ABOUT THIS BOOK
How an esoteric economic theory—and its most devout believers—changed the world forever.
In the modern economy, stock price is king. The value of a corporation is measured in how it enriches its shareholders, even when doing so subtracts from long-term growth or social good. Greed, in the last half-century of corporate practice, has become very good. Company Men is a sweeping intellectual history of how shareholder value rose from the lesser-known edges of academic theory to the vanguard of corporate practice.
Historian Sean Delehanty marshals archival resources to reveal how a group of motivated consultants, activist investors, and academic economists successfully branded shareholder value as the antidote to problems of management and economic stagnation in the 1970s. In their success, they created a class of well-heeled managers who executed shareholder-value theory as an everyday practice—and at the expense of most everything else. Delehanty’s history of the modern American corporation is a sobering account of the business regime that would rule the world and produce no shortage of regrets—even amongst those who championed it. Company Men is intellectual history at its most vital, offering a surprising origin story of our economy’s discontents.
REVIEWS
“Delehanty has made a valuable contribution to the study of economics and economic policy with Company Men…An excellent read.”
— Choice
“Company Men [explores] the idea that corporations exist to maximize the value of their shareholders’ investments, focusing on the history of this idea, why corporations chose to adopt it, and what it has meant for Americans.”
— Journal of Economic Literature
“It’s not a given that a business would be managed for the sake of investors rather than its employees, local community, or some other social good. Yet, that narrow understanding of what private enterprise is all about has become an assumption held by capitalism’s champions and critics. Delehanty explains how this happened, what the consequences have been, and what could have been different along the way.”
— A Public Witness
“Richly researched and compellingly crafted, Company Men provides a much-needed history of the ‘shareholder value revolution’ that transformed American capitalism. Expertly navigating the complex world where economic theory and business practice meet, Delehanty explains how a community of managers, intellectuals, and lobbyists refashioned the fundamental ideology of corporate management. In so doing, Delehanty offers a profound new understanding of the origins of the bifurcated, unequal economy that we now accept as normal.”
— Benjamin C. Waterhouse | University of North Carolina at Chapel Hill
“For the past generation, Americans have taken for granted that corporations exist to create shareholder value. Yet this idea is a radical departure from the past. Delehanty traces the rise of shareholder value from the conglomerate mergers of the 1960s to the bust-up takeovers of the 1980s and the pervasive spread of stock-based compensation. Through it all, he shows the powerful role played by the ideas and actions of economists—for better and worse.”
— Jerry Davis | University of Michigan
TABLE OF CONTENTS
Introduction: The Other Shock Therapy
DOI: 10.7208/chicago/9780226843704.003.0001
[Political Economy;Business History;Corporate Social Responsibility]
In 2019, the CEOs of America’s largest companies announced that their companies’ decisions to prioritize shareholder value had put the “American dream” at risk and that, going forward, they would run their companies with a “fundamental commitment to all of our stakeholders” in mind. While there is little evidence that America’s largest companies have truly moved beyond shareholder value maximization, the fact that they would identify it as a serious threat to the “American dream” spoke to the importance of this concept for explaining why the economic growth of the past several decades has been so unevenly shared.A brief survey of the history of managerial capitalism from the turn of the twentieth century to the 1960s shows that the debate about the place of the large corporation within American society has been instrumental in determining the structure of the nation’s political economy. This book is the story of how a group of economists created a new argument about the purpose of the corporation based around shareholder value maximization, and how management consultants and activist investors carried this argument into the heart of American business and what that has meant for Americans.
Chapter 1. The Conglomerates
DOI: 10.7208/chicago/9780226843704.003.0002
[Business History;Conglomerate;1960s]
The downfall of the conglomerates at the end of the 1960s fatally discredited managerial capitalism and set the stage for the shareholder value revolution. The story of the rise and fall of Litton Industries, one of the largest and most admired of the conglomerates, showed why investors both flocked to the conglomerates over the course of the 1960s and fled from them once things started to go wrong near the end of that decade. When Litton and other conglomerates did begin to falter, investors and media observers quickly turned on them. Though the 1960s ended with a public backlash against the kind of hostile takeovers and creatively financed mergers that built the conglomerates, the high levels of merger activity during that decadehelped pave the way for the takeover binge of the 1980s. With the fall of the conglomerates calling the entire structure of the corporation into question and new financial theories of the firm gestating in the minds of economists, American businesses were poised for a new round of hostile takeovers in years to come, one that would elevate shareholders to the center of the nation’s political economy.
Chapter 2. Can the Corporation Survive?
DOI: 10.7208/chicago/9780226843704.003.0003
[Intellectual History;Corporate Social Responsibility;Financial Economics]
Shareholder value theory was developed at the University of Rochester in the wake of the conglomerate crash and amidst the economic malaise of the 1970s. William Meckling, the dean of the university’s business school, and an iconoclastic finance professor named Michael Jensen, attempted to create a comprehensive theory of political economy which demonstrated that capitalism and democracy were incompatible and prioritized the protection of property rights at all costs. Though Jensen and Meckling never completed this project, the theory of the firm that they developed as part of it, which was published as a journal article in 1976, became the foundational text of the shareholder value revolution. In their article, the two economists argued that the corporation was merely a “nexus of contracts,” a legal fiction that people formed to create wealth. Jensen and Meckling argued that corporate managers had no responsibilities to society beyond maximizing the value of their shareholders’ investments. Instead of allowing managers to hold uncontested control over their companies, Jensen and Meckling believed that financial markets needed to be empowered to regulate managerial behavior. The challenge was determining out how to make that happen.
