Corporate governance varieties: Locke and Hegel’s philosophy of right and the roots of corporate governance traditions

Alexander Styhre (Department of Business Administration, School of Business, Economics and Law, University of Gothenburg, Gothenburg, Sweden)

International Journal of Organizational Analysis

ISSN: 1934-8835

Publication date: 9 July 2018



Corporate governance is the practice of balancing various stakeholder interests within the legal device of the chartered business. Recent changes in the competitive capitalism including the Great Recession, now entering its second decade, have called for reforms within the defined corporate system. To sketch a wider picture of corporate governance issues and the debate over time, this paper aims to identify two philosophical traditions, a British and liberal tradition and a continental statist tradition, which have bearings for how the legal device of the corporation is understood.


This conceptual paper combines legal philosophy and legal studies, management studies, economics and economic sociology literatures.


In the former tradition, the firm and its ownership are exclusively associated with irreducibly individual rights. In the latter tradition, property rights remain the core of legal systems, but rather than being an end in itself (as in the liberal tradition), such property rights are merely the starting point for the individual’s wider engagement in social and public affairs. These two traditions enact the firm differently and emphasize specific benefits. In the former tradition, associated with a shareholder primacy model, individual rent-seeking is foregrounded; in the latter tradition, associated with legal and management scholarship, the team production qualities of the firm are emphasized.


This conceptual paper offers an analysis of the roots of differences between Anglo-American and continental corporate governance traditions, a scholarly study that is of great theoretical and practical relevance in the era of the Great Depression.



Styhre, A. (2018), "Corporate governance varieties", International Journal of Organizational Analysis, Vol. 26 No. 3, pp. 582-598.

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Copyright © 2018, Emerald Publishing Limited


The so-called Great Recession (Redbird and Grusky, 2016; Suárez, 2014; Biven and Shierholz, 2013; Mian and Sufi, 2010), now looming for close to a decade, especially in parts of Europe, and now materializing into political consequences (the “Brexit” referendum in the UK and the anti-free trader Donald Trump surprising the “political establishment” in Washington when defeating Hilary Clinton), has also generated a renewed scholarly interest for the elementary governance mechanisms underlying the economic stagnation and soaring economic inequality, now being widely recognized as undisputed conditions of the contemporary period (Jacobs and Dirlam, 2016; Wodtke, 2016; Stockhammer, 2015; Bartolini et al., 2014; Gilens, 2012; Alderson and Nielsen, 2002). Among many things, the enforcement, not so much de jure as de facto, of a shareholder primacy model (court ruling in e.g. Delaware, the state of choice for incorporation for the majority of Fortune 1000 companies, still provides strong support for the “board-centric corporate system”; Levitin, 2014, p. 2059), stipulating that governance enriching shareholders, the firm’s investors, not only minimize the risks of management opportunism but also benefit all stakeholders, has been fortified as the dominant governance doctrine. While the popularity of the shareholder primacy model coincides with (some would say precede; see e.g. Tomaskovic-Devey et al., 2015; Dobbin and Jung, 2010) a series of worrying tendencies in advanced capitalist economies, including declining economic growth, soaring economic inequality, the loss of blue-collar and white-collar jobs and declining investment in long-term ventures including R&D and human capital, the advocacy of the shareholder primacy model seems unrelenting; shareholder advocates do, notwithstanding the remarkable success they have had in advancing their reform agenda, Cremers and Sepe (2016, p. 135) say, still “see shareholder empowerment as not yet accomplished”. Against this wider institutional and socio-economic foregrounding, there are reasons to examine the intellectual and doctrinaire roots of the shareholder primacy model. The history of the shareholder advocacy from the mid-1970s and the publication of the seminal paper of Jensen and Meckling in 1976 is well covered in the corporate governance literature. But this more “recent history” needs to be complemented by the analysis of what the renowned Annales-school historian Fernand Braudel (1980) referred to as la longue durée, the long duration wherein intellectual ideas gain a foothold on the slippery slopes of history only over time and may suddenly spring forwards, at times seemingly from nowhere (as in the case of the recurrent waves of American conservatism in the eyes of liberal commentators; see Philips-Fein, 2009, p. 725), when “their time has come”, as the saying goes.

The purpose of this paper is therefore to discuss how the so-called “Berle-Means firm” was established in the New Deal framework (Hawley, 1966), wherein the legal scholar Adolf Berle served as an advisor in the Roosevelt administration. Prior to the Wall Street crash of 1929, and the depression that lasted well until the Second World War served to blow life into the American economy, there was a debate initiated by the leading American economist Thorstein Veblen and liberals such as the lawyer Louis D. Brandeis regarding the relationship between finance capital investors and “real economy actors”, voicing worries that in an economy dominated by “passive shareholders”, enterprising and entrepreneurial impetus would be undermined or compromised in undesirable ways. This debate was in turn animated by inherited intellectual traditions in the UK (and dominated by the philosophy of right of John Locke, the great British empiricist and proponent of liberalism) and in continental Europe (primarily Germany, and with George Wilhelm Friedrich Hegel’s Philosophie des Rechts, first published in 1820, as its intellectual foundation), both being important influences for the New Dealers. Only by examining how the concerns addressed by Veblen and Brandeis in the 1910s, and how their critique of “the Money Trust” was muted in the depression era and post-Second World War period, can the present day concerns regarding the long-term consequences of the shareholder primacy model be fully understood. In essence, economists expressing a firm belief in the efficacy of market pricing, i.e. an economic model by-passing or ignoring the role of the sovereign state, were more attracted by John Locke’s “minimal theory of rights” than by Hegel’s “extended theory of rights”, which granted the sovereign state a more active and affirmative role. While Roosevelt advisors by and large were sympathetic towards continental European doctrines of statism (Adelstein, 1991, p. 165), the intellectual and cultural climate in the USA undermined a meaningful application of e.g. governance doctrines rooted in e.g. Hegel’s thinking. In the end, the received American model was constructed and operated on the basis of a minimal state doctrine. The consequences for corporate governance practice and theory are considerable, for instance, rendering legislative practices and regulatory control orchestrated by the state suspect in the eyes of e.g. free-market protagonists.

This paper is structured accordingly: First, the central elements of the philosophy of rights presented by John Locke and G.W.F. Hegel will be introduced. In the second section, the debate regarding the power and authority of the finance industry in the 1910s is discussed as a theme mirroring the situation today, more than a century later. Thereafter, the debate between law professors E. Merrick Dodd and Adolf A. Berle on the accountability of salaried managers is presented before the wider writing of Berle, a key figure in the corporate governance literature, is examined. In the following sections, some implications for corporate governance scholarship and practice are discussed.

The philosophy of right: the liberal/British and the continental/statist views

While paying attention to philosophical doctrines may appear as a concern for a handful of academic specialists or seminarists in defined disciplines, the connection between philosophical doctrines and latter day governance practices is not a moot question. In fact, like in the case of biological systems, human cultures and social institutions are “built from the bottom up”, originating with elementary mechanisms and differentiating over time. Therefore, the economic system of competitive capitalism, intimately bound up with modern democracy and the emergence of a scientific worldview, in brief, modernity, needs to be traced to its roots to explain contemporary conditions and practices.

As Duggan (2003, p. 4) explained, “liberal theorists, such as John Locke and Adam Smith, provided a set of metaphors, an organizing narrative, and a moral apologia for capitalism”. The British liberalism tradition, leveraged by the dominance of the Britons in international trade from the early eighteenth century, has many thinkers on its pantheon, including not the least John Locke, formulating the foundational liberal principle that any man has the right to the fruits of the work he has invested or laid down in say, plowing and sowing a field, building a clockwork or baking a batch of loaves. In the Anglo-American liberal tradition, Locke is a saintly figure that justifies human integrity and elementary rights vis-à-vis authorities and elites, such as the aristocracy. Locke is also explicitly enacting political power, materialized into “a right of making laws with penalties of death, and consequently all less penalties”, as a privilege and prerogative granted only for the benefit of “the public good” (Locke, 1690/2003, p. 101, Book II, §3). That is, the legislator, first the sovereign and thereafter democratically elected parliaments, must not use legislation to benefit its own interests.

In contrast, Hegel’s philosophy of right, formulated thirteen decades after Locke’s Two Treatises on Government appeared, recognizes private property as a basic legal right. Unlike Locke, who stipulates ownership rights as an end in itself and being of limited interest or concern for the sovereign state once such rights have been enacted by law, Hegel presents a considerable more complex theory of property and property rights. Hegel starts with a fictive individual in a prosocial condition, and asserts that this individual has the right to property; indeed, the right to property is “the origin” of the person’s “right to life and liberty” (Stillman, 1988, p. 1032) – for Hegel, property is “essential for an individual’s freedom” (Stillman, 1988, p. 1032). This is essentially where Locke’s philosophy of right ends, being a “minimal theory” of rights based on the proposition that, “[E]very man has a property in his own person […] The labour of his body, and the work of his hands, we may say, are properly his” (John Locke, Two Treatises on Government, Book II, Ch. 5, cited in Stillman, 1988, p. 1040). In Hegel’s thought, this prosocial recognition of the property right is merely the starting point, an axiomatic first principle in his elaborate philosophy of right. Through his property, Hegel argues, “the person goes forth from himself to relate to other men and to build social institutions” (Stillman, 1988, p. 1036), i.e. property is the vehicle for the construction of an autonomous self and individual liberties being the basis for a free individual. At the same time, which is a key complexity of Hegel’s rich thinking, property must, to serve its political, social and economic purposes, be aufgehoben (derived from Hegel’s central philosophical term Aufheben, meaning “to sublate”, to preserve by transcending or to preserve by “destruction” or “cancellation”) – it must be both preserved and transcended, be part of the life of the individual and an element within “the structure of society” (Stillman, 1988, p. 1037). This is a most complex point made by Hegel:

Hegel’s political philosophy is founded on property; but it is founded on property only so that it can transcend property. The fully developed individual – active outside the sphere of abstract rights, the system of needs, and the administration of justice – has moral and ethical ideals and human interactions (for example, family and state) that are not based on private property. But property nonetheless remains a permanent apparatus for carrying out a life plan, for giving reality to a conception of his own good, for his further development, and for his self-satisfaction. (Stillman, 1988, p. 1037)

The decisive point is that Locke and Hegel represent the two freedoms identified by Isaiah Berlin (1958), with Locke speaking of property in terms of negative freedom – freedom from oppression and the governance of the sovereign or the government – and Hegel emphasizing how property rights enable and justify participation in civil society, i.e. positive freedom. As Stillman (1988, p. 1040) remarked, “Locke’s person is socially and psychologically somewhat static and protective because he already has everything that he needs”, whereas Hegel’s person, in contrast, is “dynamic and developmental”. Hegel’s person must work to “appropriate and apprehend himself”, tasks which, to be fully accomplished, “require not only the content of the prepolitical condition but also, and necessarily, moral attitudes and practical experience in a range of rational social institutions” (Stillman, 1988, p. 1040). In this latter enactment of the private and public self, society and, by implication, the state have a much more significant role to play. Locke postulates that the right to property is original and an end in itself, and the individual is thus independent or separated from the individual’s social relations “in the state of nature and in civil or political society”. In brief, neither individuality nor property rights are constituted within the realm of social relations. In the Lockean universe, “the preservation of the person’s property is a constant and unchanging goal for citizens and for political society”, Stillman (1988, p. 1041) summarized. This position is central to the Anglo-American tradition of liberalism and its scepticism towards statism in any form, especially in American conservativism and libertarian intellectual traditions.

