From hired hands to co-owners: Compensation, team production, and the role of the CEO

Business Ethics Quarterly

Volumn 19, Issue 4, 2009, Pages 471-496

  Boatright, John R ^a  

^a NONE

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[No Author keywords available]

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EID: 70350783793     PISSN: 1052150X     EISSN: None     Source Type: Journal    
DOI: 10.5840/beq200919429     Document Type: Article

References (160)

1. Ernie Englander and Allen Kaufman, "The End of Managerial Ideology: From Corporate Social Responsibility to Corporate Social Indifference, "Enterprise and Society 5 (2004): 404-50.
2. Michael C. Jensen and Kevin J. Murphy, "CEO Incentives-It's Not How Much You Pay, But How," Harvard Business Review May-June 1990: 138.
3. Englander and Kaufman, "The End of Managerial Ideology," 417.
4. Bruno S. Frey and Margit Osterloh, "Yes, Managers Should Be Paid Like Bureaucrats," Journal of Management Inquiry 14(2005): 96-111.
5. Margaret M. Blair and Lynn A. Stout, "A Team Production Theory of Corporate Law" Virginia Law Review 85 (1999): 247-328.
6. Englander and Kaufman also apply the team production model of Blair and Stout to the selection and functioning of corporate boards.
7. Allen Kaufman and Ernie Englander, "A Team Production Model of Corporate Governance," Academy of Management Executive 19 (2005): 9-22.
8. For Frey and Osterloh, the application of team production analysis to the CEO and other managers is a feature which they add to the Blair and Stout team production model and which distinguishes their common pool approach from this model.
9. Frey and Osterloh, "Yes, Managers Should Be Paid Like Bureaucrats," 100.
10. Englander and Kaufman, "The End of Managerial Ideology" 409-11.
11. Adolf A. Berle Jr., and Gardiner C. Means, The Modern Corporation and Private Property (New York: Macmillan, 1932).
12. Englander and Kaufman, "The End of Managerial Ideology" 406.
13. Ibid., 410.
14. Wilbur G. Lewellen, Executive Compensoiion in Large Industrial Corporations (New York: Columbia University Press, 1968).
15. Englander and Kaufman, "The End of Managerial Ideology," 412
16. Lewellen, Executive Compensation in Large Industrial Corporations, 211-26.
17. Englander and Kaufman, "The End of Managerial Ideology" 413-14.
18. Michael C. Jensen, "The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems," Journal of Finance 48 (1993): 831-80.
19. Kevin J. Murphy, "Politics, Economics, and Executive Compensation," University of Cincinnati Law Review 63 (1995): 713-46
20. see 718-21.
21. Ibid., 722.
22. Lucian Bebchuk and Yaniv Grinstein, "The Growth of Executive Pay" Oxford Review of Economic Policy 21(2005): 283-303.
23. Michael C. Jensen, Kevin J. Murphy, and Eric G. Wruck, "Remuneration: Where We've Been, How We Got Here, What Are the Problems, and How to Fix Them" Harvard Business School NOM Research Paper No. 04-28 (2004): 25.
24. Brian J. Hall and Jeffrey B. Liebman, "Are CEOs Really Paid Like Bureaucrats?" Quarterly Journal of Economics 113 (1998): 653-91.
25. Margaret M. Blair, "CEO Pay: Why Such a Controversy?" Brookings Review 94(1994): 23-31.
26. The Omnibus Budget Reconciliation Act of 1993 added Section 162(m) to the Internal Revenue Code, which removed the tax deductibility for corporations of salary compensation over $1 million. For its effect
27. see Nancy L. Rose and Catherine Wolfram, "Has the 'Million Dollar Cap' Affected CEO Pay?" American Economic Review 90(90) (2000): 197-202.
28. and Brian J. Hall and Jeffrey B. Liebman, "The Taxation of Executive Compensation," in Tax Policy and the Economy, vol. 14, ed. James Poterba (Cambridge, Mass.: NBER & MIT Press, 2000).