Chapter 3. The Fourth Merger Wave
DOI: 10.7208/chicago/9780226843704.003.0004
[Finance;1970s;Hostile Takeovers]
Jensen, Meckling, and their fellow finance theorists could not have known it at the time they were creating their financial model of the corporation, but the hostile takeover movement that would place shareholder value maximization at the heart of American political economy was already underway. The explosion of hostile takeover activity in the 1980s that marked the ascent of shareholder value was part of a larger wave of mergers that began in 1974. This fourth merger wave itself was sparked by a transformation of the nation’s financial sector as Wall Street struggled to cope with the effects of the conglomerate crash and stagflation during the 1970s. As the relatively sedate, pre-1970s version of Wall Street gave way to one marked by intense competition between firms and hyper-active trading, a cohort of aggressive young takeover specialists won fame and riches as the stars of a new generation of financial professionals. This chapter examines the first half of the fourth merger wave, which ran from 1974 to 1981, in order to highlight continuities with pervious merger waves during this period and the shareholder-focused departures that would come after the election of Ronald Regan.
Chapter 4. The Reagan Revolution
DOI: 10.7208/chicago/9780226843704.003.0005
[Hostile Takeover;1980s;Finance;Business History;Political Economy]
Reagan’s victory kicked off the “deal decade” of the 1980s in which hostile takeovers were front-page news and seemingly any company could be bought and sold almost overnight. For the people who had to live through this deal decade, the world seemed to be turning upside down, and they sought easy-to-understand reasons why and actionable ideas about how to respond. Shareholder value evangelists rose to meet this need by taking a set of abstract, but pointed, academic arguments and fashioning them into both a diagnosis of American businesses’ woes as well as the cure. Armed with their retelling of shareholder value theory, these figures could claim that the woes of American business were principally due to corporate managers hoarding money that belonged to shareholders. If this was the problem, then the solution was simple: break managers’ hold over their companies and force them to do whatever it took to raise stock prices and give money back to shareholders. Thanks to the work of financial economists, activist investors led by the larger than life “corporate raiders” could claim that they were simply trying to restore shareholder value that had been destroyed by incompetent managers.
Chapter 5. The Eclipse of the Public Corporation
DOI: 10.7208/chicago/9780226843704.003.0006
[Leveraged Buyout;Private Equity;Business History;Finance]
As important as financial economists’ theories were in shifting the intellectual environment of American business, they were of little immediate use to business managers in the 1980s and 1990s who sought to protect their companies from corporate raiders and restless investors. Fortunately for managers who were searching for ways to protect themselves by maximizing shareholder value, the hostile takeover wave of the 1980s also gave rise to a series of organizational and managerial techniques that offered to teach “value based management” to corporate leaders. During the height of the takeover boom business leaders and eager investors focused on the leveraged buyout (LBO), one of the riskiest, but also potentially rewarding, of these new techniques. Though the end of the fourth merger wave in 1989 temporarily halted the wave of LBOs, the buyout boom of the 1980s did reshape American political economy thorough its two greatest legacies: the emergence of the modern private equity industry, which has used buyouts to reshape large swaths of the American economy,and the rise of a cohort of so-called value consultants who offered the managers of public companies restructuring programs designed to help them adopt some of the managerial strategies associated with LBOs.
Chapter 6. Give Stock a Chance
DOI: 10.7208/chicago/9780226843704.003.0007
[Executive Pay;Political Economy;Income Inequality;1990s;Stock Options]
Executive compensation was the final and decisive battlefield in the shareholder value revolution. By the early 1990s, it seemed like the conditions were right for academics, consultants, investors, and politicians to press for widespread compensation reform and to force companies to tie executive pay to performance. In an ironic twist of fate, corporate managers, with the help of so-called compensation consultants and scores of reformist investors and politicians, were able to harness the energies behind the drive for managerial accountability that powered the shareholder value revolution and use them to help create a system of managerial compensation that provided them with previously unthinkable amounts of money at very little risk. At the heart of this irony was the issue of executive compensation. As reformers cheered them on, corporate directors awarded executives with ever-larger compensation packages formed out of stock options that would supposedly tie executives’ pay to the financial performance of their companies. While in theory, shifting executive pay into stock options would force those executives to risk their salaries on the performance of their companies, the simplistic form of options that directors showered on executives allowed those executives to make vast fortunes with very little risk.
Conclusion: The End of Enron and the Last Man
DOI: 10.7208/chicago/9780226843704.003.0008
[Political Economy;Economic Inequality;CEO Pay;21st Century;Corporate Social Responsibility]
The shareholder value revolution did not end with the victory of shareholders over managers as some scholars have characterized it;instead, it ended with a truce between the two sides that was cemented by stock options. Shareholders agreed to allow managers to run their businesses with little interference if managers agreed to focus on keeping stock prices high. The ability of managers to boost their own compensation through manipulation of their options contracts and investors’ willingness to support them was disheartening for the academic progenitors of the shareholder value revolution, especially amidst the spectacular downfall of companies like Enron and WorldCom in the early years of the new century. Michael Jensen himself expressed his disappointment with the outcome of the shareholder value revolution he helped to start, and he criticized corporate managers for paying too much attention to Wall Street. Of course, by this time, the managers and investors who had enriched themselves through their refashioning of the ideas behind shareholder value maximization no longer had any interest in what these scholars had to say, and these economists’ critiques fell on deaf ears.
