The concept of the corporation

This is a paper John delivered at a festschrift for Leslie Hannah, the leading British business historian of his (and my) generation. Les and I have been friends and colleagues since we were both young fellows of St Johns College Oxford in the 1970s and my first book, Concentration in Modern Industry, published in 1977, was co-authored with him.



The Brooklyn Engineer and the Viennese Intellectual

In 1943, Alfred Sloan and Peter Drucker met for the first time.   The two men both possessed exceptional intelligence and deep interest in business.  They had little else in common.[1]

Sloan was born in 1875 and raised in Brooklyn.   With money borrowed from his family, Sloan took control of a small bearings company which benefitted from the growth of the automobile industry in the early years of the twentieth century.

Sloan’s company was acquired by the nascent General Motors.   Billy Durant, founder of GM, was a brilliant salesman and buyer of businesses, a less talented manager.   GM was close to collapse in the turbulent years that followed the First World War, and Pierre du Pont, of the du Pont chemical family and the company’s largest shareholder, forced Durant out of the corporation.

That was Sloan’s moment:  he was ready with a plan to manage Durant’s unwieldy empire.  He gained du Pont’s support and in 1923 became President of the company.  Under Sloan’s leadership, GM overtook Ford to become not only America’s leading automobile company, but the largest manufacturing corporation in the world.

At that meeting in 1943, Sloan had been in charge of General Motors for twenty years, having postponed his retirement to help the company make the most effective contribution to the war effort. He was 68 years old, a personally unprepossessing figure in thrall to a large hearing aid.

Drucker was more than thirty years younger and his background was very different. The son of Adolph Drucker, a senior civil servant in the Austrian Empire, he had grown up in early twentieth-century Vienna, the home of Sigmund Freud, Gustav Mahler, and Gustav Klimt, and one of the most vibrant intellectual communities which ever existed.  But by the time Nazi storm troopers were cheered as Austria was absorbed into thousand year Reich most of Austria’s leading thinkers had fled – Ludwig Wittgenstein to Cambridge, Friedrich von Hayek to London.  And Peter Drucker had emigrated to the United States.  He found employment as a journalist for Fortune and Businessweek, and was teaching at Bennington College, a small women’s liberal arts college in Vermont.

The meeting between Drucker and Sloan was the inspiration of GM’s Chief Financial Officer Donaldson Brown.  Brown was concerned that the senior management team who had created General Motors were reaching retirement.  He believed that their legacy would be better sustained if an outsider analysed and documented what they had created.

Sloan granted Drucker what business school professors today call “access”, on a scale that these modern professors can only dream of.   For two years, GM paid Drucker’s salary, and allowed him to shadow Sloan.   After meetings, the President of General Motors would retire with Drucker to discuss how well the day had gone.

But life with Sloan offered few of the comforts that ease the way of the modern chief executive.  Sloan was personally extremely wealthy, by virtue of the stockholding in GM he had received when his company was acquired, and the successive multiplications of the value of that stock under his leadership.  He would endow the Sloan-Kettering hospital, and the School of Management at MIT.  The Sloan Foundation is today an innovative supporter of social science research.

But his salary was, by modern standards, modest and his conduct of corporate affairs was austere.  He lived outside New York, where GM corporate headquarters were based, and was a regular commuter in the sleeping-car to Detroit, where he would spend nights in a Spartan cubicle.  It was a far cry from 2009, when, with General Motors teetering on the edge of bankruptcy, its well remunerated executives incurred the wrath of a congressional committee for travelling to the hearing in a corporate jet.

The product of Drucker’s observation was a book- The Concept of the Corporation.   A book was not what Donaldson Brown had in mind:  Drucker had suggested such a volume as a means of giving focus to the project.

But Sloan and his colleagues did not like the result.   They did not respond to the book:  they simply ignored it.  In retirement – Sloan stepped down from his executive role in 1946 but continued as chairman of the GM board for another decade – Sloan wrote his own account, My Years at General Motors, published in 1963, when Sloan was 87, and only two years before his death.   Although Drucker claims that Sloan described this work as a response to Drucker, there is no reference whatever to The Concept of the Corporation in it.

