New Firms for a New Era
An oft touched upon subject in 3L-3S is that of an inclusive capitalism, which goes beyond just serving the owners of capital, the lack of which has been one of the key drivers of income and wealth inequalities that the world is witnessing today. This piece by Dani Rodrik delves on the why’s and how’s of the subject in the context of corporate governance where the firm must go beyond the interests of shareholders and serve the interests of workers and society at large. Indeed, he posits that workers and societies are as much ‘invested’ in the firm as investors.
“The conventional theory under which our contemporary economies operate is that firms are governed by – or on behalf of – investors. This theory posits a clear separation between owners and employees – between capital and labor. Investors own the firm and they must make all the relevant decisions. Even where this is impractical, as in larger firms with multiple investors, the presumption is that managers are “agents” of the investors – and of investors alone.
This theory of the firm rests on two fictions. First, investors are the only ones “invested” in the firm, and hence the only ones taking risks. Second, markets are competitive and frictionless, so that workers (and others closely affected by firms’ decisions, such as suppliers) can leave and go elsewhere if they do not like how a particular firm treats them.
In reality, a job is much more than a source of income. It is a crucial part of an adult’s personal and social identity. The relationships workers build and the community they acquire on the job give them purpose and help define who they are. Jobs provide workers with not just material utility, but also expressive utility. The terms of employment determine not just how much we can afford to buy, but our sense of ourselves and the extent to which our aspirations and potential are fulfilled. This is why losing a job often delivers a severe shock to our overall life satisfaction.
If markets were hyper-competitive and frictionless, and if information were perfect, none of this would matter much. Workers would enter complete contracts with investors (or their agents), taking all these considerations into account. Workers would sort themselves among firms, choosing to work for firms that give them the best combination of material benefits and expressive value. But in the real world, such complete contracts are not possible and imperfect competition is the norm, giving firms inordinate power to shape the lives of their workers.”