The market for corporate control, exemplified by mergers, acquisitions, hostile and friendly takeovers, and all manner of complicated transactions — reverse triangular mergers, statutory short-form mergers, cash buyouts, etc. — designed to skirt otherwise-mandatory shareholder votes and statutory obstructions, often is the only incentive for managers to pursue diligently corporate efficiency and profitability.
Reputation and credibility are often enough to induce managers to perform well. When this is not the case, the threat of losing one’s job certainly lights a fire under even the most complacent corporate officer.
And yet, in the guise of coming to the rescue of hapless shareholders (who, incidentally, rely on the expertise of analysts who buy securities for large institutional investors such as retirement funds, mutual funds, and insurers), in gallops the valiant SEC and state legislatures to save the day. FULL ARTICLE
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Brad Edmonds wrote: “The owners of all the major corporations in the US and the world are you and me.”
A strange statement considering the fact that some people (not you and me) have the right to print money out of thin air and use this method to buy stocks, to merge and take over companies.
In his defense of corporations against intervention Edmonds apparently forgot that corporations themselves are a government intervention in the free market, granting them limited liability and other legal booty denied to individuals. Certainly any intervention is objectionable but I see no reason to stop short on the critique when the modern corporation differs from the USPS by only a marginal and diminishing degree.
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In his defense of corporations against intervention Edmonds apparently forgot that corporations themselves are a government intervention in the free market, granting them limited liability and other legal booty denied to individuals.
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Right on dug. But I think if you are looking at Mises Blog for a coherent basis for a moral philosophy, you’re in the wrong place.
LLCs are a *good* government intervention, dug, because this form of social engineering helps Mises blog readers get rich.
School lunch programs and libraries do NOT help mises blog readers get rich, therefore they are a form of theft and slavery.
You see, it’s all quite simple. A nice coherent moral and philosophical philosophy.
Nick, don’t you get bored trolling on the sidelines? Your trolling isn’t even of the intelligent sort; just the whingy, factually incorrect type we libertarians are used to from uninformed hicks.
Not to mention that the contractual creation of corporations is defendable.
TROLL Nick TROLL… but most people here are guided by a little more factual information than you apparently care for. They are too strong for your silly Commie Mind Tricks.
Worse, Nick’s non sequiturs are not even funny.
Brad, thanks for this perceptive piece about the battle over corporate control. Management loves barriers to takeovers, since by better locking in their positions they are better able to loot their firms, which is rather easily seen.
I see that dug latched on your key oversight, concerning tbe various grants of rights by governments to corporations, including the limited liability of investors, endless life, essentially any purpose (ultra vires now means very little) – including lobbying and campaign contributions, and various extensions by the courts of even Constitutional rights to these fictional people.
These have had profound effects, including an ability for founders to take risks that they can pass on to society (now balanced in the case of larger/insured cos) and an ability to exert much rent-seeking, corrupting pressure on government, and account for a good deal of the sick dynamics by which citizen’s groups pressure “government” to take action against “evil” corporations, and thereby enable further manipulations of government by corporations.
Nick, there are certainly points to be debated. May I suggest less snark, and more questions?
Many apostles of Austrian economics are happy to bend over backwards to try to explain their views. But simply jabbing them doesn’t bring out their best side.
Had Nick inquired, he would find that most of us are opposed to any and all intervention in the economy, including that in favour of corporate entities. But it is much easier to troll and caricature libertarians as money-obsessed egotists.
As for corporations/government, the one manipulates the other in good amounts. The relationship is by no means flowing in one direction alone.
Simply stated, corporations allow us to enjoy the productive genius of our fellow humans in ways that would not otherwise be possible. A shackled corporation is shackled genius.
Gary North resolved this for me: by dealing with a corporation, you contractually agree that your sole recourse is against the legal construct and not the individual agents. There is no contradiction with anarcho-capitalism.
I recall some time back a student or prof on this site observing that the unintended consequence of TR’s trust-busting was the rise of publicly traded entities with attenuated forms of ownership that are unaccountable to an extent the most ruthless “robber baron” could only dream. Could Mr. Edmonds give us some thoughts on this?
Nick’s idea that supports of private property are either rich or think they are going to be rich, is simply false.
For example, I support private property and civil interaction and I am not rich – and I do not believe that I even will be rich.
