Corporate governance and wealth and income inequality

• Published date: 01 November 2021
• Author: Daniel Brou,Aroop Chatterjee,Jerry Coakley,Claudia Girardone,Geoffrey Wood
• Date: 01 November 2021
• DOI: http://doi.org/10.1111/corg.12391

REVIEW ARTICLE

Corporate governance and wealth and income inequality

Daniel Brou

1

| Aroop Chatterjee

2

| Jerry Coakley

3

| Claudia Girardone

3

|

Geoffrey Wood

1

1

DAN Management and Organizational

Studies, Western University, London, Ontario,

Canada

2

Southern Centre for Inequality Studies,

University of the Witwatersrand,

Johannesburg, South Africa

3

Essex Business School, University of Essex,

Essex, UK

Correspondence

Geoffrey Wood, DAN Management and

Organizational Studies, Western University,

London, Ontario, Canada.

Email: gwood23@uwo.ca

Abstract

Research Question/Issue: There has been growing concern about rising social

inequality and its effects on general well-being and the polity. Much of this rise can

be traced to changes in the manner in which corporations or firms are governed and

how this impacts on income and wealth dispersion. This study systematically reviews

the most recent literature on external and internal corporate governance (CG) that

deals with the issue of income and wealth inequality.

Research Findings/Insights: External mechanisms such as institutional regime

(defined in terms of varieties of capitalism—liberal or coordinated markets) and

financialization reveal important insights, often implicitly, into what makes or sustains

inequality. The rise of the platform business model raises explicit concerns about

increasing wealth and wage inequality. This is because it is associated with a rapidly

growing precariat of gig workers, Big Tech entrepreneurs with untrammeled levels of

control and extreme levels of personal wealth, and widespread tax avoidance despite

record profits. The literature on internal CG is somewhat constrained in its reliance

on agency theory and a focus on shareholder primacy. This only provides limited

insights on how internal CG mechanisms impact on inequality. However, in recent

work, the issue of perverse incentives posed by CEO reward systems and their

impact on organizational sustainability and wage dispersion are receiving increasing

attention.

Theoretical/Academic Implications: Some studies do attempt to widen the lens, and

we suggest a greater focus on theorizing codetermination and alternate forms of

ownership, non-monetary incentives, the power of the Big Tech companies, and

those strands of comparative institutional analyses that explore the determinants of

internal CG structures.

Practitioner/Policy Implications: The study reasserts the importance of the firm as a

central analytical paradigm in understanding income and wealth inequality and that,

in seeking to ameliorate the latter's negative consequences, more attention needs to

be accorded to the governance and regulation of firms.

KEYWORDS

corporate governance, inequality, review

Received: 8 September 2019 Revised: 19 April 2021 Accepted: 23 April 2021

DOI: 10.1111/corg.12391

612 © 2021 John Wiley & Sons Ltd Corp Govern Int Rev. 2021;29:612–629.wileyonlinelibrary.com/journal/corg

1|INTRODUCTION

There is a growing concern worldwide about the social, economic, and

political consequences of rising inequality. It has been argued that

rising inequality brings in its wake health, political, and social ills

(Bor et al., 2017; Hacker & Pierson, 2020; Skocpol &

Hertel-Fernandez, 2016; Subedi, 2017). Against the backdrop of an

increasing concentration of wealth at the top end of the distribution

(see Bharti, 2018; Blanchet, 2016; