Summary
The corporation is where capital meets labor, a symbiotic relationship in which one cannot function without the other. Workers influence governance through various channels, as those who are governed inevitably influence the process of governing through their actions. To illustrate, I describe cases in which workers forced transparency, restrained managerial compensation, and impacted corporate performance. I summarize empirical evidence that properly motivating labor through employee stock ownership plans increases worker productivity, benefiting both shareholders and workers. However, socio-political and legal institutions bestowing workers with excessive influence vis-à-vis investors induces under performing management to form an alliance with labor, wherein the management engages in value-destroying decisions to garner worker support. American firms may not be immune from harmful effects of such alliances, especially those past their glory days. I conclude by calling for a balanced governance system geared toward shareholder value enhancement, which at the same time encourages worker participation and remains cognizant of their welfare. Such a system, I believe, will lead to greater welfare for all stakeholders.
To reach these conclusions, I begin by reviewing the rationale for shareholder value maximization. Although its importance is reaffirmed, single-minded focus on shareholder value at the expense of all other stakeholders is shortsighted. I also review recent articles combining the traditional corporate finance approach with the law and finance paradigm, which helps identify firm attributes explaining within country variation in individual companies’ governance and disclosure practices. These papers also lead to important insights into the international flow of capital and explain why foreign acquirers cherry pick in cross-border acquisitions when they enter emerging markets.