Bridge over ocean
1 January 1978 Financial Analysts Journal Volume 34, Issue 1

Can the Corporation Survive?

  1. Michael C. Jensen
  2. William H. Meckling

The most spectacular period of economic growth in our history is over. It is over not because of technological constraints, or any energy shortage, or environmental disaster, but because our government is destroying two vital instruments of that growth—the system of contract rights and the large corporation.

Participants in the government sector—politicians and bureaucrats—have the same incentive as the rest of us to expand the set of rights from which they benefit. While they cannot literally acquire title to assets, they can, through revocation and abrogation of rights, ensure themselves some control over them. They can, through this control, bestow benefits on others who can return the favor in the form of votes, funds, job offers, etc.

Although two sorts of constraints—the Constitution and the electorate—limit politicians’ efforts to dismember the system of private rights, in recent years neither has been very effective. The courts have often taken the lead in revoking private rights, especially in the civil rights arena. The electorate has become divided into special interest groups that play directly into the hands of politicians.

The corporation is particularly vulnerable to the attacks of politicians promoting special interest groups. Politicians are fond of distinguishing between “human rights” of individuals and “property rights” of corporations. The corporation is, in fact, merely the nexus for a very complex set of contract rights among individuals. Conflicts between human and property rights are, in the last analysis, conflicts between individuals.

With the common-law devotion to precedent, which assured substantial stability in the structure of property rights, being abandoned by the courts and overridden by legislative action, investors have become much less certain that any contract they enter into now will be subject to the same rules and regulations in the future. An early consequence of the erosion of property rights will be a reduction in the capitalized values of corporate securities, with many corporations able to remain in business only so long as they can finance their operations from internally generated cash flow or public subsidy.

Read the Complete Article in Financial Analysts Journal Financial Analysts Journal CFA Institute Member Content

We’re using cookies, but you can turn them off in Privacy Settings.  Otherwise, you are agreeing to our use of cookies.  Accepting cookies does not mean that we are collecting personal data. Learn more in our Privacy Policy.