In Hegel’s thinking, social relations, society and the state are granted a more central and a positive role. Hegel does not, however, reduce or equate the constitution of fully developed individuals and individual freedom with the functioning of the surrounding society and the state. Just like with the fully developed individual, realizing his or her potentiality, Hegel envisions a social and political world that must grow progressively richer and more complex and various to “generate the values and relations that can enrich the developing individuality that citizens pursue and that politics encourages” (Stillman, 1988, p. 1041). For a hard-core latter day libertarian, this vision may sound either naïve or a carte blanche for the development of an increasingly authoritarian state, but what Hegel arguably advocated was possible something more like the liberal welfare state, wherein all individuals are given certain liberties and possibilities (e.g. through the education system) to become the fully developed person he or she has the capacity to become. In Locke’s view, property right is the basis for a liberal society, but for Hegel, the same property rights are merely the stepping stone for an ongoing project to constitute individuality and a functional society supportive of the development of an autonomous and fully capable person.

The image of the market and the legal device of the contract

The deviations that Locke and Hegel’s philosophies demonstrate beyond the shared recognition of property right as a constitutive right have considerable economic and policymaking implications. While Locke is relatively silent regarding the relationship between the individual and the wider economic system (while being commonly understood as taking an affirmative view of e.g. commerce, a proposition induced from Locke’s statement regarding the rights to property as derived from an investment in labour), Hegel is more explicitly separating the economy from civil society, Stillman (1988) argues:

Hegel does not wish to impose images, metaphors, or models of private property and free contract throughout all social life. Nor does he wish to follow economistic theorists in asserting, without much argument or context, that free alienating and contracting are always desirable. (Stillman, 1988, p. 1054)

Again, Hegel’s thinking is sophisticated and demands careful examination. While he is sceptical of reducing property right to economic conditions and mechanisms (e.g. contracting), he still regards “the corporation” as being one of the key institutions of the civil society: “The family is the first ethical root of the state; the corporation is the second, and it is based in civil society”, Hegel (1999, p. 379) declared.

In this context, it is important to keep in mind that “corporation” does not primarily denote the modern firm with defined features such as limited liability, distributed ownership and salaried managers overseeing operations, but the corporation denotes a wider set of organized activities such as churches, townships, schools and voluntary organizations. For instance, the development of corporate law, the legal protection of incorporated business ventures against various external and internal opportunistic behaviour and providing other legal rights and privileges, originally enacted in the late eighteenth century and being widely established by the mid-nineteenth century in the USA (Blair, 2003, pp. 425-426), did not originally incorporate business ventures at all (Kaufman, 2008, p. 404). Instead, all kinds of civil organizations including churches and townships were granted such business charters. Still, Hegel (1981, p. 189, §288) emphasized “the corporation”, defined as commercial and professional, as well as municipal, organizations employing “officials, directors, managers, and the like”, as playing a key role in civil society. More specifically, in the corporations, defined as “voluntarily organized groups” including “business corporations, churches, interest groups, charitable societies, etc”., the corporation member finds scope for “liberality and rectitude”, Hegel claimed (Stillman, 1988, p. 1048). Within this context of the corporation, private property is aufgehoben, is simultaneously put to use and affected by the norms and goals of the corporation, and the individual must actively contribute to receive recognition, and not only maximize personal profit.

Despite this affirmative view of the corporation in Hegel’s philosophy of right, Hegel is, unlike social contract theorists in the British tradition (Hobbes, Locke, Adam Smith, etc.), not willing to use the metaphor or legal device of the contract as a meaningful mechanism in his analytical model. This in turn is rooted in the Hegel’s scepticism towards the idea of the market, widely recognized as an ethically neutral arbiter and efficient resource allocation mechanism in the British liberalism tradition (most notably captured by Adam Smith’s metaphor of the “invisible” but ultimately benevolent and fair “hand”, directing resources to their best use and thus transcending and neutralizing instrumental self-interest). In contrast to this liberal view, Hegel does not see how the market can provide sufficient agency to the free individual. This in turn is because market transactions, enabled by the use of the legal device of the contract, are based on inequality of power and not demonstrating what Hegel calls the requirement of “double competition”–competition among “both buyers and sellers”. As markets are tilting to benefit either buyers or sellers (as conveyed by the expression, “It’s a buyer’s/seller’s market today”), Hegel anticipates governmental intervention to make markets operable and efficient (Stillman, 1988, p. 1056). Furthermore, even if markets hypothetically would demonstrate fair competition and an absence of power imbalances, Hegel does not believe that the legal device of the contract can serve as a metaphor for the state and civil society, simply because the contract is too narrow and too focused on defining mutual rights and obligations (not the least because this functional simplicity enables legal enforcement) to fully apprehend how the individual develops within the realm of the state. Therefore, for Hegel, the market and its contract metaphor/device do not provide adequate possibilities for individuals choosing, which is a sine qua non for individual independence and self-determination (Stillman, 1988, p. 1053). By and large, Hegel is also sceptical of the idea that the freedom of choice would be a legitimate or qualified candidate for the constitution of the free and autonomous individual, on the one hand because the market does not provide possibilities for authentic choices, and on the other hand, because the idea of “freedom of choice” is beside the point within Hegel’s philosophy of right: “Membership in civil society is not a matter of choice” (Stillman, 1988, p. 1054).

