Influence of Public Policy on Governance: Is There a Role for Shareholders as Stakeholders?

Article excerpt

ABSTRACT

This study examines whether corporations should operate solely to maximize shareholder value or to serve a more broadly defined, diverse set of social interests. This paper reviews how American public policy toward corporations has rested upon different answers to this question, from colonial times to the twenty-first century. It does so in order to provide a historical context in which to view the social and ethical issues that underlie recent corporate scandals. In the last several years, powerful Chief Executive Officers (CEO's) have been forced out by the board members, employees, shareholders, and the government for poor performance or ethical improprieties. Boardroom scandals and corruption of companies during periods of crisis (Murray, 2007) have created a sense of paranoia and a zero-tolerance atmosphere. As Public corporations are in the midst of radical change due to governmental oversight and the role of the CEO may be greatly diminished as a result. American corporate finance and law has been shaped by the failures of bold, visionary speculators whose reckless gambles invariably attempted a bridge too far and inflicted great damage on others when they collapsed. In turn, their debacles spurred the reforms of the New Deal and the Sarbanes-Oxley Act. Compounding the scandals is an ongoing cat-and-mouse game between regulators efforts to police the factors that lead to failures and efforts by corporate America (Skeel, 2005) to evade the current regulation in the name of efficiency and flexibility. But there is also a silver lining to the stunning failures: the outrage they provoke galvanizes public opinion in favor of corporate reform. This study offers a strikingly new diagnosis of the corporate governance in the context of recent corporate scandals that raise ethical questions related to the duties and obligations of corporate directors and officers, and lessons to be learned for global corporations.

Introduction

Across the nation and around the globe, Chief Executive Officers (CEOs) are feeling pressure to deliver consistent improvement in earnings growth regardless of the economic environment in which they are working. This pressure is exerted by their companies' shareholders and boards of directors. This study examines whether corporations should operate solely to maximize shareholder value or to serve a more broadly defined, diverse set of social interests. This paper reviews how American public policy toward corporations has rested upon different answers to this question, from colonial times to the twenty-first century. It does so in order to provide a historical context in which to view the social and ethical issues that underlie recent corporate scandals. In the last several years, powerful CEO's have been forced out by the board members, employees, shareholders, and the government for poor performance or ethical improprieties. Boardroom scandals and corruption of companies during periods of crisis (Murray, 2007) have created a sense of paranoia and a zero-tolerance atmosphere. As Public corporations are in the midst of radical change due to governmental oversight and the role of the CEO may be greatly diminished as a result. American corporate finance and law has been shaped by the failures of bold, visionary speculators whose reckless gambles invariably attempted a bridge too far and inflicted great damage on others when they collapsed. In turn, their debacles spurred the reforms of the New Deal and the Sarbanes-Oxley Act. Compounding the scandals is an ongoing cat-and-mouse game between regulators efforts to police the factors that lead to failures and efforts by corporate America (Skeel, 2005) to evade the current regulation in the name of efficiency and flexibility. But there is also a silver lining to the stunning failures: the outrage they provoke galvanizes public opinion in favor of corporate reform. This study offers a strikingly new diagnosis of the influence of public policy on corporate governance. …