In our latest 21st Century Capitalism initiative paper, “What must corporate directors do? Maximizing shareholder value versus creating value through team production,” author Margaret M. Blair explores how the share value maximization norm (or the “short-termism” malady) came to dominate, why it is wrong, and why the “team production” approach provides a better basis for governing corporations over the long term.
Blair reviews the legal and economic theories behind the share-value maximization norm, and then lays out a theory of corporate law building on the economics of team production. Blair demonstrates how the team production theory recognizes that creating wealth for society as a whole requires recognizing the importance of all of the participants in a corporate enterprise, and making sure that all share in the expanding pie so that they continue to collaborate to create wealth.
Arguing that the corporate form itself helps solve the team production problem, Blair details five features which distinguish corporations from other organizational forms:
- Legal personality
- Limited liability
- Transferable shares
- Management under a Board of Directors
- Indefinite existence
Blair concludes that these five characteristics are all problematic from a principal-agent point of view where shareholders are principals. However, the team production theory makes sense out of these arrangements. This theory provides a rationale for the role of corporate directors consistent with the role that boards of directors historically understood themselves to play: balancing competing interests so the whole organization stays productive.
On the one hand the U.S. wants to be defending U.S. companies overseas and they are going to see this as vindictive, particularly in going after Apple’s profits retroactively. But in the bigger picture the U.S. is taking moves to fight inversions and improve the global system.