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Wealth Creation and Wealth Sharing: A Colloquium on Corporate Governance and Investments in Human Capital

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A distinguished group of academics and practitioners revisits Blair's earlier book Ownership and Control: Rethinking Corporate Governance for the Twenty-First Century. In less than 90 pages, the participants review some of the most significant arguments in the field concerning Blair's contention that employees are legitimate stakeholders in corporations and that like shareholders, they too have firm-specific investments at risk, in the form of human capital. Blair looks at the current system and asks whether the allocation of risks and rewards is inevitable or should labor also be considered a residual claimant. The group seems to come close to consensus that firms should greatly expand their use of equity-based compensation systems in exchange for salary reductions. Blair suggests the use of restricted stock which can encourage commitment to the firm by requiring they continue their employment in order to reap the full benefits. In fact, many are already doing so, especially, as pointed out by Ronald Gilson, in high-technology industries. Some pension funds have recognized this in their proxy voting guidelines (see, for example TIAA-CREF which has different stock dilution guidelines for high-technology industries). An encouraging note comes from Jonathan Low, Deputy Assistant Secretary for Work and Technology Policy at the U.S. Department of Labor who indicates that five different groups have approached the Department that are looking to set up screens or create funds based on workplace practices and investments in human capital. Low also cites a study by Wayne Cascio, of the University of Colorado, on the effects of massive downsizing. Three years after downsizing, sample companies had subsequent earnings increases of 183%, whereas comparison firms in the same industries that did not downsize had earnings increases of 422%. Cumulative stock returns over three years were 4.7% vs 34.3%. He concludes that pension fund managers "would be justified in encouraging a second look at such tactics."