Why did Sloan dislike Drucker’s book so much?   Not because it is hostile to GM.   While there are criticisms, no reader would doubt that the overall tone is one of admiration for the company and respect for the men who had built it.   Still, as anyone who has written about modern business will know, praise is rarely sufficiently high

But the restrained tone was not the principal problem.   Sloan was not a modest man, but, like his colleagues, he was a highly intelligent and perceptive man.   (The executives of Sloan’s day feigned anti-intellectualism – Drucker describes how they attempted to conceal from him the information that one had a PhD in economics – but it was only later in the corporation’s life that anti -intellectualism in GM was a reality rather than a pretence).  The locus of disagreement was more subtle.

Both Drucker and Sloan understood that GM’s great achievement had been the establishment of a system of professional management.  Drucker described GM’s management systems in depth, but he was more interested in a broader issue.   The development of corporations like GM as the dominant forces in a modern economy changed fundamentally the nature of power in society.  The first industrialists had derived their authority from their ownership of the means of production – the class relationships that Marx had analysed.

But the professional managers that Sloan and Drucker described did not derive their power from the ownership of the means of production.  What gave legitimacy to the power that Sloan and his colleagues exercised?   What was the proper scope, and necessary limits, of that authority?   What defined the social role of the modern, professionally managed corporation?   These were not questions that Sloan and his colleagues wished to discuss.   So when Drucker sought to raise them in The Concept of the Corporation, they closed his book.

The Corporate Economy

Today we pass airport bookstalls groaning with piles of vacuous management books:  it is hard to believe that in 1945 neither Drucker nor GM executives nor publishers imagined that there was any significant market for an account of the inside workings of a business.  The Concept of the Corporation was published by a small firm, Transaction Publishers.

But The Concept of the Corporation was widely read.  Seventy years later, Drucker’s book is still in print, and it established him as the first, and perhaps still the most insightful, of business gurus.  And the book was studied closely by the person at whom Brown’s project was most of all directed – Sloan’s successor, Charlie Wilson.   And at GM’s principal rival.   When the eponymous founder died in 1946, Henry Ford II was quick to install professional management.   Ford’s ‘whizz kids’ borrowed extensively from GM’s techniques and systems and enabled a revitalised Ford to contest market leadership once again.   The most famous of the ‘whizz kids’, Robert McNamara, was to become Kennedy’s Secretary of Defense and to lose his reputation demonstrating that the systems of control and analysis which had proved so effective in Detroit failed six thousand miles away in the Mekong Delta and along the Ho Chi Minh trail.[2]

But McNamara was not the first automobile company chief executive to be summoned to manage the US government’s largest business.  When Eisenhower became President, with the Korean War in the balance as Chinese troops raced across the Yellow River, Eisenhower appointed Charlie Wilson as Defense Secretary.

In confirmation hearings, Wilson reportedly said ‘what’s good for General Motors is good for America’.  What he actually said was ‘I thought that what was good for America was good for General Motors, and vice versa’. [3]  But no matter:  the exchange exemplified the central role which the large diversified corporation played in modern economic life.

In the two decades, the importance of this institution would be recognised in many different ways.  Igor Ansoff and Kenneth Andrews developed the subject of corporate strategy, which was a key element in the MBA programmes of the rapidly expanding business schools.   Economists were slow to come to terms with the corporation – Ansoff would justify his approach to corporate strategy by observing that microeconomics had contributed little to the subject he tried to elucidate, but Edith Penrose’s work on the growth of the firm would in due course be seen as the founding text of the currently dominant paradigm of the resource-based theory of strategy.  And management consultants, once represented only by men with stopwatches, would offer their services.

The corporation was by now sufficiently part of society to be the butt of humour, as in W H Whyte’s The Organisation Man or Sloan Wilson’s fictional account in The Man in the Grey Flannel Suit.  And the rise of the corporate economy was documented for the US by Chandler’s Strategy and Structure and for the UK in Hannah’s Rise of the Corporate Economy.  The belief that the modern professional executive had development management skills and expertise that were of general application, and not necessarily rooted in the specifics of particular industries, provided the rationale for conglomerates such as Ling-Temco-Vought and ITT.

