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Review of Prosperity: Better Business makes the Greater Good, by Colin Mayer

Article  in  Business Ethics Quarterly · November 2019

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Ryan Burg
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Ryan Burg, Bucknell University

According to Colin Mayer’s Prosperity, every enterprise should be owned, governed,

and managed with a coherent sense of purpose. Working from international and

historical examples, this interdisciplinary monograph advances the cause of

idiosyncratic value by rethinking the legal and financial aspects of business.

Given the scope of the ethical challenges faced by the financial sector, more

contact is needed between financial theory and business ethics. As such, Mayer’s

contribution is particularly welcome. Its ten chapters deal with principles (chapter

1), purposes (2), and values more widely within the firm; the history (3) and

ownership (4) of the corporation; the governance of the firm (5) and measurement

of its performance (6); the legal (7) and regulatory (8) environment in which firms

operate; and the financial (9) and investment (10) processes that strengthen or

undermine corporate purposes. A confusing preface introduces the book and a

helpful postscript concludes it.

In lieu of a foundational principle like shareholder primacy or stakeholder

fairness, Mayer proposes “purpose primacy” (2018: 230). Purposes are “value

propositions” (109) that define performance: "Until one knows what the

corporation set out to do, one has nothing to say about how well it has done" (7).

Contrary to financial theorists who view comparability as the hallmark of capital

markets (see Hsieh, 2007), Mayer sees overemphasized financial performance as

derailing the sense of purpose that founders, employees, and investors bring to an

organization.

Many scholars recognize the wide diversity of firms, but Prosperity celebrates

this distinctiveness in a new way. Gone are boilerplate articles of incorporation and

cut-and-paste ethics statements. Instead, Mayer contends that a firm’s specific

purpose should be baked into its governance and ownership structures,

management practices, and the way that it is regulated.

The sense of purpose that Mayer extols does not prescribe any particular

ends, but some means are proscribed. Mayer’s version of the harm principle

prohibits capital depletion and capital offsetting, suggesting that a firm cannot

deplete natural or social capital to enhance financial capital (133-4). The argument

is an interesting application of the triple-bottom-line approach. It is helpful that,

relative to full cost accounting, non-depletion can be accomplished without

ascribing a numerical value to incommensurable forms of capital (139-40). This

argument for non-depletion overlaps with what I have called “object stewardship,”

(Burg, 2018:64). Mayer’s formulation is useful because it integrates well with

established accounting procedures.

In promoting this pluralistic definition of firm capitalization, Mayer sets up a

key aspect of his critique of the Friedman doctrine. Historically, shareholders stood

in partnership with other stakeholders. Then agency-based approaches to corporate

governance came to dominate and began to exaggerate owners’ importance. While

financial capital might once have been in short supply, Mayer claims that we are in a

new phase of financial history. Financial capital is less scarce than it used to be,
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particularly in comparison with natural and social capital, which are increasingly

depleted (203). Short-term ownership worsens conflicts both among shareholders

and between shareholders and other stakeholders (103, 162). A sense of purpose

may help to adjudicate competing claims on organizational resources.

“Purpose” is a generic concept that does a lot of work in Mayer’s Prosperity.

Mayer views firms as evolved economic systems that encapsulate individual

contributions to common projects. A firm’s purposes exceed what any individual can

accomplish, but collaboration comes at the expense of agency: "once voluntarily

adopting the corporate form, the providers of its capital are trapped in an embrace

from which there is no escape" (49). Purposiveness establishes and maintains the

fragile alliances upon which corporate commitments depend.

Despite an interesting account of interdependence and the importance of

commitment, Mayer’s purpose argument is fragmented and reliant on an obscure

biological metaphor (algae and foraminifera symbiosis). Mayer seems unaware of

the stakeholder fairness arguments that run in the same direction, and focuses

instead on a practical claim that purpose primacy is better able to establish and

maintain trust so that corporations can sustain commitments. Such an argument can

only be tested with practice.

