The US stock market and the governance of innovative enterprise

Abstract

During the 1980s and 1990s the argument that "maximizing shareholder value" results in superior economic performance came to dominate the corporate governance debates. This shareholder-value perspective represents an attempt to construct a theory of corporate governance that is consistent with the neoclassical theory of the market economy. I outline the rationale for the shareholder-value perspective, and show that, rooted in agency theory, it lacks a theory of innovative enterprise. To go beyond agency theory and its shareholdervalue perspective, I present a framework for analyzing the functions of the stock market in the business corporation and the influence of these functions on the innovation process. I then apply this framework to the experience of the US ICT industries over the past decade to consider empirically the influences of the five functions of the stock market-summarized as "creation", "control", "combination", "compensation", and "cash"-on innovative enterprise in US high-technology industries. In the conclusion, I draw out the implications of the changing functions of the stock market for the governance of innovative enterprise.

The New Economy Business Model and Sustainable Prosperity

“…As I have argue at length elsewhere (Lazonick 2007c;2008, ch. 6), increases in stock prices can be driven by innovation, speculation, or redistribution.…”

“…Yet, as I have shown elsewhere (Lazonick and O'Sullivan 2000;Lazonick 2007c), it is a perspective that fails to address the conditions under which business enterprises are in fact innovative. In particular, the ideology of "maximizing shareholder value" ignores the role of workers, communities, and governments in making investments in the innovation process without any guarantee of a return.…”

“…Through its creation and compensation functions the US stock market supported the reallocation of capital and labor from OEBM to NEBM, while through its combination function it supported the rapid growth of New Economy firms. As such, the stock market became integral to NEBM in the 1990s and 2000s, especially in industries -most notably ICT but also biotech (Lazonick 2007c;) --that have enabled the United States to maintain its position of global high-tech leadership. At the same time, however, the augmented role of the stock market in NEBM has since the 1980s rendered US economic growth unstable and inequitable.…”

“…The offer of broad-based stock options, which would only become valuable with an IPO or a private sale to a listed company, encouraged members of the high-tech labor force to reallocate their services from OEBM to NEBM. Once a new venture had done an IPO, the combination function then became important for the growth of New Economy firms, as epitomized by Cisco's growth-through-acquisition strategy; From 1993 through 2000 Cisco did 71 acquisitions for $35.2 billion, of which over 98 percent was paid in Cisco stock (Lazonick 2007c(Lazonick , 1012 (Noone and Rubel 1970;Wilson 1986;Reiner 1989, ch. 5).…”

The Transnationalization of Financial Reporting Standards

“…Notions of "agency" -and the idea that shareholders were the only group whose interest should be maximized by a corporation -became fashionable and influential not only in the US, but more widely. In 1980 stock options accounted for 19% of CEO remuneration in large United States corporations but it had risen to about 49% by 2000 (Lazonick, 2007). Anecdotal evidence strongly suggests that it has continued to rise further since then.…”