There were critics of the growing social, political and economic power of the corporation.  Eisenhower’s valedictory address on relinquishing the presidency in 1961 warned of the dangers of what he christened ‘the military-industrial complex’.  JK Galbraith’s The New Industrial State in 1967 claimed that the corporation controlled its environment to such an extent that it transcended the traditional sources of ‘countervailing power’.

The empty corporation

But the debate on the social role of the corporation would develop in a different direction.  Milton Friedman’s article in the New York Times magazine in 1970 under the title ‘The Social Responsibility of Business is to Increase its Profits’ may be the most cited piece ever to appear in that newspaper.  Friedman asserted, bizarrely, that business could not have responsibilities:  only people could have responsibilities.  The legitimacy of corporate activity needed no justification beyond a general assertion of the legitimacy of private property:  the shareholders ‘owned’ the corporate vehicle and its executives were simply the agents of the owners.

The agency perspective was developed by Jensen and Meckling (1976) which emphasised the need for executive incentives, such as stock options, which might align the interests of managers and shareholders.  The notion of corporate personality was no more than a legal fiction, a device for minimising transactions costs:  the firm was a ‘nexus of contracts’. (Easterbrook and Fischel)  The broader intellectual climate was set by concepts of ‘the market for corporate control’ (Manne) – management teams competed through the mechanism of mergers and acquisitions for the right to deploy corporate assets, and the efficient market hypothesis (Fama).   The boundaries of the firm were themselves dictated by transactions costs:  where idiosyncratic investment was required , the hierarchical structures of the firm represented a more efficient organisational form than the competitive structures of the market place. This  ‘markets and hierarchies’  theory of the firm, first propounded in 1937 by  Ronald Coase, became the dominant paradigm  amongst economists, a development acknowledged by the award of a Nobel Prize to Coase while  Edith Penrose died, largely unrecognised, in 1998.

All these economists (except Penrose) were alumni of the University of Chicago, and members of the ‘law and economics’ school that was initiated there:  that intellectual tradition found physical embodiment at George Mason University, largely devoted to the ‘law and economics’ movement.  (The essential claim is that law is and should be designed and implemented to promote economic efficiency, rather than more abstract social and political goals of justice and equality).[4]

The ‘nexus of contracts’ approach treats  the corporation as an empty shell.  The managers and employees are a group of individuals,  who find it convenient to do business with each other, and with customers and suppliers,.  There is no collective interest (and, of course, no collective responsibility) only a coincidence of individual interests.  The internal organisation of the corporation – the issue which preoccupied Sloan – is reduced to a matter of command and control, to be treated as a principal agent problem in which any information asymmetry between manager and managed (or owner and manager) is to be handled by suitable targets and incentive systems. This theme dominates Milgrom and Roberts’ classic 1992 text on the economics of industrial organisation

The external relationships of the company are defined by contract, and circumscribed by corporate law.  The concept of the corporation as a social organisation, operating in a wider social context, so emphasised by Drucker, has disappeared.

One might talk of the hollow corporation, had the term not been appropriated to describe the late twentieth century corporations which outsourced most of their supply chains; perhaps the empty corporation is an appropriate term These businesses abandoned (as General Motors itself would do) the extensive vertical integration which had characterised the earlier generation of corporations whose rise was chronicled by Chandler and Hannah. As I shall describe below, these developments cast doubt on the theory of the firm elaborated by Coase at precisely the time that theory commanded academic attention.

 The evolution of corporations in practice

This fundamentally financially driven view of the corporation would probably have had little impact outside the academic world had its implications not been so congenial to investment bankers – and to corporate executives themselves.  The representation of the corporation as a transactional rather than a social vehicle had obvious attractions for those whose livelihood was based on fees for transactions.  The recharacterisation of the nature of corporate activity became a central part of the process of financialisation which took place in western economies from the 1970s.

The phrase ‘shareholder value’ seems to have been coined by Alfred Rappaport, whose 1986 text is still the bible of the movement.  But the age of the centrality of shareholder value is widely regarded as beginning with a speech by Jack Welch, newly appointed CEO of GE, in 1981 at the Pierre Hotel in New York.  Significantly, his audience was drawn from Manhattan’s financial community.

