Corporate Governance and 'Economic Democracy': An Attack on Freedom

PROCEEDINGS OF CORPORATE GOVERNANCE: A DEFINITIVE EXPLORATION OF THE ISSUES, C.J. Huizenga, ed., UCLA Extension, 1983

Harvard Business School NOM Unit Working Paper No. 1983

24 Pages Posted: 11 Nov 2002 Last revised: 17 Jan 2011

Michael C. Jensen

SSRN; Harvard Business School; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Harvard University - Accounting & Control Unit

William H. Meckling

Simon School, University of Rochester (Deceased)

Date Written: June 30, 1983

Abstract

In this article we review the implications of the Nader proposals for Taming the Giant Corporation and the related campaigns for economic and corporate democracy. These campaigns, if successful, would impose costs on one group for the benefit of others, reduce economic efficiency and wealth, and finally would reduce, not increase, freedom.

Corporate democracy advocates would impose restrictions on the freedom of individuals to associate, contract, and produce through the corporate form. In doing so they often use the analogy with the political state to buttress their arguments without coming to grips with the essential difference between the government (whether local, state or federal) and a corporation: Only a governmental has the legal monopoly over the use of physical coercion and violence on individuals (including arrest and imprisonment) to compel compliance with the dictates of the state. No corporation no matter how large has the police powers. No corporation has the legal right to use violence to compel any individual to buy from it, sell to it, invest in it, or work for it.

We offer a new definition of freedom. Maximal freedom exists in a society if: (1) the rights system passes on to individuals the full set of opportunities provided by nature, and (2) the state enforces its monopoly over violence, and (3) each person has exclusive rights in his or her body. In this system the state is required to use coercion and violence to enforce the rights which resolve the physical incompatibility problem, and to maintain the state's monopoly over the use of violence.

In conclusion we call on the various public interest lawyers and organizations to use their resources to increase freedom and aggregate welfare. They can do this by focusing their resources on preventing the use of the police powers for private benefit, for wealth confiscation, and for political theft.

Keywords: definition of freedom, economic democracy, corporate democracy, corporategovernance, role of government, contracting, federal chartering, violence, police powers, rights

Suggested Citation

Jensen, Michael C. and Meckling, William H., Corporate Governance and 'Economic Democracy': An Attack on Freedom (June 30, 1983). PROCEEDINGS OF CORPORATE GOVERNANCE: A DEFINITIVE EXPLORATION OF THE ISSUES, C.J. Huizenga, ed., UCLA Extension, 1983; Harvard Business School NOM Unit Working Paper No. 1983. Available at SSRN: https://ssrn.com/abstract=321521 or http://dx.doi.org/10.2139/ssrn.321521

Michael C. Jensen (Contact Author)

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Harvard Business School ( email )

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European Corporate Governance Institute (ECGI) ( email )

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Harvard University - Accounting & Control Unit ( email )

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William H. Meckling

Simon School, University of Rochester (Deceased)

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