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From Hired Hands to Co-Owners: Compensation, Team Production, and the Role of the CEO

Published online by Cambridge University Press:  23 January 2015

Abstract:

In the 1990s, the role of the chief executive officer (CEO) of major United States corporations underwent a profound transformation in which CEOs went from being bureaucrats or technocrats to shareholder partisans who acted more like proprietors or entrepreneurs. This transformation occurred in response to changes in the competitive environment of U.S. corporations and also to the agency theory argument that high levels of compensation by means of stock options helped to overcome the agency problem inherent in the separation of ownership and control. Some critics charge that this new CEO role is objectionable for a variety of reasons, which may also be applicable to the current financial crisis in which CEO misconduct may have played a part. These objections are based largely on a team production model of corporate governance, which is held by these critics to be superior to the standard agent-principal model. This article examines the objections offered by critics of the changed role of the CEO and argues that their negative assessment of this development and their use of the team production model to support their conclusions are not warranted. CEOs have changed from hired hands to co-owners, and this change may have contributed in some measure to the current financial crisis. However, in determining the morally preferable role of the CEO, care must be taken not to discard what is sound in the changed role.

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Articles
Copyright
Copyright © Society for Business Ethics 2009

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References

Notes

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29. Ibid., 438. 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. See Marens, Richard and Wicks, Andrew, “Getting Real: Stakeholder Theory, Managerial Practice, and the General Irrelevance of Fiduciary Duties Owed to Shareholders,Business Ethics Quarterly 9 (1999): 273–93.CrossRefGoogle Scholar

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38. Bebchuk and Fried, Pay Without Performance.

39. Frey and Osterloh, “Yes, Managers Should Be Paid Like Bureaucrats,” 99.

40. 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. Ibid., 99.

41. Ibid., 100.

42. 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.

43. Frey and Osterloh cite Shane A. Johnson, Harley E. Ryan, and Yisong S. Tian, “Executive Compensation and Corporate Fraud,” unpublished manuscript (2005).

44. Kaufman and Englander, “A Team Production Model of Corporate Governance,” 9.

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48. Ibid., 405. See also Kaufman, Allen, Zacharias, Lawrence, and Karson, Marvin, Managers vs. Owners: The Struggle for Corporate Control in American Democracy (New York: Oxford University Press, 1995).Google Scholar

49. Englander and Kaufman, “The End of Managerial Ideology,” 438.

50. Some articles that find a link between compensation and fraud are Harris, Jared and Bromiley, Philip, “Incentives to Cheat: The Influence of Executive Compensation and Firm Performance on Financial Misrepresentation,Organization Science 18 (2007): 350–67;CrossRefGoogle Scholar and Burns, Natasha and Kedia, Simi, “The Impact of Performance-Based Compensation on Misreporting,Journal of Financial Economics 79 (2006): 3567.CrossRefGoogle Scholar Mixed results are reported in O'Connor, Joseph P. Jr.,, Priem, Richard L., Joseph, Coombs E., and Matthew Gilley, K., “Do CEO Stock Options Prevent or Promote Fraudulent Financial Reporting,Academy of Management Journal 49 (2006): 483500.CrossRefGoogle Scholar Other researchers find no link between compensation and fraud. See Ericson, Merle, Hanlon, Michelle, and Maydew, Edward, “Is There a Link between Executive Equity Incentives and Accounting Fraud?Journal of Accounting Research 44 (2006): 113–43.CrossRefGoogle Scholar

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52. The economic analysis of team production is due primarily to Alchian and Demsetz, “Production, Information Costs, and Economic Organization.” For other contributions, see Holmstrom, Bengt, “Moral Hazard in Teams,Bell Journal of Economics and Management 13 (1982): 324–40;CrossRefGoogle ScholarAoki, Masahiko, “The Contingent Governance of Teams: Analysis of Institutional Complementarity,International Economic Review 35 (1994): 657–76;Google Scholar and Rajan, Raghuram G. and Zingales, Luigi, “Power in the Theory of the Firm,Quarterly Journal of Economics 113 (1998): 387432.CrossRefGoogle Scholar

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54. Alchian and Demsetz, “Production, Information Costs, and Economic Organization,” 777, 779.