In summary, Locke provides a minimal liberal theory of negative freedom (“freedom from”), wherein the right to the fruits of one’s own labour is a constative right in a civil society. Hegel, in contrast, offers an extended liberal theory of positive freedom (“freedom to”), wherein property right is stipulated as the basis for civil society but wherein social organizations such as the corporation and the state play a more central role in materializing individual liberties. Many things do separate Locke and Hegel, but they are unified in their firm stance on property rights, being at the core of the philosophy of rights. While the minimal theory of Locke has been the beacon for generations of Anglo-American liberals, conservatives and libertarians, Hegel’s scepticism about the market and the alleged virtues of freedom of choice (not the least being some kind of slogan for the Chicago school of economics tradition, following Milton Friedman’s charismatic lead; see e.g. Friedman and Friedman, 1979) has been less recognized. Yet, Hegel’s argument about property rights as being a constitutional right, still being only the starting point for the participation in and continuous development of civil society, is haunting policymakers and theorists, perhaps because it indicates that private property without a surrounding society and functional state would be an oxymoron, as the very term “private” is introduced as a contrast to “public”, and “property” is per se a legal term that presupposes at least a minimal state supplying jurisprudence or at least the presence of collective legal norms. As will be discussed below, the Hegelian scepticism towards the market and the concern for the corporation as a vehicle for the fulfilment of collective pursuits has been a perennial issue in the corporate governance literature. That is, Hegel’s thinking may receive limited recognition in comparison to Locke’s, but the issues he addresses within his philosophy of right remain of relevance for corporate governance scholarship and policy.

The pre-depression corporate governance debate

The modern concept of the firm including all its defined features was enshrined by corporate law that was developed during the nineteenth century. In addition to corporate law, developed to promote business venturing and enterprising in societies quickly being transformed by the industrial revolution, corporate governance denotes set of practice, standards, legislation and regulatory activities that serve to monitor the business venture, the corporation. While corporate law is relatively stable over time to enable a transparent corporate system and law enforcement, yet accompanied by court ruling cases that further substantiate and clarify the legislation, corporate governance is subject to continuous modifications and ongoing discussions and scholarly analyses. Much of the modern corporate governance practices were developed in the depression-era and in the post-Second World War period, characterized by what has been called “managerialism” (Marris, 1964) and the development of the “Berle-Means firm”, characterized by the separation of ownership and control. Also in the period preceding the Wall Street crash and the reforms that followed to restore competitive capitalism, there were concerns regarding the governance of industry and the corporate system.

Thorstein Veblen, for instance – “quite probably the most famous American economist in the first quarter of the twentieth century”, in Ebenstein’s (2015, p. 28) account – expressed his concern over what he referred to as “absentee ownership”, i.e. finance capital owners’ investment in companies to reap the benefits without being actively involved in the day-to-day operations. In Veblen’s (1919/1964, p. 44) view , in this regime, ownership has become “denatured” and “no longer carries its earlier duties and responsibilities”. The dominance of “absentee ownership of anonymous corporate capital” means that the corporate system loses some of its legitimacy as wealthy investors can now “control the conditions of life” for the large majority of the population, but without taking any adequate responsibilities. In another publication, Veblen (1916, p. 16) criticized the new “financial captains of industry”, who demonstrate an:

[…] [a]ddiction to abstract and unremitting valuation of all things in terms of price and profit leaves them, by settled habit, unfit to appreciate those technological facts and values that can be formulated only in terms of tangible mechanical performance.

In Veblen’s (1916, p. 16) scathing critique of these finance capital investors, “they are experts in process and profits and financial manoeuvres; and yet the final discretion in all questions of industrial policy continues to rest in their hands”. There are thus two major concerns that Veblen addressed: first, that finance capital investors are granted significant power and authority in the economic system of competitive capitalism, now being able to serve, Veblen (1919/1964, p. 45) said, as “an anonymous pensioner on the enterprise”. Second, Veblen (1916, p. 16) was worried that this singlehanded emphasis on “profits and financial manoeuvres” leads to that “the financial captains of industry” are:

[…] losing touch with the management of industrial processes, at the same time that the management of corporate business has, in effect, been shifting into the hands of a bureaucratic clerical staff.

In the end, Veblen believes the corporate system is now being hi-jacked and taken over by investors exclusively concerned with generating finance capital rents but otherwise having little expertise in how liquidity is generated on basis of highly illiquid capital, such as machinery, input materials and human resources.

Veblen was not the only liberal in the period who worried about the dominance of the finance industry and the hegemony of finance capital investors. The liberal lawyer Louis D. Brandeis (1914/1967, p. 43), an outspoken critic of what he referred to as the “money trust”, claimed that “industrial and political liberty” was “imperiled” by the money trust. Like Veblen, Brandeis was critical of the finance industry’s claim that it supplied the finance capital needed to fuel the capitalist economy. While in fact, Brandeis claimed that “the great banking houses” only come into relation” with enterprises, either after the success had been attained, or upon “reorganization” after the possibility of success had been demonstrated”, or when the funds of “the hardy pioneers, who had risked their all, were exhausted” (Brandeis, 1914/1967, pp. 91-92). Such claims are consistent with and substantiated by more recent scholarly works demonstrating that finance capital enters industries only after most of the risks have been discounted by the state, or where the state serves as a warrant of socialized losses (Roy, 1997; Evans, 1995; Dobbin, 1994; Levitin, 2014). In other words, liberals such as Veblen and Brandeis were concerned already during the first decades of the twentieth century that finance capital investors were granted liberties that were possibly not optimal for overall economic efficiency, as they undermined the incentives of entrepreneurs and business promoters. In the 1920s, and especially after the Wall Street crash of 1929, this discussion about the relationship between passive capital owners and active entrepreneurs, business promoters and their assigned executives would be even more animated, not the least on basis of the works published by the legal scholar Adolf A. Berle.

