Corporate Governance and Shareholder Capitalism

Corporte Governance

Which business strategy firms pursue

How profits are distributed

Shareholder model

primary duty is to maximise short-term profits and share price, returning maximum cash to owners. Dominant in LMEs since the 1980s. Associated with Milton Friedman's doctrine.

Stakeholder model

Balance between return to owners with the long-term claims of workers, suppliers, consumers

Associated with CMEs, co-determination and patient capital

Friedman Doctrine 1970

there is one and only one social responsibility of business — to use its resources to increase its profits." The intellectual foundation of shareholder capitalism.

Retain and Reinvest

post-war US corporate model where profits were kept inside the firm and reinvested in new plants, equipment, and worker training. Associated with vertically integrated firms, managerial control, and rising wages.

Vertical integration

Firm owns and control multiple stages of production process

Downsize and Distribute

corporate model that replaced retain-and-reinvest from the 1980s onward. Firms shed non-core activities, outsource production, and return cash to shareholders through dividends and buybacks rather than reinvesting.

Factoryless Manufacturing

firm designs and markets a product but outsources all physical production to contractors in low-wage countries. Examples: Nike, Apple, Nvidia.

Pincipal - Agent Problem

conflict of interest between shareholders (principals) who own a firm and managers (agents) who run it. Managers may pursue their own interests (high salaries, job security, empire-building) rather than maximising shareholder returns.

Agency Theory

eoliberal framework that analyses the principal-agent problem and proposes solutions (stock options and hostile takeovers) to align manager behaviour with shareholder interests.

Stock Option Compensation

giving managers the right to buy company shares at a pre-agreed price at a future date. If the share price rises above that price, they profit. Aligns manager incentives with share price maximisation. Critique: rewards luck, encourages short-termism.

Hostile Takeover

outside firm or investor buys enough shares to take control of a company against the wishes of existing management. Acts as a disciplining mechanism: if managers perform badly, share price falls, making the firm vulnerable to takeover and management replacement.

Institutional Investors

large financial institutions (pension funds, mutual funds, insurance companies) that pool savings and invest in publicly listed companies. Their rise created massive demand for publicly listed shares and increased shareholder pressure on firms.

Share Buybacks

when a firm buys back its own shares on the open market. Reduces the number of shares outstanding → artificially inflates the share price → boosts manager stock option compensation. Uses cash that could otherwise fund investment or wages.

Patient capital

long-term financing (typically from banks in CMEs) that is not withdrawn when short-term profits dip. Allows firms to invest in long-term projects, firm-specific skills, and incremental innovation without constant pressure from financial markets.

Venture Capital

capital invested in new, risky innovations and start-ups in exchange for an equity stake. Accepts high risk for potentially high return. Dominant in LMEs and associated with radical innovation (Silicon Valley, biotech).

Intangible assets

non-physical assets including patents, trademarks, software, algorithms, brands, and data. Now approximately 80% of the market value of leading US corporations. Shift from physical capital toward knowledge capital as the main source of corporate value.

Productivity Divergence

growing gap between "frontier firms" (Amazon, Apple, Google) that pull ahead in productivity and the rest of the economy that stagnates. Winner-take-all dynamic driven by network effects and intangible assets.

Co-determination

German system of worker representation on company supervisory boards. Gives workers formal institutional power over major corporate decisions. A key feature of the stakeholder model in CMEs.

Capital Gains

profits earned from selling an asset (shares, property) for more than the purchase price. One of the two ways shareholders make money from owning shares (the other being dividends).

Dividens

egular cash payments made by a company to its shareholders out of profits. One of the two ways shareholders make money, alongside capital gains from share price appreciation.