Also many mega rich people (the sort who own large parts of huge corporations) support bigger government rather than smaller government.
Bill Gates, Warren Buffet, Peter Lewis, George Soros, Marc Cuban……, Mrs Kerry.
Do I need to go on?
By the way I am not against “free school lunches” and other such – as long as no one is forced to pay for them by threats of fines and prison. If people wish to donate money to provide “free school lunches” that is nice of them.
On corporations:
The old confusion (that keeps comming back) between the limited liability statutes of the 19th century and the corporate form.
There have been corporate owners of property involved in trade for thousands of years.
For example, some monastic orders were very big economic players in the Middle Ages.
There were also non religious trading companies – again centuries before the statutes normally pointed to.
The basic point is as follows.
If a group of people get together and set up a trading enterprise they must TELL people whether they they are individually liable or not.
If the position is “if things go wrong you can only take the money in the corporate pot – you can not come after our homes and other possessions” that must be open.
This is why in Britain a company has to put “Ltd” after its name if it operates limited liability, and in the United State in has to put “inc” after its name.
It is a matter of CHOICE whether one decides to deal with a limited liablity enterprise or not.
For example, if people want to deal with non limited liability Lloyds insurance operations they could.
Being a “name” (an investor) in a Lloyds syndicate can carry great rewards indeed – but it also carries great risks. As one looses everything if the syndicate gets into trouble.
Bottom line – being involved with corporate limited liability form enterprises is a matter of CHOICE (for both investors, supplyers and customers) not a “gift of the state” – although, as with everything, the government has got involved by passing statutes and a vast number of other regulations.
“But the effects of credit money expansion….”
I rather doubt that the writer of the post was in favour of credit money expansion.
By the way if people wish to reduce the power of “faceless corporations” they could so by getting rid of the regulations that the writer points to – these undermine owner-managers and support the power of hired managers who seem to hire themselves.
One could also get rid of such things as the “Prpogressive” income tax, and Capital Gains Tax and the Death Tax.
These taxes undermine individual or family owned enterprises in competition with corporations.
One of Mr Buffet’s favourate tactics is to approach the owner-manager of an enterprise and say something like “when you die your children will be hit by the Death Tax – but if you sell out to my organization you can put the money in trust for your children”.
Hence “trust fund kids” rather than people who inherit real ownership of the family firm and whose income depends on how well they run it in the long term.
The corporate-governance movement is ridden through with putting-Humpty-Dumpty-back-together-again measures. To paraphrase John Kenneth Galbraith, in a parodic vein, “corporate-governance advocates seek to expose what short sellers are largely prohibited from calling attention to.”
Paul Marks, good points, except you are only partly right with this:
It is a matter of CHOICE whether one decides to deal with a limited liablity enterprise or not.
In the case of purely voluntary transactions – such as vitually all commercial, consumer and labor contracts/purchases/sales – yes; for all others, clearly NO. What are these “all others”? A broad range of actions that transfer risks and costs on an involuntary basis to others. There is a wide legacy of uncomepensated environmental costs and damages that have been shifted to others by bankrupt firms whose owners/investors took profits but not the fat tail of lingering risks.
These costs in many cases are very large and are still with us, and this lingering legacy and the ongoing legal ability of investors to leave others holding the bag for known and unknown risks is one of the reasons why those damn pesky collectivist enviros and other man-haters (otherwise known as your neighbors) constantly politicize the purely commercial or industrial “risk-taking” activities of our enterprises.
Investor control of the corporation is, for the most part, a myth. Regardless of the legal theory on which the corporation is founded, in practice the shareholder is just an even weaker contractual claimant than the bondholder, and the real residual claimant is management. Stephan Kinsella, perversely, was forced into a strategic retreat to essentially this position in an earlier debate on the corporate form, in order to absolve the shareholder from liability for the actions of management. The agency relationship between shareholder and management, he said, was fictitious; the shareholder was simply an investor with limited contractual rights to the usufruct, and real control was vested in management.
The importance of hostile takeover is greatly overrated. It was the big thing in the early ’80s, arising as a response to the junk bond innovation, and largely subsided by the late ’80s as management used its insider advantage to rig the rules against hostile takeover. Martin Hellwig’s article on the subject is very good:
“On the Economics and Politics of Corporate Finance and Corporate Control,” in Xavier Vives, ed., Corporate Governance: Theoretical and Empirical Perspectives (Cambridge: Cambridge University Press, 2000), pp. 95-134.