The question of separation of ownership and control, managerial accountability and the institutionalization of the “Berle-Means firm”

Just like Veblen and Brandeis were two decades earlier, liberal scholars and intellectuals were equally concerned about the governance of industry and the role of capital investors during the Great Depression. What has been known as the Dodd-Berle debate between the Harvard Law School Professor E. Merrick Dodd Jr. and President Roosevelt advisor Adolf A. Berle has been emphasized as a watershed discussion between advocates of state regulation and a market-oriented governance model. Following Veblen and Brandeis’ strident advocacy of a more detailed monitoring of e.g. the finance industry, Dodd (1932, p. 1153) argued that shareholders (here addressed as “the stockholder”), “who have no contact with business other than to derive dividends from it”, were particularly unsuitable for playing a key role in contributing to social and economic welfare. Rather than promoting shareholder-centric or finance industry-based governance in the corporate system, Dodd (1932, p. 1153) proposed that “incorporated business” could only be “professionalized” (i.e. play a wider role than to merely generate rents for its investors) until the managers are involved in such a project. For instance, one such welfare-generating effect, of acute interest during the depression era when unemployment soared to unprecedented levels, was how make “the economic security of the worker” one of the obligations of the incorporated business, Dodd (1932, pp. 1151-1152) argued. For Dodd (1932), such questions were not simply of academic or theoretical interest but concerned the questions whether “capitalism is worth saving” and can “permanently survive under modern conditions”; for Dodd, writing in 1932, such eschatological themes were by no means far-fetched or beyond the questions at hand.

Berle, a liberal legal scholar, shared many of Dodd’s worries and concerns, and yet his response to Dodd has widely been interpreted as a resolute defence of a shareholder-based corporate governance model. This interpretation of Berle’s work has been disputed in the corporate governance literature, where some scholars emphasize that Berle did in fact not invite shareholder primacy governance, as advocated by agency theorists and contract theorists from the 1970s. Similar to Dodd (1932), concerned about the efficacy of the governance function of the corporate system, but unlike Dodd, who seemed to put much faith in the managers as the agents of socio-political and welfare generating projects, Berle (1932, pp. 1366-1367) speaks of the “great industrial managers, their bankers and still more the men composing their silent ‘control’” (i.e. shareholders), and claims that this group today serves “more as princes and ministers than as promoters or merchants”. In addition, Berle (1932, p. 1367) is sceptical towards the recent view, taken by corporate lawyers – “mainly in New York”, and Berle adds that managers are “trustees” for “corporate security holders”. This can be seen as a critique of early attempts to downplay the role of managers in the corporate system. Yet, Berle (1932) is a staunch defender of the economic system based on individual ownership of property, and he deplores the lack of concern regarding “the subject of private property” in “American enlightened juristic thought”. This is a “great misfortune” in Berle’s account, because “a society based on the individual” can only be maintained on the basis of a “vigorous protection of the property that he has” (Berle, 1932, p. 1368). However, consistent with Veblen’s previous critique, Berle makes a distinction between “active” and “passive” property, whereof the latter is exemplified by a “stock certificate or a bond”, each representing “an infinitesimal claim on massed industrial wealth and funnelled income-stream” (Berle, 1932, p. 1368). However – and this is probably the reason for Berle being portrayed as a shareholder governance primacy advocate – Berle says that “the owner of passive property” has limited possibilities for securing the value of such assets but can only sell off the asset if he/she is dissatisfied with the performance of the management team of the firm issuing the stock or the bond. Furthermore, this predicament “[l]eaves him entirely in the hands of the factual possessor or administrator of the massed wealth” (Berle, 1932, p. 1370).

Berle (1932, p. 1370) then proceeds to claim that the present regime of corporate management has generated a social and professional class that can seize power “without recognition of responsibility”. That is, it is reasonable to claim that Berle (1932) is more sceptical towards unchecked managerial authority than he is concerned with shareholders drawing the shortest straw; the subordinate position of the shareholder is merely invoked to indicate the power balance in favour of top management in American corporations. Berle (1932) is thus sceptical towards Dodd’s (1932) belief in the managers as social reformers and functionaries within the emerging welfare state:

Most students of corporation finance dream of a time when corporate administration will be held to a high degree of required responsibility – a responsibility conceived not merely in terms of stockholders’ rights, but in terms of economic government satisfying the respective needs of investors, workers, customers, and the aggregated community. (Berle, 1932, p. 1372)

Furthermore, Berle advocates mechanisms that would impose checks and balances on managers, or else they would be able to claim substantial authority in the corporate system, and, ipso facto, wider society, now dependent on the corporate system for its subsistence:

Unchecked by present legal balances, a social-economic absolutism of corporate administrators, even if benevolent, might be unsafe; and in any case it hardly affords the soundest base on which to construct the economic commonwealth which industrialism seems to require. (Berle, 1932, p. 1372)

Berle’s (1932) critique of unregulated managerial authority has been widely interpreted as a favourable attitude towards shareholder primacy governance, especially after the publication of Berle and Means’ seminal work The Modern Corporation & Private Property in 1934 – “[o]ne of the most influential social-scientific works of the twentieth century” (Moore and Rebérioux, 2011, p. 86) – at the height of depression and its political project to restore the faith in competitive capitalism. Competitive capitalism was both seriously impaired by the system-wide consequences of the Wall Street crash of 1929, and rivalled by both socialist and communist economic models and the corporativist fascist model being developed in e.g. Italy and Germany in the 1930s.

Still, against this background, Berle’s concern for shareholders has been overstated, as Hill and Painter (2009, p. 1178) claimed:

The emphasis on stock-based compensation reflected that in many influential quarters, shareholder primacy had become the norm. To overstate the case (but not by much), many believed that making managers shareholders would solve everything. Thus, one of the problems that Berle identified – that managers too often do not do what stockholders want them to do – was supposedly solved, with enormous, some would say grotesque, stock compensation plans. The broader problem that Berle, Dodd and Brandeis had discussed – that corporations and particularly banks were sometimes run in a socially irresponsible manner – was largely ignored. (Hill and Painter, 2009, p. 1178)

When advocating this interpretation of Berle’s work and his intentions, Berle’s response to a critique of his work published by legal scholar Henry Manne in 1962 is key to Berle’s normative view of the balance of power between shareholders and managers (and thus, the firm sui juris). Being a severe critique of The Modern Corporation & Private Property, Manne (1962) claimed that a lack of “traditional economic analysis” and an overstating of corporate law issues undermine the practical relevance of the book. By implication, Manne continues, and Berle and Means (1934/1991) advocate a governance model that keep managers “safe from outside interference” (i.e. market evaluations of their performance). This in turn, Manne (1962, p. 405) argued, leading to predictable and systematic managerial opportunism: “If this situation exists for all firms in the industry, then […] incumbent managers will be able to capture for themselves this greater-than-competitive return for their services”. Here Manne (1962, p. 404) did not spare the reader numerous examples of how this managerial opportunism may materialize into a squandering of resources, including the buying of “[e]xpensive office furnishings, lavish expense accounts, company yachts, time off from day-to-day business concerns, and a variety of other nonpecuniary rewards”. In short, Manne (1962) portrayed Berle and Means (1934/1991) as being lax on managerial accountability and naïve regarding allegedly escalating opportunist behaviour in executive suites.