Welch did not actually use the term ‘shareholder value’ in that speech, and it would not appear in GE’s annual reports until the 1990s.  But the  emphasis on the stock price was clear, and a central plank of his message was that the business would be focussed on activities in which the company held, or could rapidly establish, market leadership.  Welch soon acquired the nickname ‘neutron Jack’, after the neutron bomb, which kills people but does not damage property.  It was, perhaps, an appropriate title for the master of the empty corporation.

Along with the mantra of shareholder value came the role of the corporate executive as portfolio manager, juggling a collection of businesses as a fund manager might juggle a collection of stocks.  Acquisition, whether horizontal through the purchase of competitors or vertical through the purchase of suppliers or distributors – had always been part of the corporate economy, and as described above the 1960s had spanned a conglomerate movement (by the 1980s, most of these had flashed and burned), but only in the 1980s did divestments of ‘non-core’ business units become  a routine practice large corporations.  Such portfolio management, through sales and purchases of businesses, led to the eventual demise of Britain’s two largest industrial companies in 1990 – ICI and GEC.   Large scale financial restructuring of existing businesses became commonplace – the largest was the takeover of tobacco and food giant RJR Nabisco by the private equity house KKR, famously recounted in Barbarians at the Gate

Executives were at first slow to see the advantages to them of the reappraisal of the role of the corporation.  But the principal agent model pointed to the need for incentive schemes that motivated managers to pursue the owners’ objective of shareholder value, and share options were a mechanism, albeit asymmetric, for rewarding success in achieving that goal.  As stock markets boomed in the last two decades of the twentieth century, options made many managers rich.  Welch would not be the first chief executive of GE to be the most admired businessman in the United States, but he was certainly the wealthiest.

The growth of executive compensation coincided with the cult of the heroic CEO, of whom Welch was exemplar.  Alfred Sloan, in common with most other business leaders of his generation, was barely known to a wider public.  Nor did he devote much time to cultivating stockholders.  The rise of business journalism led to a personalisation of the corporation – Microsoft was Bill Gates, Sandy Weill was Citigroup – and in the pages of Fortune or BusinessWeek the success or failure of these businesses was attributable to the genius, or misjudgements, of these individuals.  Such an approach is another interpretation of the empty corporation – like the nexus of contracts, it denies the reality of the corporation as social unit.

More generally, the rhetoric of shareholder value exempted senior executives from fuller discussion of the legitimacy of corporate organisation and the social responsibility of the corporation.  Management authority was derived by delegation from the stockholders as owners of the corporation.  It seemed to matter little that the ‘owners’ were in reality excluded from any meaningful control:  that shareholder general meetings were little more than formalities. US corporate law was developed to entrench the position of incumbent management and the battle over ‘proxy access’ – the ability of shareholders to present their own resolutions at meetings – continues still.  Incredibly, some investment banks would charge the putative owners for ‘corporate access’ – the privilege of an audience with management[5].  Analogous to the claims of Soviet leaders to represent the dictatorship of the proletariat, the rhetoric of shareholder value served to paper over the limited degree of executive accountability to anyone at all.

And – in what would be in some respects the most telling paradox, the rise of remuneration schemes of ever increasing complexity, far from aligning the interests of managers and shareholders, proved in the twenty-first century to be the principal source of friction between them.

The global financial crisis of 2008 demonstrated the fundamental weakness of empty corporations. Most conspicuously, but perhaps not surprisingly, these weaknesses emerged in the institutions that had done most to promote them. Investment banks, traditionally partnerships but transformed into corporate entities,  had in these new structures little reality as organisations:  essentially, they provided a common platform in which individuals might pursue their own self-interest.  Levels of trust and cooperation within these institutions were low, and such reputation as the corporation itself enjoyed was to be exploited for the personal benefit of individuals they employed.  The coincidence of individual interests happened only occasionally.  In the 2007-8 crisis, such businesses would be torn apart by the greed of their own employees.  The business that ‘made nothing but money’ (Bear Stearns)[6] proved in the end an ineffective vehicle even for that.

