Beyond Managerialism: Investor Capitalism?
Capitalism, in most large public corporations, has been subtly transformed from a system of dominance by the suppliers of capital to a system of dominance by the managers, dubbed “managerialism.” In many respects, managerialism is beneficial to investors and other enterprise constituencies, since managers’ rewards typically grow with the profitability of the enterprise. But managerialism permits drastic wastes of resources when managers hang on to their jobs after they have become inefficient or spend lavishly to defend themselves against takeover bids. Derivative suits, shareholder proposals, independent directors, and other prescriptions have failed to stifle managerial abuses. This is the message of Part I.
Through most of the twentieth century, managerialism appeared to be an inescapable consequence of the dispersion of share ownership in tiny fractions among tens of thousands of holders. But the last quarter of the century witnessed a dramatic concentration of shareholdings in investment institutions- principally pension funds, mutual funds, endowments, and stock ownership plans. The holdings of these institutions are so large that a manageable number of funds could feasibly join hands to supervise managers in a new system of control that might be called “investor capitalism.” This is the thesis of Part II.
The remainder of the Article explores the reasons why funds have not exerted their potential power and speculates on the consequences of institutions’ exerting it. Part III examines the motivation of institutions and their components. One problem is the dilemma of “collective goods.” A portfolio manager gains nothing for himself by improving the profitability of General Motors (for instance), since the gains will be shared by all the other portfolio managers who are in competition with the one that spent his own time and money in producing the improvement. Another problem is the pressure that fund sponsors can exert on portfolio managers. The managers of General Motors, for example, might press trustees of General Motors’ pension fund to support the managers of takeover targets, even though the fund would benefit from the bid’s success.
If institutional managers were to surmount the dilemma of collective goods, the pressure of sponsors, and other motivational impediments, they would confront a regime of federal securities regulation that is indifferent in some respects, and hostile in others, toward investors’ exercise of power over managers. These impediments are reviewed in Part IV.
Part V offers speculations on the consequences that might flow from institutional investors’ exercise of their potential power over corporate managers. At best, this change might accelerate the removal of inefficient managers and block the waste of resources on takeover battles. At worst, it might lead to sacrificing long-term goals for short-term gains, or to enhancing the entrenchment of enterprise managers through alliances between them and institutional managers. A few revisions of legislation and case law would enhance the probability of beneficial consequences.
In conclusion, the Article proposes changes in public and private attitudes and amendments of laws and regulations to advance the cause of “investor capitalism.”