It’s rather odd, BTW, to stress the statutory basis of “poison pills” and other anti-shareholder measures by management, and yet at the same time to insist that the defining features of the corporate form could be created by contract. Management’s main power does not depend in any essential way on statute, but results from the logic of its own internal position in the corporation, and its primary influence over governance rules. Does anyone doubt that management, with its insiders’ advantage in setting the internal rules of governance, could come up with measures like poison pills, shark repellents, or greenmail?
Investor control of the large corporation is a fiction for the same reason as voter control of government: those running the machinery of a large organization will always have an advantage, in time, attention, agenda control, and control over the internal governance rules, over the outsiders whom they represent in theory. It’s the inevitable law of power shift from the mandators to the mandatees, as Robert Michels put it: “who says organization, says oligarchy.”
Mises was far too hubristic in imagining that his “entrepreneur,” armed only with the magic of double-entry bookkeeping, could maintain control of the corporation. For one thing, even stipulating a perfect market for corporate control and the inability of management to game the internal rules of corporate governance to protect themselves, he neglected all the Hayekian problems for the entrepreneur in figuring out what the accounting figures even MEAN. I wrote about them here:
Economic Calculation in the Corporate Commonwealth
If anything, stock options and other incentive systems for maximizing profits and share value create perverse incentives for asset stripping, starving, and milking organizations to inflate short-term returns. The CEO governs the corporation like an Ottoman tax farmer governed his province, extracting maximum revenue and then moving on, leaving a successor to inherit the problems of a gutted economy. This is essentially how Nardelli increased the apparent earnings of Home Depot and got himself a $200 million retirement package.
Finally, to address Paul Marks’ argument that the corporation could be established purely by private contract: I will stipulate that that is true. But as a commenter pointed out on an earlier thread on Kinsella’s article on the corporate form, the state lowers the contractual transaction costs of adopting a corporate form of organization, and all the transaction costs of negotiating entity status on an ad hoc basis, by providing a ready-made and automatic procedure with standard forms, etc. So the corporation is made artificially prevalent compared to other forms of organization. The corporation, which might be possible contractually as simply one form of organization among many, is made the standard form–which greatly reduces the “voluntary” nature of doing business with it. Doing business with a state enterprise in the old USSR was “voluntary,” you know, so long as you could find a satisfactory alternative.
So what do you suggest as a remedy Mr Carson?
Inquisitor,
I’m not sure there is a solution for the large and (in theory) absentee-owned corporation. Agency problems are sort of built into it, given those starting assumptions. I would like to see an end to the kinds of state intervention that promote economic centralization, concentration of capital, and absentee ownership. Generally the greater the degree of profit-sharing and self-management, the fewer the agency problems. Uniting worker control with worker ownership minimizes the kind of information problems associated with hiearchies and power (R.A. Wilson described them very well), and the agency problems that result from replacing market with administrative incentives.
What role does consumer sovereignty play in making corporations pay for their inefficiencies and indulgences?
Kevin Carson writes without addressing the consumer angle (yet anyway):
“Management’s main power does not depend in any essential way on statute, but results from the logic of its own internal position in the corporation, and its primary influence over governance rules. Does anyone doubt that management, with its insiders’ advantage in setting the internal rules of governance, could come up with measures like poison pills, shark repellents, or greenmail?â€
Carson does suggest reinstating market as a partial answer, but then says:
“Uniting worker control with worker ownership minimizes the kind of information problems associated with hierarchies and power.†This would bring up the problematic question of Syndicalism. One dictionary defines it as a “movement to transfer ownership of means of production and distribution to industrial workers through various poltical meansâ€.
This is how Mises allies consumers, entrepreneurs and capitalists against syndicalism:
“The entrepreneurs and capitalists are not irresponsible autocrats. They are unconditionally subject to the sovereignty of the consumers. The market is a consumers’ democracy. The syndicalists want to transform it into a producers’ democracy. This idea is fallacious, for the sole end and purpose of production is consumption.â€
Shouldn’t this be covered by the contract that one enters when buying stock? Deprivation of the opportunity to vote as defined in the contract of ownership of stock is a violation of property rights.
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