29. Hall and Liebman, "Are CEOs Really Paid Like Bureaucrats?" 656.
30. Xavier Gabaix and Augustin Landier, "Why Has CEO Pay Increased So Much?" Unpublished Manuscript, January 8, 2007.
31. Zajac and Westphal observe that theory is important symbolically in gaining the acceptance of stock options and the resulting high compensation. They cite both agency theory and human resource justifications as instrumental in securing the acceptability of CEO compensation.
32. Edward J. Zajac and James D. Westphal, "Accounting for the Explanations of CEO Compensation: Substance and Symbolism," Administrative Science Quarterly 40 (1995): 283-308.
33. For the development of the theory of the firm in economics
34. see Armen A. Alchian and Harold Demsetz, "Production, Information Costs, and Economic Organization," American Economic Review 62 (1972): 777-95
35. Benjamin Klein, Robert A. Crawford, and Armen A. Alchian, "Vertical Integration, Appropriable Rents, and the Competitive Contracting Process" Journal of Law and Economics 21(1978): 297-326
36. Michael C. Jensen and William H. Meckling, "Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure" Journal of Financial Economics 3 (1983): 305-60
37. Eugene F. Fama and Michael C. Jensen, "Separation of Ownership and Control" Journal of Law and Economics 26 (1983): 301-25
38. Steven N. S. Cheung, "The Contractual Theory of the Firm" Journal of Law and Economics 26 (1983): 1-22
39. and Oliver E. Williamson, The Economic Institutions of Capitalism (New York: Free Press, 1985).
40. For the development of this theory in corporate law
41. see Frank H. Easterbrook and Daniel R. Fischel, The Economic Structure of Corporate Law (Cambridge, Mass.: Harvard University Press, 1991)
42. William A. Klein, "The Modern Business Organization: Bargaining under Constraints," Yale Law Journal 91(1982):1521-64.
43. Oliver Hart, "An Economist's Perspective on the Theory of the Firm," Columbia Law Review 89 (1989): 1757-73
44. and Henry N. Butler, "The Contractual Theory of the Firm," George Mason Law Review 11(1989): 99-123.
45. Jensen, Murphy, and Wruck, Remuneration, 100.
46. Of course, corporate boards may be mistaken about the cost and effectiveness of stock options as incentives.
47. see Brian J. Hall and Kevin J. Murphy, "The Trouble with Stock Options," Journal of Economic Perspectives 17 (2003): 49-70.
48. Many scholars who accept that CEOs ought to be compensated in ways that provide incentives to increase shareholder wealth nevertheless argue that current compensation practices fall to do this.
49. See Lucian Bebchuk and Jesse Fried, Pay Without Performance: The Unfulfilled Promise of Executive Compensation (Cambridge, Mass.: Harvard University Press, 2004).
50. Englander and Kaufman, "The End of Managerial Ideology," 438.
51. Ibid., 438.
52. Although Englander and Kaufman claim that in the older role, CEOs had a fiduciary duty to non-shareholder constituencies because of a fiduciary duty to the corporation, this fiduciary duty to non-shareholder constituencies is of fairly recent origin and has been held in only a few very narrow instances. However, the general lack of any legal fiduciary duty to non-shareholder constituencies does not mean that executives and directors have no moral and legal non-fiduciary duties to non-shareholder constituencies.
53. See Richard Marens and Andrew Wicks, "Getting Real: Stakeholder Theory, Managerial Practice, and the General Irrelevance of Fiduciary Duties Owed to Shareholders," Business Ethics Quarterly 9 (1999): 273-93.
54. Joseph A. Schumpeter, Capitalism, Socialism, and Democracy (New York: Harper & Row, 1942).
55. Englander and Kaufman observe that the changes that caused managers to be a special class "fostered a tournament for the CEO title and bestowed on the winner the right to a proprietary fortune"
56. Englander and Kaufman, "The End of Managerial Ideology" 432
57. For discussions of the economics of tournaments in CEO compensation
58. see Edward Lazear and Sherwin Rosen, "Rank-Order Tournaments as Optimum Labor Contracts," Journal of Political Economy 89(1981): 841-64
59. Sherwin Rosen, "Prizes and Incentives in Elimination Tournaments" American Economic Review 76 (1986): 701-15
60. and Charles A. O'Reilly III, Brian G. Main, and Graef S. Crystal, "CEO Compensation as Tournament and Social Comparison: A Tale of Two Theories" Administrative Science Quarterly 33 (1988): 257-74.