Needless to say, Berle (1962) did not let such accusations pass unnoticed, but disassembled Manne’s argumentation stepwise. First of all, Berle was critical of Manne’s inability to take into account the wider socio-economic and historical conditions that brought forward Berle and Means’ seminal work:

Professor Manne and his contemporaries did not live through World War I and the decade of the twenties, and the crash of 1929, culminating in the breakdown of the American economic system in 1933. They have not experienced a corporate and financial world without the safeguards of the Securities and Exchange Commission, without systemization and enforced publicity of corporate accounting, without (more or less) consistent application of antitrust laws, without discouragement of financial pyramiding, and which tolerated conflicts of interest to a degree unthinkable now. (Berle, 1962, p. 433)

Berle (1962) thus argues that Manne (1962) is guilty of a so-called “whig-history” fallacy, wherein the present situation is created on basis of a series of inevitable and historically determined events unfolding, and where the situation today is accomplished on the basis of an almost mechanical necessity. As opposed to this view, commonly treated as an overtly naïve historical narrative, it could have been possible that the history would have taken an entirely different turn, leading to entirely different scenarios and outcomes.

Second, Berle (1962) grapples with the implicit objective with Manne’s (1962) critique, to advocate and render legitimate an economic theory of law that should trump inherited legal traditions and legal theory on the basis of instrumental rationality and calculation derived from rational choice theory: “Professor Manne and his academic supporters are, of course, accepting and crusading for an academic theory of economics, and are trying to place the modern corporation within it” (Berle, 1962, p. 435). This attempt to overturn legal theory and to subsume it under some generic “economic theory of law” (pioneered by the law and economics tradition initiated at the law school of University of Chicago by Aaron Director in the 1950s, and concentrating on criticizing anti-trust law; Van Horn and Emmett, 2015) do not impress Berle. In Berle’s view, the critique of what he refers to as “the industrial system” on the basis of orthodox economic theory overlooks and marginalizes the role of institutions being developed over time, and ignores the separation of “ownership from management” (Berle, 1962, p. 436) as being a legal innovation, protected by law in business charters issued by states (in the USA) or the federal state (in e.g. the UK). Rather than being inefficient and impaired by clumsy and self-sufficient managers, this industrial system, being under the guidance and control of both finance market actors and regulatory agencies (whereof many were instituted within various New Deal programs), Berle (1962, p. 437) says:

[…] has done more for more people, has made possible a higher standard of living for the vast majority of a huge population in a huge country, has preserved more liberty for individual self-development, and now affords more tools (however unused or badly used) from which a good society can be forged so far as economics can do so, than any system in recorded history.

At the same time, Berle (1962, p. 437) admits, despite such benefits, the industrial system is still “eons from perfection”.

In the following sections, Berle proceeds to respond to and reject a series of technical issues brought up by Manne (1962), and consistently averts both his criticism regarding the protection of managers and undermines Manne’s own theory of the market for management control. In making this argument to support the received corporate system as stipulated by corporate law, Berle (1962) enforces the authority and discretion of managers vis-à-vis shareholders; in Berle’s view, Manne (1962) and his collaborators fail to present any credible argument justifying legal reforms. That is, the authority and discretion of managers stand fast and in fact represent a balancing force against “free market pricing”:

In assuming responsibility for certain aspects of community life, in making gifts to charity, in playing any role in economic statesmanship not dictated by market considerations, the corporate management traitorously departs from the discipline of seeking the highest possible profit, regarded by classicists as the motive driving all into the court of the ‘free market’ – the supreme and beneficent arbitrator. When these recreant managements depart somewhat from their devotion to making the last market-dollar for their stockholders, they denigrate the market mechanism and are thus faithless to their profit-seeking trust. (Berle, 1962, p. 442)

When reading Berle (1962), he neither emerges as a proponent of shareholder primacy nor as sponsor of shareholder activism. On the contrary, Berle’s work represent a legal theory view of the corporate system that does not seek to reduce the relationship between the legal device of the business charter, its finance capital supply, and its executive function to a mere price-setting mechanism. In Berle’s view, the legal institution of the firm, developed over decades or even centuries, cannot be defenestrated simply on the basis of fictive cases of rampant managerial malfeasance, as the institutional framework of competitive capitalism is a social and legal system that has evolved over time and with the intention to strike a balance between e.g. stability and economic growth, enterprising and finance industry rent-seeking, individual and collective objectives and so forth. While Berle (1932) argued that managers – but also their bankers and shareholders – are now “the princes” of the economic system, it does not follow that he is willing to discard the entire legal device of the corporation as soon as some legal scholar inspired by economic theory or an economist advocate the idea that legal theory would benefit from economic analyses. On the contrary, Berle (1962) maintains that the industrial system, despite its imperfections, remains a major accomplishment that needs to be recognized in its full complexity, rather than simply being dismissed on basis of marginal concerns (i.e. the perceived risk of managerial opportunism). Seen in this view, Berle remains a key figure in the corporate governance literature, and a figure whose seminal contributions remain disputed.

