CEOs as partners

Rich Booth has an interesting little paper, Five Decades of Corporation Law - From Conglomeration to Equity Compensation. Here’s some of the abstract:

This brief essay recounts developments in corporation law over the last fifty years. It begins with the rise of finance capitalism and the conglomerate corporation which was followed by the emergence of hostile takeovers in the late 1970s and 1980s. . . . . Target managers vigorously sought ways to defend themselves from takeover. But the genie was out of the bottle. Although the initial motivation for takeovers was the bust up of inefficient conglomerate companies - because investors figured out that they could roll their own diversified portfolios more cheaply - diversified investors also figured out that they could tolerate more risk. So they demanded higher returns from all companies. Faced with this irresistible force, target managers also sought ways to share the gains. The result was that executive compensation evolved from a salary and bonus system to one based on stock options and other forms of equity. . . . . Ironically, the primary justification for takeovers had been that target companies tended to hoard cash and use it for uneconomic growth. Thus, the takeover did not die because of defensive tactics and protectionist state takeover laws. It simply went in house. The implications of this evolution are significant. For one, it calls into question the traditional notion that the stockholders own the company and that the CEO is a glorified employee. It may make more sense to think of stockholders and managers as in partnership with each other with the board of directors charged primarily with the role of arbitrating the competing claims of these two groups of owners. . . . .

Rich expressed some of this in an earlier article in the Illinois “uncorporation” symposium a few years back: Executive Compensation, Corporate Governance, and the Partner-Manager, 2004 U. Ill. L. Rev. 269.

Let me suggest a different subtitle for this work: From Corporation to Partnership. The evolution of CEOs from employees to partners is only part of this bigger story. Takeovers are, indeed, the mechanism of change, but I think the change is more drastic than Rich indicates. Once we give the managers the incentives of ownership we lose some of the rationale for giving shareholders strong voting and fiduciary rights. Why not make them glorified creditors? As long as they get their cash, we don’t have as much need for these monitoring devices. Then we can also scrap the monitoring board and other costly paraphernalia of the corporate form.  For more on this, see my Rise of the Uncorporation.