55. Ibid., 782–83.

56. Ibid., 781.

57. Ibid., 781–83.

58. Blair and Stout, “A Team Production Theory of Corporate Law,” 276–78.

59. Ibid., 264, 270.

60. Ibid., 253.

61. Ibid., 250–51, 254.

62. Ibid., 275.

63. Kaufman and Englander, “A Team Production Model of Corporate Governance,” 13.

64. Frey and Osterloh, “Yes, Managers Should Be Paid Like Bureaucrats,” 99.

65. Kostant, Peter C., “Team Production and the Progressive Corporate Law Agenda,University of California at Davis Law Review 35 (2001–2002): 667704.Google Scholar See also Mitchell, Lawrence E., ed., Progressive Corporate Law (Boulder, Colo.: Westview Press, 1995);Google Scholar and Greenfield, Kent, The Failure of Corporate Law: Fundamental Flaws and Progressive Possibilities (Chicago: University of Chicago Press, 2006).Google Scholar

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69. Alchian and Demsetz, “Production, Information Costs, and Economic Organization,” 782.

70. Meese, “The Team Production Theory of Corporate Law,” 1669.

71. Hansmann, Henry and Kraakman, Reinier, “The End of History for Corporate Law,Georgetown Law Journal 89 (2000–2001): 448.Google Scholar

72. Blair and Stout, “A Team Production Theory of Corporate Law,” 282.

73. Ibid., 283.

74. Millon, “New Game Plan or Business as Usual?” 1031.

75. Ibid., 1038.

76. Ibid.

77. Charney, David, “Workers and Corporate Governance: The Role of Political Culture,117;Google Scholar and Rock, Edward B. and Wachter, Michael L., “Tailored Claims and Governance: The Fit between Employees and Shareholder,”127; both in Employees and Corporate Governance, ed. Blair, Margaret M. and Roe, Mark (Washington, D.C.: Brookings Institution Press, 1999).Google Scholar

78. 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. Blair and Stout, “Trust, Trustworthiness, and the Behavioral Foundations of Corporate Law.”

79. Lee, “Efficiency and Ethics in the Debate about Shareholder Primacy,” 549–50.

80. Ibid., 545.

81. Blair and Stout, “A Team Production Theory of Corporate Law,” 251.

82. Lee, “Efficiency and Ethics in the Debate about Shareholder Primacy,” 546.

83. Stout, “The Shareholder as Ulysses,” 688.

84. Ibid., 689.

85. Ibid., 671.

86. Kostant, “Team Production and the Progressive Corporate Law Agenda,” 675.

87. Ibid., 669. For discussions of how corporate laws develops norms of behavior, see Eisenberg, Melvin A., “Corporate Law and Social Norms,Columbia Law Review 99 (1999): 1253–92;CrossRefGoogle Scholar and Rock, Edward B., “Saints and Sinners: How Does Delaware Corporate Law Work?UCLA Law Review 44 (1997): 10091107.Google Scholar

88. Blair and Stout, “Trust, Trustworthiness, and the Behavioral Foundations of Corporate Law”; and Mitchell, Lawrence E., “Trust and Team Production in Post-Capitalist Society,Journal of Corporation Law 24 (1998–1999): 870912.Google Scholar

89. For a discussion of the possible implications of the team production model for the law of fiduciary duties, 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.Google Scholar Kaufman and Englander draw some implications of the team production model for the composition of boards within existing corporate governance. See Kaufman and Englander, “A Team Production Model of Corporate Governance.”

90. A critical assessment of the power of corporate governance to affect distributive justice is offered in Maitland, Ian, “Distributive Justice in Firms: Do the Rules of Corporate Governance Matter?Business Ethics Quarterly 11 (2001): 129–43.CrossRefGoogle Scholar For responses to this article, see Beck, John H., “Distributive Justice and the Rules of the Corporation: Partial versus General Equilibrium Analysis,Business Ethics Quarterly 15 (2005): 355–62;CrossRefGoogle Scholar and Witztum, Amos, “Corporate Rules, Distributive Justice, and Efficiency,Business Ethics Quarterly 18 (2008): 85116.CrossRefGoogle Scholar

91. Millon, “New Game Plan or Business as Usual?” and Meese, “The Team Production Theory of Corporate Law.”