Alternative perspectives

The term ‘stakeholder’ predates the use of ‘shareholder value’.   The word may have been coined by Edward Freeman, who in a 1963 article defined a stakeholder as a member of ‘the groups without whose support the organisation would cease to exist’.   Two differences from the contractarian perspective are evident immediately.  The emphasis is on the individual as member of a group, rather than as autonomous agent.  And the world ‘support’ entails something distinct from a contractual relationship.  The contract is essentially transactional:  ‘support’ implies a social and political context and more extensive cooperation than can be written in a contract, or achieved through financial incentives.

The shareholder value approach has always been an Anglo-American phenomenon.   A 1995 survey of CEO attitudes[7] produced the striking result that the large majority of US and UK executives asserted shareholder primacy an even larger majority of German and Japanese CEOs believed that their responsibility was to balance the interests of all stakeholders.  This is not, or not primarily, a legal difference:  the careful legal analysis of Lynn Stout finds only lukewarm support in US law for any duty to maximise shareholder value, and the 2006 UK Companies Act lays on directors the obligation ‘to promote the success of the company for the benefit of the members’, emphasising that benefit to the members is a consequence of the success of the company rather than a measure of that success.  Further, UK law explicitly rejects the model of shareholders as owners:  ‘shareholders are not, in the eyes of the law, part owners of the company’. What  shareholders own is not the company but only their shares, .

Thus the geographic variety of concepts of the corporation is the product of differing cultures rather than different statutory frameworks.  The 2008 crisis was a challenge to the validity of the Anglo-American model and, to some degree, to capitalist organisation taken as a whole.  While the massive injections of government funds that followed the collapse of Lehman stabilised the financial system, the continuing revelation of corporate abuse, by no means confined to the financial sector, contributed to the wide dissatisfaction with economic performance which has only grown in the decade that followed the global financial crisis.  In 2009 Jack Welch proclaimed shareholder value ‘the dumbest idea in the world’.[8]

Abuses in the financial system were not the result of the pursuit of shareholder value at the expense of other stakeholders.  Indeed the companies concerned have paid out previously unimagined quantities of shareholder funds in compensation for individual wrongdoing.  Hannah ended his extensive history of Barclays Bank in 1996, just as Bob Diamond joined the corporation and developed its investment bank, ultimately taking control of the whole institution before being removed by regulators in 2012:  Barclays share price languishes today at roughly the levels achieved in 1996 but in the meantime Diamond and other senior employees of the bank have become rich.  The experience of investors in other financial companies has been similarly dire, and the experience of their senior executives similarly rewarding.[9]

Abuse was accentuated in the financial sector, but not confined to it.  Revelations of aggressive tax avoidance by companies which in other respects appeared to serve their stakeholders well became widespread.  In 2016 high profile scandals at two retailers, BHS and Sports Direct, led to a government consultation paper on corporate governance and a commitment to rein in excessive remuneration.

Even at the height of the shareholder value movement, there was concern for CSR, ‘corporate social responsibility’, now more often described as ‘the ESG (environmental, social, governance) agenda’.   But this approach falls far short of recognising the challenge which Drucker identified more than half a century ago – to understand the nature of the corporation as social organisation to define and legitimise its role in the communities in which it operates.  Rather the CSR agenda attempts to answer the concerns of progressive individual who are not much interested in business – and certainly not interested in the mechanics of organising a large corporation and constructing productive corporate strategies.  The result has been a proliferation of brochures printed on recycled paper and displaying pictures of smiling figures from ethnic minorities, accompanied by bland and substantially false clichés about making profits by doing good.  This approach sidesteps the much more substantive issues of the proper role and function of the large business organisation in the global economy.

