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  • Klaus Ilmonen

The Elephant in the Room: The Distribution of Economic Growth and Corporate Governance

From August 16, 2016

There has been much concern that economic growth has eluded the middle-classes. Economic development has raised an immense number of people from poverty globally. In the industrial world, however, the economic system has benefited the wealthiest, but left the lower middle and working classes behind – or even worse off. In the famous “elephant-graph” developed by economist Branko Milanovic, the downward sloping snout of the elephant represents the decreasing prospects of the middle classes – while its upward end represents the increased incomes of the wealthiest. On a global level economic development has been positive; but for the developed West the decreasing prospects of the working and middle-classes has brought uncertainty and political instability. The development of industrial structures may well strengthen the trend further. We have already seen results of this development in the increase of populist politics and pressure on established democratic dynamics.

These trends can have significant effects for financial markets and for corporate regulation as well. Corporate governance is the result of bargaining among corporate constituencies over the inputs and outputs of the corporate enterprise (Nobel, 2009). A key factor has been the alignment (and dis-alignment) of interests among shareholders, managers and labour. The interests of these constituencies can shift over time as the political economy evolves (Gourevitch & Shinn, 2010). The question is how the current trends in the West will be reflected in corporate governance outcomes. Labour is likely to further lose bargaining power as their role in production decreases. As the business environment becomes increasingly complex and managerial work more demanding, managers  are becoming a more rare commodity and their bargaining power is likely to increase. Shareholders have increasingly diverse investment horizons and may have coordination challenges with respect to actively pursuing their interests. Will this be a return to managerialism and a focus on investor protection based on a class-conflict model of corporate governance (Gourevitch & Shinn, 2010).

The Milanovic model in Bloomberg news:

Gourevitch & Shinn, Political Power & Corporate Control 2010:

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