Today is the rare day where I feel like a professor.  Dressed in jeans and drinking coffee in my office, I have been reading Colin Mayer's book Firm Commitment in advance of the Berle VIII Symposium in Seattle next week (you can also see Haskell's post & Joan's post about Berle).  That's not a typo, my agenda for the day is reading.  And not for a paper or to prep for class, I am just reading a book–cover to cover. I can hardly contain my joy at this.

I have been struck by the elegantly simple idea that corporations' true benefit is to advance (and therefore) balance commitment and control.  I have long viewed the corporate binary as between accountability and control.  Under my framework the two are necessary to balance and contribute to the checks and balances within the corporate power puzzle of making the managers, who control the corporation, accountable to the shareholders.  Colin Mayer posits that the one directional accountability of the corporation to shareholders without reciprocity of commitment from the shareholders to the corporation is a corrosive element in corporate design.  

"The most significant source of failure is the therefore that we have created a system of shareholder value driven companies who detrimental effects regulation is supposed to but fails to correct, and in response we week greater regulation as the only instrument that we believe can address the problem.  We are therefore entering a cycle of the pursuit of ever-narrower shareholder interests moderated by steadily more intrusive but ineffective regulation."

In developing the notions of commitment and control, I have found the following passages particularly thought-provoking:

"The financial structure of the corporation is of critical importance…The commitment of owners derives from the capital that is employed in the corporation. What is held within it is fundamentally different from what remains outside as the private property of its owners. What is distributed to owners as dividends is no longer available as protection against adverse financial conditions and what is provided in the form of debt from banks and bondholders as against equity form shareholders is secure only as long as the corporation has the means with which to service it."

"While incentives and control are centre stage in conventional economics, commitment is not. Enhancing choice, competition, and liquidity is the economist's prescription for improving social welfare, and legal contracts, competition policy and regulation are their basic toolkit for achieving it. Eliminate restrictions on consumers' freedom to choose, firms' ability to compete, and financial markets' provision of liquidity and we can all move closer to economic nirvana. Of course, economics recognizes the problems of time inconsistency in us doing today what yesterday we promised we would not conceive of doing today; of reputations in us continuing to do today what we promised to do yesterday for fear of not being able to do it tomorrow, and of capital and collateral in making it expensive for us to deviate from what we said yesterday we would do today and tomorrow. But these are anomalies. Economics does not recognize the fundamental role of commitment in all aspects of our commercial as well as our social lives and the way in which institutions contribute to the creation and preservation of commitment. It does not appreciate the full manner in which choice, competition and liquidity undermine commitment or the fact that institutions are not simply mechanisms for reducing costs of transaction, but on the contrary means to establish and enhance commitment at the expense of choice, competition, and liquidity. Commitment is the subject of soft sentimental sociologists, not of realistic rational economists. The sociologists' are the words of Shakespeare's 'Love all, trust few. Do wrong to none', the economists' those of Lenin:  'Trust is good, control is better.'" 

-Anne Tucker