The changing concept of the corporation

GM, du Pont, Guinness and ICI were representative of the corporations whose rise Drucker, Chandler and Hannah chronicled .  These large manufacturing businesses were capital intensive and their specialist plant was dedicated to its specific purpose – .automobile assembly, petrochemical refining, brewing, etc      The nexus of contracts and shareholder value paradigms were , in essence, an attempt to interpret the modern phenomenon of the large corporation in terms of the neo-Marxist dichotomy between capital and labour: the shareholders collectively occupied the role of the capitalist owner of the plant, to which the alienated employees deliver their homogenous labour services

In 1946, and perhaps still for a few more years after that , it might have been possible to imagine that the General Motors of 1946 could be managed as a hierarchical structure, or group of hierarchical structures; and that within these structures, employees could either be directed by their senior managers or incentivised by principal agent structures through provisions such as ‘piece rates’ which related wages to the volume of output. Both Drucker had understood, Sloan perhaps less clearly, that this account did not even begin to do justice to the reality of the twentieth-century corporation – that was the purpose of their collaboration.

And by 1980 – as the ‘nexus of contracts’ theory gained academic popularity and the shareholder value slogan came into use, General Motors was losing market share to Japanese  competitors whose concept of the corporation was very different from that of a ‘nexus of contracts’. The agreements of these corporations with employees and suppliers were implicit contracts, enforced by mutual trust and expectations of continued long term relationships. The Toyota Production System, far from insisting that the assembly line be kept running at full speed, famously gave employees access to a big red button which they could press to stop the process if they perceived defects. [10]

General Motors, Coase had theorised, engaged in vertical integration to control idiosyncratic supplies that required dedicated investment, and bought less heterogeneous items as cheaply as possible in competitive markets. Toyota’s  suppliers, of both specialist and homogeneous components, formed a ‘keiretsu’, an organisational form which defied this  dichotomy between markets and hierarchies..The keiretsu, consisting of legally independent firms, large and small, was characterised by geographical proximity and historical continuity.

Japanese manufacturers, led by Toyota, benefitted from these arrangements through greater product reliability and were able to adopt ‘just-in-time’ practices with minimal stock levels and to work with suppliers to shorten model cycles. Japanese practices were imitated by US corporations and in 1994 General Motors and Toyota jointly established NUMMI (New United Motor Manufacturing Inc) to implement Japanese production systems at Fremont, California.  (Ironically, the NUMMI plant closed in 2010 after General Motors’ bankruptcy and is now the manufacturing facility of Tesla, Silicon Valley’s foray into the automobile industry).

But if the nexus of contracts model of the corporation increasingly failed to capture the historic essence, far less the  evolving nature, of the twentieth century corporation, still less could it do justice to the twenty-first century corporation. The largest corporations (by market capitalisation) today are Apple and Alphabet (the parent company of Google).  Operating assets account for only around 5% of the value of these corporations.  These businesses are not capital intensive and most of the capital resources they do use – offices, retail premises – need not be owned by the corporation that operates from them and typically is not owned by that corporation.

When the value of the business lies almost entirely in the expectation of future profits generated by a management team, much of that prospective revenue stream derived from products and activities which have not yet been imagined, the relationship between investors, management  and employees is necessarily one of partnership. The earlier observation of the divorce of ownership and control is superseded by a structure in which control is shared between these investors, management and employees and hence exercised by none of them

The stakeholding corporation

Freeman has identified three central differences between the stakeholder concept of the corporation and the shareholder value, nexus of contracts, approach.  I shall follow his illuminating taxonomy.

First, the corporation is a social organisation, not an assembly of agents who find it profitable (today) to do business with each other.  In the successful organisation, corporate personality is a reality, not just a legal construct, and corporate culture is central to business performance..  Because the corporation is a social organisation, and a continuing entity within a history and a future, it is able to operate largely on the basis of implicit contracts with employees, with suppliers and customers, and with the communities in which it operates.  These implicit contracts, shared understandings rather than legal documents (although legal documents, irrelevant unless the relationship breaks down often exist in parallel) are enforced by their association with  personal relationships and   by the common intention to develop continuing economic relationships.  Such agreements the capacity to secure ‘consummate’ rather than ‘perfunctory’ cooperation – adherence to the common objective rather than compliance with the rules.[11]

An implicit contract with the community is part of this nexus of implicit contracts.  This context is sometimes described as a ‘licence to operate’, and the term is useful, although it suggests an inappropriate formality.  The licence to operate is not, as sometimes suggested, a fee for the privilege of limited liability.  It arises from the knowledge that all property rights in a complex economy are social constructions, and regulation of such social construction is necessary to legitimate the private exercise of authority – as reflected in the considerable power held by executives of large corporations,  It should be evident that aggressive tax avoidance is a breach of this implicit contract with society.  The assertion that such actions are within the law simply misses the point.