While purpose primacy is among Prosperity’s more novel contributions, the

application of this argument to corporate governance shows the book’s more radical

program. The defense of an unequal distribution of shareholder power exemplifies

this radicalism.
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Mayer lauds family ownership (90), dual class shares (90-1, 125), the history

of local capital markets in England (92), the history of family governance in Japan

(96), industrial trusts (162), boards that appoint trustees to protect a firm’s mission

(161-2), and ownership by employee pension schemes (192). Generalizing across

these examples, Mayer favors modes of investment and governance that utlize

interpersonal norms and organizational commitments and disfavors anonymous,

short-term market relations.

Mayer may be justified in preferring the close social relations of embedded

ownership structures to the status quo standard of anonymous shareholding.

Individual investors’ subtle moral priorities are often drowned out by institutional

intermediation. In comparison, legacy blockholders are demonstrably more capable

of sustaining a dialogue with management and governing for the long term.

Nevertheless, agency and democratic theorists have reason to question Mayer’s

defense of unequal voting rights.

The concern in agency theory is that principals with diminished control

rights will be unable to organize in order to protect their interests with respect to

the shares that they hold. In Google, for example, where some shares give ten votes

each, others one, and others no votes at all, one might worry that the owners of non-

voting shares will be subject to the idiosyncratic preferences of the owners of voting

and super-voting shares. Mayer is aware of the risk that control rights will be used

to expropriate resources from minority shareholders, a risk that is exacerbated by

the hybrid forms that he discusses (91). He nevertheless concludes that these
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arrangements are often necessary to sustain and enhance a firm’s idiosyncratic

value.

While Mayer has little to say about property-based accounts of owners’

rights, he makes some provocative claims about owners’ responsibilities:

“ownership involves committing to, not controlling, entrepreneurship and

innovation” (90). On this account, the moral status of an owner is partially

determined by that owner’s commitment to a firm’s purpose.

This is where I see Prosperity’s argument as being the most compelling.

Owners who are committed to firms that are, in turn, committed to meaningful

pursuits have a special moral status. They secure a moral claim to their just deserts

by having earned them, by having helped to accomplish something that they did on

purpose without depleting resources in the process. Being purposeful invites

innovation through specialization in capital provision, management, and business

strategy. In contrast, firms without a specific sense of purpose are less capable of

accomplishing anything because they do not know what they are trying to do:

“Vacuous statements of values create a vacuum in social contracts that companies

cannot credibly fill” (187). Most corporate governance is generic corporate

governance, so the suggestion that generic corporate governance cannot generate

effective norms is a serious critique of the status quo.

Mayer attributes a significant range of business mismanagement and

environmental misconduct to the governance function and the profit motive. He

suggests that purposive businesses should decide how to be owned with care, given

these risks and also the opportunities that are being missed. Mayer makes reference
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to a striking number of cases where industrial trusts and founding families have

stewarded the value of the firms that they govern, countering the agency theory

critique.

The democratic critique of Mayer’s proposal is more serious. In this age of

elite power, mass inequality, and rising political authoritarianism, granting outsized

control to blockholders involves a further concentration of power within the

corporate governance system. For Mayer, corporations are “inhumane because we

have taken humans and humanity out … and replaced them with anonymous

markets and shareholders over whom we have no control” (45). I understand the

mechanisms of social control that Mayer trusts, but I wonder how smoothly this

machinery can function when the blockholders wield the political influence of the

Walton, Koch, or Mars families.

I do grant the claim that financial relationships within publicly traded firms

have tended to level these firms’ purposes and mute their moral distinctiveness.

Long-term planning, environmental stewardship, and effective management have

suffered as a consequence. Perhaps Mayer is right that many firms should be

governed like non-profits with self-appointing boards to buttress the firm, its

stakeholders, and its managers from excessive short-termism.

If elites can be entrusted with a firm’s purposes, as they were when it was

founded, they promise to have a greater capacity to support innovation than

anonymous market processes. Just as we mock Soviet artistic expression that was

designed by committee, so too might we doubt that decentralized, anonymous, and

ephemeral owners are capable of the integrity and expressive depth required to

uphold important corporate commitments.

The need to uphold commitments ranges beyond the dynamics of

relationships with owners. In the penultimate chapter, Mayer takes on the challenge

of explaining how investments in infrastructure can be improved or sustained more

reliably. Mayer’s answer is consistent with his argument throughout the text: trust

facilitates collaborative relationships that make credible commitments on all sides.

