Legal Commentary

I wanted to build a little more on my thoughts about the role of "shareholder primacy" in "The Big Squeeze."  The book argues that "[t]he hugely greater importance of the shareholder over the worker represents a sea change in capitalism."  It describes how the "shareholders first" mentality that now pervades publicly-traded corporations is harmful to workers.  Instead of maintaining the social contract of high wages and few layoffs, companies now lay off workers even in good times, and they continually seek to cut wages and benefits.  The pressure from the moves comes from globalization, certainly, but also from shareholders who reward layoffs and punish generosity to workers.  Indeed, Greenhouse notes: "Ironically, managers of workers' pension funds often served as a catalyst for laying off workers."

Conversely, the examples of "good companies" are often privately held.  One example is Patagonia, the California outdoors apparel company that provides its workers with extensive scheduling flexibility and great benefits.  Greenhouse provides the following thoughts from Patagonia's principal owners:

Yvon and Malinda Choutard acknowledge that the company they own could not be nearly so generous toward its workers or the environment if it had gone public.  "I went through the process of what it means to go public," Choulinard says.  "It would have been the death of my company.  You lose all power.  You can't take risks.  The accountants would say, 'When you do this or that, there is no benefit to the company.  What are you doing with the other people's [the shareholders'] money?'"

Larry Ribstein has written extensively about the possibilities of the "uncorporation" -- private partnerships or LLCs that are more specifically tailored to the parties' preferences.  Ribstein focuses on how these firms have key partnership-type features such as distribution and liquidation rights and strong-form manager incentives.  Because of these features, he argues that uncorporations will care less about corporate social responsibility or shareholders-rights initiatives.  However, uncorporations might also be suited to run in a different direction -- to be more oriented towards social responsibility than the general market would allow.  With a nimble, private structure, uncorporations could make decisions that the market might normally frown upon.

All of this is to say that union pension funds and other employee-oriented investors might want to think more carefully about how they invest their money.  It feels good to be touting shareholders' rights when it comes to issues like executive compensation.  But as "Big Squeeze" points out, shareholder primacy may not be the best way to support pro-worker changes in the economy.  Uncorporations may provide new ways for funds to invest in companies with employee-oriented policies.