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The University of Chicago Business Law Review

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235

Abstract

This essay outlines foundations of the current moment facing corporations and politics, which I have characterized as a new “problem of twelve”—that is, the concentration of power in the hands of a small number of index and private equity fund sponsors.1 Through the middle of the twentieth century, public companies dominated the U.S. economy and government. They owed their dominance to having been socially legitimated coming out of the Great Depression, a legitimation built on their affirmative war efforts and on the negative constraints of securities law, progressive taxation, labor unions, and operational regulation. From 1970 on, however, they changed and were dramatically changed by politics and economics. American corporate leaders used politics to liquidate most of their New Deal constraints, simplifying governance of public companies, only to face a new political constraint in the form of the institutional investors, and new economic constraints in the form of globalization, automation and the “technology” of hostile takeovers and private equity.

How did corporations shake off their New Deal political constraints? Corporate leaders invested in their own political capital and applied the resulting power to roll back antitrust law, taxation and regulation. Most importantly, they laid low their most powerful political rival—private sector labor unions. As they achieved political victories, however, public companies’ autonomy in fact dramatically shrank. Indeed, they faced an existential crisis – in the form of globalization, inflation, automation, hostile takeovers, and LBOs (i.e., private equity). Since 1990, they have also faced an ongoing challenge in the form of a “shareholder rights movement,” in which institutional investors organized politically, first by public pension funds and hedge funds, and lately increasingly by index funds. Meanwhile, private equity, which seemed to diminish in the recession of 1989–91, has more than recovered and has been growing much faster than public equity markets, displacing public companies in both the economy and the political system.

This combination of “liberated” corporate power re-constrained by markets and shareholders sets the stage for the current politics of the “problem of twelve” created by the ongoing growth and concentration of index and private equity funds. If corporations had not been politically “liberated” from 1970 on, the influence of index and private equity funds would be less important to the political system and to the economy. If companies had not faced the whirlwind of global capitalism and the technology shocks it ushered in, choices in how they were governed would not have had such dramatic implications for the economy and polity. If institutional shareholders had not developed the standard suite of powers they use to influence companies—policy formation and coordination, lobbying, shareholder resolutions, and more inthe-weeds but crucial governance tools such as majority vote bylaws—the ability of index funds to influence companies would be significantly weaker. If labor had not been decapitated as a political force, the ability of private equity fund lobbying to eliminate the remaining New Deal constraints on their growth would likely not have been successful. If companies had not become the core not only of the U.S. economy but of its political economy, the stakes for how investment funds are governed would be lower.

With this context, it can be better understood why index and private equity funds are increasingly perceived as – and indeed often are – politically active and influential. It also becomes more understandable why other political actors – civil society organizations, social activists, political parties and politicians – have responded and are continuing to respond to these funds’ growing economic clout and political power. Without the backstory, it would be hard to understand how an application of one essence aspect of capitalism—finance—has increasingly attracted political focus on topics such as diversity, treatment of workers, and climate change. Asset managers now draw charges of “socialism” from the right, and charges of antitrust harm and of foot-dragging on other salient issues, such as corporate political disclosure, from the left.

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