Failure of US 'economic democratization'

By Shin Jang-sup

As Korea's National Assembly starts its new four-year term, opposing political parties are unanimous in arguing that social polarization is the most serious problem facing Korean society and suggesting "economic democratization" as its solution. In his opening speech of the Assembly last month, Kim Chong-in, the leader of the opposition Minjoo Party of Korea (MPK), claimed that the current Park Geun-hye government has abandoned its initial election promises to realize "economic democratization" and, to correct the situation, his party has submitted amendments to commercial law to achieve economic democratization. Chung Jin-suk, the floor leader of the incumbent Saenuri Party, while contending that there has been some progress in economic democratization in Korea since the Park government came to power in 2014, also emphasized the importance of furthering economic democratization as a solution to the "polarization of capital."

The term "democratization" is an appealing word to most of the populace. In fact, many believe that democratization is an ideal any society should pursue. However, the problem with "economic democratization" is that it is not clear what it actually means in running an economy or business in a capitalist country, what are the tools to achieve it, who are its eventual beneficiaries and so on. We are probably still encountering such clamors for economic democratization because of the ambiguity of the term when it is applied to actual policies even though the term has been used in policy discourse in Korea for quite a long while, and Korea actually underwent a major corporate restructuring in the name of "economic democratization" under the tutelage of the International Monetary Fund (IMF) after the foreign exchange crisis in 1997.

To make sense of the discourse of economic democratization, it is necessary to understand what really happened in the U.S. where the term originated and where it has been practiced longer than in Korea. In contrast to the situation in Korea where economic democratization contains anti-chaebol sentiment and presupposes that professional management is preferable to family management, economic democratization in the U.S. emerged as an antithesis of what people perceived as "autocratic professional management."

From the early 20th century, ownership of major U.S. companies became dispersed to minority shareholders and what business historian Alfred Chandler named "managerial capitalism" flourished. Professional managers focused their efforts on expanding their organizations. They were "organizational men" whose competency was vindicated by promotion within their company hierarchies. They were "corporate generals" who carried out the great strides of the U.S. economy in the middle of the 20th century.

However, they started facing increased criticism in the 1970s that they were over-diversifying their businesses just for the sake of growth at the expense of profits and shareholder interests. They were also accused of building their own "fiefdoms" inside corporations. Added to the negative perceptions of U.S. managerial capitalism was the fact that new competition ― especially from the Japanese and Germans ― was beginning to catch up. Many of them were also suffering economic problems due to the global recession and inflationary pressures caused by the two oil shocks. At the vanguard of criticizing U.S. public corporations were various shareholder activists, including labor activists, corporate raiders, most institutional investors, activist-oriented academics and lawyers. Despite their diverse backgrounds and motivations, they formed a common front against U.S. corporations under the banner of shareholder value.

The U.S. corporate sector consequently underwent a major restructuring process often by "hostile takeovers" in the 1980s. It is still controversial whether the restructuring actually helped strengthen the U.S.'s corporations or economy. It is not controversial, however, that the restructuring irreversibly changed the power relations between corporations and financial investors. Corporate managers accepted the maximizing shareholder value ideology as the new creed of managing corporations. Achieving and maintaining higher stock prices, rather than sales growth and expansion of businesses, became the primary objective of CEOs. Corporations thus carried out major cost-cutting measures through shedding workers, merging different operations, outsourcing manufacturing and services, moving production facilities to low-cost countries and so on. Even in Silicon Valley, it has become the preferred method to employ young foreign professionals who can work longer hours at a lower salary over continuing to employ experienced locals.

The collapse of the middle class and the emergence of the "1% versus 99%" framework in the U.S. had much to do with this restructuring process. The "Trump phenomenon" in which both blue-collar and white-collar workers are disenchanted with the current political establishment and instead supporting Donald Trump in the U.S. presidential race, is also grounded in the restructuring based on shareholder value ideology.

Those who advocate economic democratization in Korea tend to ignore this negative side of U.S. restructuring. Some even show a tendency to accept whatever happened in the U.S. as the "global standard" that other countries should follow. But an undeniable fact is that major beneficiaries of pursuing economic democratization through shareholder democracy in the U.S. were financial institutions and some corporate executives who were awarded with lucrative stock options. Most workers and ordinary people were marginalized. The end result was far from the ideals of democracy.

However, advocates of economic democratization in Korea are still proposing U.S.-style policies to strengthen the power of "minority shareholders" and making their "independent" agents participate more actively in corporate affairs. These attempts are highly likely to repeat U.S. failures. Financial investors would definitely benefit from it. Lawyers, accountants, scholars, retired public servants and even retired politicians will be beneficiaries because they are the ones who will be needed to fill those new posts in "independent" boards and various supervisory organizations. However, workers will lose out in the process of achieving short-term profit targets and maximizing shareholder value. Entrepreneurship is also likely to further decline.

Robert Monks, a leading shareholder activist in the U.S., even admitted in his later years that his activism went nowhere and said it might be better to have a corporate governance system run by strong owner-managers, like Warren Buffet's‎ Berkshire Hathaway, than one run by professional managers or heavily influenced by financial investors. There is no universally best corporate governance system. There are only alternative second-best or even third-best systems with their own pros and cons.

The main task of the Korean government is to find concrete ways to achieve equitable distribution while maintaining economic dynamism in the context of the Korean economy, rather than sticking to the ambiguous term of "economic democratization" and attempting to implant the failures of the U.S. in Korea without critical assessment.

Shin Jang-sup is an economics professor at National University of Singapore and former adviser to Korea's finance minister.

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