For example, when political bodies agree to terms with private businesses such that

these businesses make significant public investments with the promise of future

returns, the government needs to find ways to ensure that the terms of that

commitment are upheld. Mayer goes so far as to propose that the distinction

between the purposes of business and state be abolished because their purposes

overlap. The state alone cannot guide firms’ purposes through the law, and

important aspects of public goods provision cannot be addressed without states and

firms working in concert.

I would like to have seen more emphasis placed on transparency as a key

feature of public-private partnerships, but the coverage in Mayer’s argument is

balanced by other important considerations. For instance, Mayer observes that

states’ eagerness to privatize public assets has been promoted by a public

accounting error, a failure to value the public sector capital and its functioning in

society. The book includes a number of insightful observations of this sort. In critical

chapters on investment and finance, Mayer carefully deconstructs the tax incentives

that have made firms so eager to receive loans rather than investments, which have
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also shaped the leverage that banks take on. Once again, Mayer deals with these

issues by proposing a focus on purposes. He contends that regulators should focus

on the function of financial markets, applying the same regulatory spirit to activities

in shadow banking and publicly insured banks when their functional roles overlap.

That the argument in Prosperity is thin on some literatures can be forgiven

provided that it achieves sufficient novelty in other areas. One area where it does so

is stakeholder theory. Some aspects of the text are sympathetic to stakeholders.

Mayer explains that “[t]he purpose of the corporation is to do things that address

the problems confronting us as customers and communities, suppliers and

shareholders, employees and retirees” (40). Elsewhere, Mayer views stakeholders

as a hindrance: "the corporation is capable of delivering substantial benefits to its

customers and communities" provided that it is "freed from the shackles of

particular interest groups, be they shareholders, employees, or governments" (4).

Late in the book, Mayer provides an example of this through the innovation of

mobile money as a payment platform in Kenya(177-8), an innovation that would not

have been possible if the emergent platform had been shackled with excessive

regulation.

If purpose primacy can be squared with stakeholder theory, it can answer

difficult governance and regulatory questions to support stakeholder responsibility.

Yet, Mayer sometimes seems to suggest that purpose primacy can proceed without

emphasizing stakeholder relations. I find this implausible. What is a “purpose”

without an individual or group to value it? Mayer’s theory of corporate

consciousness obscures more than it clarifies, particularly in light of his prediction

that artificial intelligence will soon establish firms’ purposes (57). A simpler path for

purpose primacy is through a stakeholder model. It need only grant that purposes

come from people and groups and also recognize that firms can be organized to

serve different stakeholder communities.

Prosperity’s grand vision is that stakeholders, including shareholders,

should place trust in managers and a core block of owners based upon an

expressed purpose for the firm. Once they do so, managers are then freed to do

what they set out to do and to innovate and improve as they go. Not surprisingly,

the text is on its surest footing in later chapters when it stays closest to the author’s

area of expertise. The chapters on ownership, governance, performance, law, and

finance are peppered with interesting insights, and they build an argument that will

challenge key assumptions shared by many business ethics scholars. Alas, the book

barely acknowledges nearly fifty years of responses to Friedman.

The biggest limitation of Mayer’s Prosperity is the biggest opportunity for the

discipline of business ethics. The text leaves many questions unanswered as far as

what purposes firms ought to pursue. A theory of purpose provides a point of

departure for posing these questions, but Prosperity ends where business ethics

begins, with a need to distinguish just, righteous, virtuous, or good corporate

purposes from those that are not.

REFERENCE

Burg, Ryan (2018) Business Ethics for a Material World: An Ecological Approach to

Object Stewardship. Cambridge: Cambridge University Press.

Hsieh, Nien-hê (2007) “Maximization, Incomparability, and Managerial Choice.”

Business Ethics Quarterly 17(3): 497-513.

Ryan Burg serves as visiting assistant professor at Bucknell University’s Freeman

College of Management. He holds a joint Ph.D. in business ethics and sociology from

the University of Pennsylvania. His research focuses on the scope of business

responsibility, particularly where state and market failures coincide. His current

project considers the moral animus of money, asking whether movements to reform

currency might improve upon the ecological disappointments of private and public

regulation. Burg recently published Business Ethics for a Material World (2018). The

book was a finalist for the Academy of Management’s 2019 Social Issues in

Management book award.

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