61. Milton Friedman, Capitalism and Freedom (Chicago: University of Chicago Press, 1962), 133.
62. Although Englander and Kaufman probably overstate the demise of corporate social responsibility, its acceptance in corporate America has undergone a significant change in which socially responsible activities are undertaken on the grounds that they benefit shareholders.
63. For discussions of the so-called"business case" for CSR
64. see David Vogel, The Market for Virtue: The Potential and Limits of Corporate Social Responsibility (Washington, D.C.: The Brookings Institution, 2005)
65. and Craig N. Smith, "Corporate Social Responsibility: Whether or How?" California Management Review 45 (2003): 52-76.
66. Englander and Kaufman, "The End of Managerial Ideology" 415.
67. See also Kaufman and Englander, "A Team Production Model of Corporate Governance," in which the authors argue that the present-day role of the boards, like the present-day role of the CEO, is inefficient and ought to be redesigned in accord with a team production model of the firm.
68. The nirvana fallacy is generally attributed to Harold Demsetz, "Information and Efficiency: Another Viewpoint," Journal of Law and Economics 12 (1969): 1-22.
69. Englander and Kaufman, "The End of Managerial Ideology," 439.
70. Michael C. Jensen, "Value Maximization, Stakeholder Theory, and the Corporate Objective Function," Business Ethics Quarterly 12 (2006): 235-56.
71. Englander and Kaufman, "The End of Managerial Ideology," 407.
72. Bebchuk and Fried, Pay Without Performance.
73. Frey and Osterloh, "Yes, Managers Should Be Paid Like Bureaucrats" 99.
74. As Frey and Osterloh note, in addition to the underinvestment of firm-specific assets, the problems in team production to be solved also include free-riding by team members and information asymmetry.
75. Ibid., 99.
76. Ibid., 100.
77. Frey and Osterloh's common pool approach incorporates the team production model but adds the element of prosocial intrinsic motivation to solve the problem of how a CEO can have firm-specific investments and still be a mediating hierarch. Although this added element may strengthen the team production model by solving an alleged problem with it, prosocial intrinsic motivation need not be considered in this article's examination of the team production model. For present purposes, it is the soundness of the team production model-on whose main elements all holders agree-and not of Frey and Osterloh's expanded version that is critical to evaluating the criticism of England and Kaufman and of Frey and Osterloh of the changed CEO role. Thus, in this article, the team production model and the common pool approach are considered as one, and the merits of Frey and Osterloh's account of prosocial intrinsic motivation need not be further considered.
78. Frey and Osterloh cite Shane A. Johnson, Harley B. Ryan, and Yisong S. Tian, "Executive Compensation and Corporate Fraud" unpublished manuscript (2005).
79. Kaufman and Englander, "A Team Production Model of Corporate Governance," 9.
80. Thomas Piketty and Emmanuel Saez, "Income Inequality in the United States, 1913-1998," Quarterly Journal of Economics 118 (2003): 1-39
81. and Thomas Piketty and Emmanuel Saez, "The Evolution of Top Incomes: A Historical and International Perspective," National Bureau of Economic Research, Working Paper 11955 (2006).
82. Ian Dew-Becker and Robert J. Gordon, "Where Did the Productivity Growth Go? Inflation Dynamics and the Distribution of Income," Brookings Panel on Economic Activity, Washington, D.C., September 8-9, 2005.
83. Englander and Kaufman, "The End of Managerial Ideology," 442.
84. Ibid., 405.
85. See also Allen Kaufman, Lawrence Zacharias, and Marvin Karson, Managers vs. Owners: The Struggle for Corporate Control in American Democracy (New York: Oxford University Press, 1995).
86. Englander and Kaufman, "The End of Managerial Ideology," 438.
87. Some articles that find a link between compensation and fraud are Jared Harris and Philip Bromiley, "Incentives to Cheat: The Influence of Executive Compensation and Firm Performance on Financial Misrepresentation, " Organization Science 18 (2007): 350-67
88. and Natasha Burns and Simi Kedia, "The Impact of Performance-Based Compensation on Misreporting," Journal of Financial Economics 79 (2006): 35-67.
