate most of society’s commercial needs, provide employment opportunities and make a great impact on governmental policy. Considering the dominance and power held by corporations, their potential divergence from the general public is not to be taken lightly. Theory of corporate law does not portray such divergence. On the contrary, stakeholder theory portrays the corporation as a sphere of cooperation and coordination between all stakeholder constituencies, including the general public. This essay explores the relationship of the general public with the public corporation and its legal manifestation in corporate law.
The essay is organized as follows. Part I introduces stakeholder theory and team production analysis. Using the contractual model of the corporation, the essay argues that the corporation does not provide equal participation or representation to all stakeholder constituencies. The corporation’s financiers, suppliers and employees form the corporate team, creating together the corporate value, whereas the contractual relationship of the corporation with the general public is at arm’s length and often, for corporations with no retail consumers, with no contractual foundations at all. Under this organizational model, the general public assumes a role within the corporate team only to the extent that it provides public financing. Corporate law and securities regulation are thus often justified as laws for the protection of retail investors.
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