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Starting in 1970

08/10/19 | by david2 [mail] | Categories: General

Jensen agreed with Berle’s starting point: Corporate managers were unaccountable because shareholders could not restrain them. But rather than seeing a remedy in checks exerted by regulators and organized labor, Jensen proposed to overhaul the firm so that ownership and control were reunited. Executives should be rewarded more with stock and less with salary, so that they would think like shareholders and focus on the profits that shareholders wanted. Managers who failed to generate a good return would see their stock prices languish, which would create tempting takeover targets. A market for corporate control would redouble the pressure on bosses to behave like owners. Successful takeovers, in turn, would shift corporations into the hands of single, all-powerful proprietors, capable of overseeing management more effectively than scattered stockholders could. In sum, Jensen’s prescriptions inverted Berle’s. The market could be made to solve the problem of the firm. Government could pull back from regulation.


Yet a large cost eluded Jensen’s calculations. The social contract of the Berle era was gone: the unstated assumption of lifetime employment, the promise of retirement benefits, the sense of community and stability and shared purpose that gave millions of lives their meaning. Berle had viewed the corporation as a social and political institution as much as an economic one, and the dismembering of corporations on purely economic grounds was bound to generate fallout that had not been accounted for. Meanwhile, Jensen’s market-centric mind-set permeated finance, enabling opaque risks to build up in banks and other trading houses. As the collapse of Enron and other corporate darlings revealed, a good deal of non-market-related accounting fraud compounded the fragility. Even before the 2008 crash, Jensen disavowed the transactional culture he had helped to legitimize. Holy shit, Jensen remembers saying to himself. Anything can be corrupted.

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