Workers Are Risk-Takers Too

Raphaële Chappe in Late Light:

In 1976, Michael Jensen and William Meckling published “Theory of the Firm,” an article that became one of the most-cited economic articles ever written. In the article, Jensen and Meckling presented a theory of the firm that revolved around the goal of reducing agency costs by aligning the interests of executives with those of shareholders through incentive compensation structures such as stock options. Rooted in principal–agent considerations, this framework launched a new regime of corporate governance—the set of processes, institutions, and legal frameworks that determine how a corporation is run—that came to be known as “shareholder value maximization.” The Business Roundtable, a nonprofit association whose members are chief executive officers of major US companies, has recently issued a statement on the purpose of the corporation, professing a commitment to all stakeholders, and not just shareholders. If we take this statement at face value, the shareholder value maximization paradigm is being challenged.

As the research of William Lazonick has shown, the maximization of shareholder value was used—in the United States alone—to justify the extraction of some $3.4 trillion between 2004 and 2013 via dividends and share buy-backs, dollars that could have been spent on capital expenditures or to fund research and development activities. It should come as no surprise, then, that over the past decades increased corporate profitability has resulted neither in increased investment in labor nor in capital—a real “investment paradox” for both!

More here.