89. Mixed results are reported in Joseph P. O'Connor Jr., Richard L. Priem, Joseph E. Coombs, and K. Matthew Gluey, "Do CEO Stock Options Prevent or Promote Fraudulent Financial Reporting," Academy of Management Journal 49 (2006): 483-500.
90. Other researchers find no link between compensation and fraud.
91. See Merle Ericson, Michelle Hanlon, and Edward Maydew, "Is There a Link between Executive Equity Incentives and Accounting Fraud?" Journal of Accounting Research 44 (2006): 113-43.
92. In addition to Blair and Stout, "A Team Production Theory of Corporate Law, "
93. see also Margaret M. Blair and Lynn A. Stout, "Corporate Accountability: Director Accountability and the Mediating Role of the Board," Washington University Law Quarterly 79 (2001): 403-48
94. Margaret M. Blair and Lynn A. Stout, "Trust, Trustworthiness, and the Behavioral Norms of Corporate Law," University of Pennsylvania Law Review 149(2001): 1735-1810
95. and Margaret M. Blair and Lynn A. Stout, "Team Production in Business Organizations: An Introduction," Journal of Corporation Law 24 (1999): 743-50.
96. The economic analysis of team production is due primarily to Alchian and Demsetz, "Production, Information Costs, and Economic Organization." For other contributions
97. see Bengt Holmstrom, "Moral Hazard in Teams," Bell Journal of Economics and Management 13 (1982): 324-40
98. Masahiko Aoki, "The Contingent Governance of Teams: Analysis of Institutional Complementarity," International Economic Review 35(1994): 657-76
99. and Raghuram G. Rajan and Luigi Zingales, "Power in the Theory of the Firm," Quarterly Journal of Economics 113 (1998): 387-432.
100. Ronald M. Coase, "The Nature of the Firm," Economica, N.S., 4 (1937): 386-405.
101. Alchian and Demsetz, "Production, Information Costs, and Economic Organization," 777, 779.
102. Ibid., 782-83.
103. Ibid., 781.
104. Ibid., 781-83.
105. Blair and Stout, "A Team Production Theory of Corporate Law," 276-78.
106. Ibid., 264, 270.
107. Ibid., 253.
108. Ibid., 250-251, 254.
109. Ibid., 275.
110. Kaufman and Englander, "A Team Production Model of Corporate Governance," 13.
111. Frey and Osterloh, "Yes, Managers Should Be Paid Like Bureaucrats," 99.
112. Peter C. Kostant, "Team Production and the Progressive Corporate Law Agenda" University of Calfornia at Davis Law Review 35(2001-2002): 667-704.
113. see also Lawrence E. Mitchell, ed., Progressive Corporate Law (Boulder, Cob.: Westview Press, 1995)
114. and Kent Greenfield, The Failure of Corporate Law: Fundamental Flaws and Progressive Possibilities (Chicago: University of Chicago Press, 2006).
115. John C. Coates IV, "Measuring the Domain of Mediating Hierarchy: How Contestable Are U.S. Public Corporations?" Journal of Corporation Law 24(1998-1999): 837-67
116. David Millon, "New Game Plan or Business as Usual? A Critique of the Team Production Model of the Corporate Law" Virginia Law Review 86 (2000): 1001-44
117. Alan J. Meese, "The Team Production Theory of Corporate Law: A Critical Assessment," William and Mary Law Review 43 (2001-2002): 1629-1702
118. and Ian B. Lee, "Efficiency and Ethics in the Debate about Shareholder Primacy" Delaware Journal of Corporate Law 31(2006): 533-87.
119. See, for example, Jonathan R. Macey, "An Economic Analysis of the Various Rationales for Making Shareholders the Exclusive Beneficiaries of Corporate Fiduciary Duties" Stetson Law Review 21(1991): 401-24
120. and Lynn A. Stout, "Bad and Not-So-Bad Arguments for Shareholder Primacy," Southern California Law Review 75 (2002): 1189-1209.
