Corporate Law and Economic Stagnation
The shift in the institutional logics of corporate governance towards shareholder value ('Great Reversal in Corporate Governance') coupled with shareholdership's increasing short-termism ('Great Reversal in Shareholdership') have cumulatively contributed to the low GDP growth rates that are observed in five major Western economies (France, Germany, the Netherlands, the UK, and the US) since the breakdown of the Bretton Woods system in the early 1970s. This book presents - through empirical data and with the help of the post-Keynesian theory of the firm - a historical causality chain: the two Great Reversals led to higher equity payout ratios and lower retention ratios in public corporations that in turn caused lower growth rates of (business) capital accumulation that in turn caused lower GDP growth rates. Corporate law has been an accomplice for the reorientation of corporate governance towards shareholder value, i.e. for the 'Great Reversal in Corporate Governance,' and thus it indirectly shares the blame for the low rates of capital accumulation that have thrown the five major Western economies in a stagnation mode over the past four decades. The book introduces the post-Bretton Woods shareholder value index: a numerical legal index that shows the progress that the corporate laws of the five major Western economies covered have made at the shareholder value level during the post-Bretton Woods era. Corporate law rules have escalated the divestment of structurally long-termist institutional investors from equity positions and have preserved the trend towards shareholder short-termism that other legal and extra-legal institutions have directly caused. Corporate law has thus sustained the 'Great Reversal in Shareholdership' and hence it has contributed to the maintenance of the second factor that brought about the observed low growth rates in the five major Western economics over the past four decades. The book presents developments in the field of corporate law in the five major Western economies generating bias in favor of short-termism. 'Long Governance' emerges as the only way by which corporate law can fight stagnation. It is a management theory that calls management to set as a benchmark for its actions the long-run interests of all the shareholders who hold, have held, or will hold stock in the firm and also a legal concept requiring directors' duties to be discharged towards the maximization of long-term corporate welfare. Long Governance encourages also the provision of incentives, so that a class of long-termist shareholders, which can subsequently be empowered, can be created.
Publication Date: 1/28/2013