Managerial Fiduciary Duty and Social Responsibility: The Changing Nature of Corporate Governance in Post-War America

Abstract

Enron's demise and the corporate investigations that ensued have reinvigorated the debate on managerial fiduciary duty. Some have argued that the recent stock bubble and the ensuing revelations of managerial malfeasance merely repeat history: Capitalism regularly corrects market exuberance and redirects resources along an efficient path. True, each bubble has its particular causes. The most recent one arose in concert with over-investment in high technology and recently deregulated industries. Those who claim that the 1990s bubble marked a significant change point to evidence that Enron's practice of misreporting information to bolster performance figures and executive stock option values extended widely within the corporate sector. In this view, excess was connected to stock option incentive systems that allowed these managers to exploit information asymmetry between themselves and investors. Even Alan Greenspan, the Chairman of the Federal Reserve Bank, expressed this view when he openly questioned the market's ability to disperse information in an accurate and timely manner and the wisdom of reporting rules that did not demand that stock options be included as business expenses. In this essay, we elaborate this theme - that the stock market's deflation exposed a structural reworking of managerial incentive hierarchies and managerial ideology. During the 1990s, U.S. managerial capitalism underwent a profound transformation from a technocratic system to a proprietary one. In the former, managers functioned as teams to sustain the firm and to promote social welfare. In the latter, corporate bureaucratic teams broke up into tournaments in which managers competed for advancement toward the CEO prize. Because their reward system depended heavily on stock options that were accompanied by downside risk-protection, these tournaments turned managers into a special class of shareholders. And, like any other shareholder, managers sought to maximize their individual utility functions - even if it deviated from the firm's best interest. Once this new regime became established practice, managers discarded their technocratic, stakeholder creed and adopted a property rights ideology, originally elaborated in academia by financial agency theorists.