Repeated breaches of these implicit contracts have been central to the decline in popular perception of the legitimacy of corporate activity, evident in the critique of multinationals and the associated  rejection of globalisation.  There have been too many instances of violation of the reasonable expectations of employees, the trust of customers, and the exploitation of vulnerable suppliers.

Second, the corporation is necessarily a cooperative venture.  If our economy could really be described by production functions in which homogenous capital and labour come together to create standardised products in competitive markets under conditions of instant returns to scale, there would be no need for the corporate economy.  Corporations exist because these assumptions are not fulfilled, and the successful corporation is one which creates rents through distinctive combinations of idiosyncratic factors.   This is the Penrosian model which underpins the resource based theory of strategy, and it captures the reality of the modern corporate economy far better than the Coasian tradition.  In that modern economy, as  Amar Bhidé has noted, consumers as well as suppliers, employees, managers and investors – all stakeholders –  play a role in the creation of these economic rents.

The rationale of the corporation is that the value it creates is more than the some of its parts, and a responsibility of senior executives is to determine the appropriate distribution between stakeholders of that value, bearing in mind considerations both of equity and efficiency, the contributions which different stakeholder groups have made to the creation of that value and the need to preserve that value and its sources in the future by fulfilling the expectations of different stakeholder groups.

It is hard to improve on the characterisation of this issue by Freeman, Parmar and Martin (2016).   ‘There is a “jointness” to stakeholder interests.  Each stakeholder contributions to the value that is created for the others…..  Business is fundamentally a cooperative enterprise, built to create value, trade and make ourselves, and others, better off’:   and contrast this, as they do, with the view that ‘executives have to make tradeoffs where the value created for one shareholder reduces the value created for stakeholders’.   The management responsibility for distributing the value created is necessarily a matter of fine judgement.  What is certain is that the assertion that the value added created in a business is in its entirety the property of the stockholders is a position which would fundamentally undermine the factors which give rise to that value added in the first place – and in practice has.

It is not, however, possible to calculate – even if it were appropriate to do so – what distribution of economic rent would maximise the net present value of current and future returns to shareholders.  There is no basis for any claim that creating value for all stakeholders necessarily maximises shareholder value.  It might, or it might not, and we will never know.

And third, human motivations are complex and multifaceted.  There are people for whom money is an overwhelmingly dominant motivation, and who are primarily self-interested and opportunistic, but they are defective as human beings, and generally not suitable for employment in senior positions in complex organisations.  And attempts to create organisations in the financial sector designed not only to accommodate but to attract such people have been markedly unsuccessful in creating value within the organisations themselves.  Most people benefit from interactions with colleagues, want to take pride in the organisation for which they work and from the jobs which they do, and there is clear evidence that job satisfaction plays a major part in what makes people happy.  The economic success of the corporation is essentially bound up with its success as a social organisation.

And both Drucker and Sloan knew that, even if some of their successor commentators found it possible to overlook it.


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Wilson, Sloan. The Man in the Gray Flannel Suit 2. New York: Arbor, 1984. Print.

Yoshimori, Masaru. “Whose Company Is It? The Concept of the Corporation in Japan and the West.” Long Range Planning 28.4 (1995): 2-44. Print.



[1] This section draws in particular on Drucker (1998), McDonald (2003),  Pelfrey (2006)Farber (2015), Drucker Institute,

[2] Macnamara (1996)

[3] Charles E. Wilson (1952) in: Confirmation hearings before the Senate Armed Services Committee, responding to Sen. Robert Hendrickson’s question regarding conflicts of interest. Quoted in Safire’s Political Dictionary (1978) by William Safire.

[4] Much of this work was promoted by the Olin foundation (Blundell 2006))



[7] Yoshimori (1995)


[9] Kay (2015) pp

[10] Ohno 2014

[11] A distinction introduced by Williamson (1975)  See also Hart and Moore (2008) who suggest, without further justification, that there is little additional cost to the employee in consummate cooperation

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