9 - European corporate governance: Is there an alternative to neo-liberalism?

Summary

Introduction

One of the most significant developments in economic theory in recent decades is the emergence of a neo-liberal approach to governing the firm, which has become commonly known as the ‘shareholder’ or the ‘shareholder-value’ model. This approach, which is based on the conceptionalization of the firm as a set of contracts between ‘principals’ and ‘agents’, has achieved a dominant position in academic thinking and policy making in the field of corporate governance at the EU level. Most advocates of this approach do not explicitly identify themselves as neo-liberals; nevertheless, the tenets of this approach clearly fit the definition of neo-liberalism offered in the first chapter of this book. The shareholder model is based on a strong faith in the efficiency of markets because it claims that a properly functioning stock market can best measure the value of firms and efficiently allocate capital to the most profitable investment projects. Furthermore, the stock market is a key element in creating a ‘market for corporate control’, which allows ownership and management of underperforming firms to be transferred – if necessary, against the will of incumbent managers and employees – to actors that will restructure the firm to increase efficiency. The shareholder model of governance, it is argued, has positive welfare effects for stakeholders in the firm (including employees) and, therefore, for society as a whole.

In contrast with laissez-faire approaches to corporate governance, the shareholder model accepts the need for a strong state role in setting and enforcing rules to enable the stock market to function properly. In particular, so-called minority shareholders (i.e., those shareholders holding relatively small proportions of stock in a company) must be protected from a host of actors that might exploit information or power advantages to extract value from the firm in their own interests. The shareholder model also contrasts with the broad class of ‘stakeholder’ theories, which value worker participation, state-led industrial policy, and (more recently) environmental protection.