Berle’s legacy: the “Berle-Means firm”

Adolf A. Berle and the joint work of Berle and Gardiner Means, a skilled statistician, have remained subject to perennial scholarly debates since its publication. While some shareholder primacy advocates regard Berle as a forerunner and proponent of the finance market-based model they champion, others see Berle as a defender of the legal theory view of the firm as prescribed by corporate legislation. As e.g. Mizruchi (2004, p. 581) pointed out:

Berle and Means’s concern about the separation of ownership from control was not simply about managers’ lack of accountability for investors. It was also a concern about managers’ lack of accountability to society in general.

Such arguments indicate that Berle has been misinterpreted in ways that have benefitted certain political and scholarly programs, pitting Berle as a white knight of free market pricing against E. Merrick Dodd’s call for increased regulatory control of the corporate system and an expanded role of the state in corporate matters.

Under all conditions, Berle and Means have been credited for their work under the label of the “Berle-Means firm” (Roe, 2000, p. 546), denoting the chartered business with dispersed ownership and with defined executives at the helm, serving as the directors’ agents. The Berle-Means firm dominated in the era of managerialist capitalism (Marris, 1964) of the post-Second World War period until the mid-1970s’ economic depression. After the mid-1970s, the corporation has undergone considerable restructuring and reforms, and de-regulatory impulses in the finance industry, also globalizing over the past four decades, have altered the governance function of the corporation, now considerably much more responsive to finance market interest. That is, it is today possible to speak about a “post-Berle-Means firm” (Moore and Rebérioux, 2011) wherein the influence and deficiencies of finance market pricing are no longer cushioned by competent board of directors and their assigned managers, but where the finance market is instead understood and treated as a neutral mechanism for the assessment of managerial decision-making quality. This represents a diametrical opposed view of the view of the market taken by Veblen, Brandeis, Berle and the New Deal policymakers, granting the finance market certain capacities and benefits, but still not being in the position to govern the corporate system:

[T]he doctrine of shareholder primacy relies for its effective realization upon the functioning of a liquid and efficient stock market: in a sense, while a liquid stock market was perceived as a ‘problem’ in the post-Berle and Means managerialist literature, it is considered by contractarianism as the ‘solution’. (Moore and Rebérioux, 2011, p. 88)

In the end, Veblen, Brandies, Berle and the New Dealers advocated a “Hegelian firm”, wherein the “corporation” is the favoured and assigned platform for the realization and transcendence of private property. In contrast, shareholder primacy advocates including a heterogeneous group of agency theorists, contract theorists and free market protagonists, all sharing the belief in the analytical benefits of orthodox neoclassical economic theory, have successfully promoted a “Lockean firm”, wherein private property is carefully separated from the wider socio-economic, institutional and cultural conditions that were originally integrated into corporate law.


The shareholder primacy model, advocated by e.g. agency theorists and contract theorists, is indebted to Locke’s minimal theory of negative freedom, making the question of shareholders’ rent the core issue of governance. Moreover, in this view, rights are irreducibly individual and can only be secured and preserved on basis of individual preferences, aspirations, and entitlements. La Porta et al.’s (1998, p. 4. Emphasis added) definition of corporate governance, stated accordingly, “Corporate governance is, to a large extent, a set of mechanisms through which outside investors protect themselves against expropriation by the insiders”, is by and large consistent with this Lockean view; it is the “outside investors’ interest” that is the primary concern and such interest needs to be “protected”. In contrast, theories of corporate governance that emphasize the team production qualities of the chartered and incorporated business are founded on Hegelian ideas, wherein rights are fulfilled and rendered meaningful within the domain of the corporation. As such, and by legislation, property rights and other individual rights bestowed upon the individual are only meaningful if these are the means to accomplish wider goals – goals that transcend and fulfil the original rights serving as the basis for civil society. In this Hegelian view, represented by Berle himself and a range of legal-managerial scholarship, the corporation. O’Sullivan’s (2000, p. 1. Emphasis in the original) definition of corporate governance is representative of this extended theory of positive freedom:

Corporate governance is concerned with the institutions that influence how business corporations allocate resources and returns. Specifically, a system of corporate governance shapes and makes investment decisions in corporations, what types of investments they make, and how returns from investments are distributed.

Rather than simply speaking about the interests of “outside investors”, as La Porta et al.’s (1998) did, O’Sullivan’s (2000) included a wider set of “institutions” that all add to the production of economic value. This indicates a Hegelian tradition of thinking, making individual property rights merely the starting point for the corporate system and the wider institutional setup of the economic system at hand, i.e. in the contemporary period, competitive capitalism.

Based on the distinction between a Lockean and a Hegelian view of corporate governance, a number of objections to the minimal theory of corporate governance can be articulated. First of all, shareholders are neither de jure nor de facto, the firm’s investors (i.e. owners) in the way that the minimal theory suggests: “[F]rom a legal perspective, shareholders do not, and cannot, own corporations. Corporations are independent legal entities that own themselves, just as human beings own themselves” (Stout, 2012, p. 10. Emphasis in the original). “By folklore habit we say the buyer of stock of AT&T or General Motors has ‘invested in’ these companies; but this is pure fiction”, Berle (1962, p. 446) added. Second, shareholders are not the only residual claimants (as stated by e.g. Fama and Jensen, 1983) outside of the highly specific case of bankruptcy law (Stout, 2013). This is because in a world of incomplete contracts, complicated and costly to write and enforce, not only shareholders are exposed to various market risks: “When contracts are incomplete residual claimant status is a matter of degree and is not restricted to shareholders” (Garvey and Swan, 1994, p. 154).