121. Meese, "The Team Production Theory of Corporate Law" 1634.
122. Stout recognizes that the choice among the competing agent-principal and team production models depends, at least in part, on the empirical evidence, and she offers some evidence with regard to charter provisions of initial public offerings and discusses the problems of obtaining empirical evidence.
123. Lynn A. Stout, "The Shareholder as Ulysses: Some Empirical Evidence on Why Investors in Public Corporations Tolerate Board Governance" University of Pennsylvania Law Review 152(2003): 667-712.
124. Alchian and Deinsetz, "Production, Information Costs, and Economic Organization," 782.
125. Meese, "The Team Production Theory of Corporate Law" 1669.
126. Henry Hansmann and Reinier Kraakman, "The End of History for Corporate Law" Georgetown Law Journal 89 (2000-2001): 448.
127. Blair and Stout, "A Team Production Theory of Corporate Law," 282.
128. Ibid., 283.
129. Millon, "New Game Plan or Business as Usual?" 1031.
130. Millon, "New Game Plan or Business as Usual?" 1038.
131. Millon, "New Game Plan or Business as Usual?" 1038.
132. David Chamey, "Workers and Corporate Governance: The Role of Political Culture," 117
133. and Edward B. Rock and Michael L. Wachter, "Tailored Claims and Governance: The Fit between Employees and Shareholder," 127
134. both in Employees and Corporate Governance, ed. Margaret M. Blair and Mark Roe (Washington, D.C.: Brookings Institution Press, 1999).
135. Blair and Stout argue at length that the use of legal and market incentives to prevent opportunistic behavior is inadequate and that internalized norms of trust and trustworthiness play an important role in facilitating cooperation in business firms.
136. Blair and Stout, "Trust, Trustworthiness, and the Behavioral Foundations of Corporate Law."
137. Lee, "Efficiency and Ethics in the Debate about Shareholder Primacy," 549-50.
138. Ibid., 545.
139. Blair and Stout, "A Team Production Theory of Corporate Law" 251.
140. Lee, "Efficiency and Ethics in the Debate about Shareholder Primacy," 546.
141. Stout, "The Shareholder as Ulysses" 688.
142. Ibid., 689.
143. Ibid., 671.
144. Kostant, "Team Production and the Progressive Corporate Law Agenda" 675.
145. Ibid., 669.
146. For discussions of how corporate laws develops norms of behavior
147. see Melvin A. Eisenberg, "Corporate Law and Social Norms" Columbia Law Review 99 (1999): 1253-92
148. and Edward B. Rock, "Saints and Sinners: How Does Delaware Corporate Law Work?" UCLA Law Review 44 (1997): 1009-1107.
149. Blair and Stout, "Trust, Trustworthiness, and the Behavioral Foundations of Corporate Law"
150. and Lawrence E. Mitchell, "Trust and Team Production in Post-Capitalist Society," Journal of Corporation Law 24 (1998-1999): 870-912.
151. For a discussion of the possible implications of the team production model for the law of fiduciary duties
152. see Gregory Scott Crespi, "Redefining Fiduciary Duties of Corporate Directors in Accordance with the Team Production Model of Corporate Governance," Creighton Law Review 36 (2002-2003): 623-42.
153. Kaufman and Englander draw some implications of the team production model for the composition of boards within existing corporate governance
154. See Kaufman and Englander, "A Team Production Model of Corporate Governance."
155. A critical assessment of the power of corporate governance to affect distributive justice is offered in Ian Maitland, "Distributive Justice in Firms: Do the Rules of Corporate Governance Matter?" Business Ethics Quiirterly 11(2001): 129-43.
156. For responses to this article
157. see John H. Beck, "Distributive Justice and the Rules of the Corporation: Partial versus General Equilibrium Analysis," Business Ethics Quarterly 15 (2005): 355-2
158. and Amos Witztum, "Corporate Rules, Distributive Justice, and Efficiency" Business Ethics Quarterly 18 (2008): 85-116.
159. Millon, "New Game Plan or Business as Usual?"
160. and Meese, "The Team Production Theory of Corporate Law."