ICC Advance Access originally published online on November 21, 2007
Industrial and Corporate Change 2007 16(6):983-1035; doi:10.1093/icc/dtm030
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The US stock market and the governance of innovative enterprise*
Correspondence: William Lazonick, Department of Regional Economic and Social Development, University of Massachusetts Lowell, Lowell, MA 01854, USA. e-mail: william_lazonick{at}uml.edu
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 shareholder-value 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 research contained in this article has been supported by The Upjohn Institute for Employment Research; World Institute for Development Economics Research (WIDER); ESEMK project funded by the European Commission under the 6th Framework Programme (contract CIT2-CT-2004-506077); and The Work Foundation (London). Previous versions of this article were presented at the Conference on Institutions for Economic Development, WIDER, Helsinki, April 18–19, 2005; Conference on Perspectives of Corporate Governance, Wissenschaftszentrum Berlin (WZB), March 9–10, 2006; and Conference on Capital Matters: Managing Labor's Capital, Harvard Law School, Cambridge, April 26–28, 2006. Many of the ideas presented here reflect my collaboration with Mary O'Sullivan, for whose insights I am grateful. Yue Zhang, Dimitra Paparounas, Mustafa Erdem Sakinc, and Gao He provided excellent research assistance. A previous and shorter version of this article appeared as "Shareholder Value and Governance of Innovative Enterprise" in Ulrich Jürgens, Gunnar Folke Schuppert, Dieter, Sadowski, and Manfred Weiss, eds., Perspectives of Corporate Governance (Perspektiven der Corporate Governance), Nomos, 2007.
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