Third, by legal statutes, directors are trustees, not the shareholders’ agents, and managers, who shareholder primacy advocates want to turn into the shareholders’ agents on basis of the two argument disqualified above (i.e. that shareholders “own” the firm and that they are the only legitimate residual claimants), are the agents of the directors and no one else. “In the eyes of the law, corporate directors are a unique form of fiduciary who, to the extent they resemble any other form, perhaps most closely resemble trustees”, Blair and Stout (1999, p. 291) said. In addition, in the role of trustees, bestowed with fiduciary duties, the board is expected to act in ways that contribute to social welfare and not only to enrich certain stakeholders such as shareholders. A Delaware Chancery Court statement (cited in Blair and Stout, 1999, p. 296) makes it clear:

[The Board] had an obligation to the community of interests that sustained the corporation, to exercise judgment in an informed, good faith effort to maximize the corporation’s long-term wealth creating capacity

As a consequence, shareholders cannot “control” managers, and to build a theory of the corporation on the premise that shareholders have contracted for such rights “grossly mischaracterizes the legal realities of most public corporations” (Blair and Stout, 1999, pp. 260-261).

Fourth and finally, as an empirical matter, the assumption that shareholders would be more prudent and demonstrate less proclivity to succumb to opportunistic and illicit behaviour than e.g. managers – systematically made suspicious of such weak moral fibre – is not a tenable proposition. As e.g. Coffee (1991, p. 1334) stated, “institutional investors should not be mistaken for financial saints”; nor will institutional investors “automatically represent all shareholders”, but they are likely to “favour the interests of their employers” in the case of diverging interests (Coffee, 1991, p. 1334). Therefore, Coffee (1991, p. 1367) induced, the reduction of agency costs (being the favoured, yet hard-to-measure estimate of the degree of management opportunism in the shareholder primacy literature) “cannot be the sole goal of corporate governance reform”, on the grounds that “monitors as well as managers can behave opportunistically” (Coffee, 1991, p. 1367). In addition, what free market protagonists at times address as the “free rider problem” (with Olson’s, 1965, term), and commonly being an argument in favour of de-regulatory reform, is present among the community of shareholders (Coffee, 1984, p. 1190). Speaking about how a “rational apathy” characterizes the behaviour of shareholders as no shareholder can, Coffee (1984, p. 1190) argued, “fully appropriate the gain that his individual efforts might produce”, Coffee said that the rational shareholders chose to take no action and thus generate a free rider problem. In other words, Coffee (1984) argued that opportunistic or self-interested behaviour does not solely exist in the executive suites but is a human quality existing throughout the economic system.

In the end, the question of corporate governance is a matter of how to balance individual interests and rent-seeking, and how to institute and enforce incentives for participating in collective action. Both the minimal Lockean and the extended Hegelian theory provide their own distinct benefits, but the one-sided dominance of the individualistic and reductionist Lockean theory in shareholder primacy advocacy has overstated the benefits of self-interest in this delicate balancing of individual rent-seeking and collective action. On the other hand, a dominance of the extended Hegelian theory in corporate governance theory would easily understate individual interests, with undesirable consequences following. While much agency theory and contract theory literature promoting the shareholder primacy model are unhesitantly Lockean in orientation and in its advocacy, the legal theory and management studies literatures arguably do better job to shed light on a wider field, indeed making corporate governance a matter of the institutional conditions supporting the corporate system and the specific firm in question. That is, a scholarship that contributes to the handling of corporate governance issues must continuously question the very foundation upon which such scholarship rests and not the least seek the roots of inherited and in many ways taken for granted doctrines and beliefs, or else the balancing of individual rent-seeking and collective action is tilted in either direction.


The flamboyant and provocative social theorist Slavoj Žižek (2008, p. 1) advised that theorists should avoid “an arrogant position of ourselves as judges of the past”. In the post-Second World War period, Hegelian statism has been both widely endorsed within the project to expand and deepen the welfare state and its provisions, and yet it has been treated as a thinly veiled argument in favour of a paternalist, even authoritative state by certain commentators, frequently in conservative and libertarian quarters. The recent decline in the faith in the liberal economy and its institutions, indicating that a new conventional wisdom is about to be established departing, from that once referred to as the “Washington consensus” among political commentators (Babb, 2013; Sheppard and Leitner 2010), may be equally problematic for the Lockean theory of individual rights. Efficient governance is rooted in both formal legislation and everyday practices, and in both cases the balancing of individual benefits and collective accomplishments remains imperative. Therefore, it is important to not abandon the Lockean, liberal inspirations now when the pendulum possibly swings back in this forthcoming period of governance reform. The Lockean and the Hegelian positions are thus complementary rather than mutually excluding frameworks for the establishment of governance legislation, regulation and practice. However, taking a Braudelian (1980) longue durée view of corporate governance breeds an understanding of how perennial issues have been tackled over time and with the ebb and flows of the economic cycles. For instance, the role of individual rent-seeking and collective action such as team production efforts, the balancing of the interest of financial and non-financial industries and director and management accountability are a few examples of corporate governance issues that have been debated over time and temporarily handled through specific practices and rules. What worried Thorstein Veblen, Louis D. Brandies and Adolf A. Berle in the 1910s and the 1930s may essentially be the same thing that worries scholars, policymakers and commentators in the beginning of the third millennium, despite all the finance industry innovations (e.g. the development of derivative instruments and the expansion of securitization of assets, the implementation of digital media including the recent use of high-frequency trading and “robot trading” [Arnoldi, 2016; Lange et al., 2016; Lenglet, 2011] and various legal and regulatory reforms). This ultimately testifies to the condition that when all things are said and done, human nature and the demand to both recognize individual self-interest and collaborative action remain stable factors over time. Governance scholarship thus needs to consider this condition and to reconcile various objectives within prescribed policies and practices.


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Further reading

Pitofsky, R. (1979), “The political content of antitrust”, University of Pennsylvania Law Review, Vol. 127 No. 4, pp. 1051-1075.

Wood, B.D. and Anderson, J.E. (1993), “The politics of US antitrust regulation”, American Journal of Political Science, Vol. 37 No. 1, pp. 1-39.

Corresponding author

Alexander Styhre can be contacted at: