In late 2019, somewhat surprisingly, the Business Roundtable issued a brief statement advocating “a fundamental commitment to all of our stakeholders,” thus ending its decades long singular commitment to shareholder value.

The statement triggered an intense global debate about the purpose of the modern corporation. In academia and in policy circles, new attention is now being paid to whether or not pursuit of profit is the sole obligation of the corporation. Legislation that would mandate a more significant role in corporate governance for stakeholders was introduced by Sen. Elizabeth Warren and may, in light of the commitment of the Biden administration to restoring fairness in the economy, stand a chance of passage.

In a new paper, “The Myth of Corporate Governance,” I examine the longstanding impasse in corporate law between advocates of shareholder value (usually scholars associated with, but not exclusively, the “agency” school) and those who call for greater responsiveness to stakeholders. I explain that the impasse is based on a shared, but mistaken, understanding of the corporation. Corporations are not, in fact, “governed” but ruled. And they are ruled in order to pursue or execute the mandate of a capitalist political economy. Any genuine attempt to shift corporations away from that mandate will engender significant resistance. (Of course, this is not to suggest that such an effort should not be made, although this particular paper leaves out any normative consideration of policy choices.)

The origins of the myth of “corporate governance” lie in the mutual acceptance by both shareholder value and stakeholder advocates of what is called, in the academic literature, the “Berle-Means paradigm.” I explain in the paper, however, that that paradigm was problematic from its origins and, in any case, has been long misunderstood by many scholars.

Adolf A. Berle, a corporate lawyer and academic, and his colleague Gardiner Means, an economist, co-authored a major study of the structure of the large corporation called The Modern Corporation and Private Property. The book appeared in 1932 just as the Great Depression was taking hold in the wake of the 1929 stock market crash.

Berle theorized that by the early 20^th century our pre-existing conception of individual property had been destroyed, leading to a “a major shift in civilization” towards a kind of post-capitalist “industrial feudalism:” “The explosion of the atom of property destroys the basis of the old assumption that the quest for profits will spur the owner of industrial property to its effective use.” Instead of an individual (or small association) of entrepreneur(s) who owned and controlled the assets of a business, he and Means concluded, the modern corporation separated ownership from control, thus largely eliminating the traditional capitalist incentives thought to exist when businesses were managed in a personal and direct manner by their owners.

There were, however, significant problems with the logic of the Berle-Means thesis as well as with the empirical evidence they mustered in support of their position. The major logical problem, largely overlooked by scholars, is that they provided no rational explanation for the rise to power of a new managerial class in place of the prior capitalist entrepreneur. That is, why would, or even more interestingly, just how would, a capitalist owner surrender control to non-owning managers? I explore in the paper some key examples in Berle and Means’ book and explain how their conclusions are not justified by the historical record.

It is more accurate to characterize the modern corporation as still today made up of two major groups, financial and industrial capitalists, who, together, own and control the corporation. Their control, of course, is expressed through the forms they occupy within the firm, as outside investors, today dominated by large centralized pools of capital, as board members, and as shareholding “managers,” if you will, of the day-to-day operations of the firm.

But the reality of what these “capitalists” are doing should not be ignored because of the legally assigned “form” in which they carry it out. A single coherent class of capitalists, financial and industrial, rule the corporation in pursuit of the mandates of the capitalist system: the generation of value through capital accumulation. The result is a powerful tendency towards concentration and centralization of financial and industrial capital in a small group of firms, whose power is only infrequently disrupted by challengers.

Instead of recognizing this historical constant, so to speak, of capitalist control and purpose in the corporation, however, both agency and stakeholder adherents typically minimize, or ignore altogether, the deeper socio-political analysis offered by Berle and Means. Instead, they simply borrow the ownership-control distinction and attempt to design “governance” mechanisms that they believe will solve the problems associated with this structure.

This approach leads to somewhat tortured explanations for key court decisions and corporate policy as I explain in a case study of the conflict between activist investor Carl Icahn and Apple, Inc. over its dividend policy. Some viewed this conflict as a classic example of agency theory at work, with Icahn posed as a savior of dispersed shareholders. But a closer look confirms my view that a dominant ownership group’s approach to shareholder payouts was executing the core mandates of capitalist political economy.

As the debate about corporate purpose continues, and perhaps takes on greater significance in the legislative arena, my paper is an attempt to focus attention on the foundational structure and purpose of the modern corporation.

This post comes to us from Professor Stephen F. Diamond at Santa Clara University School of Law. It is based on his recent article, “The Myth of Corporate Governance,” available here.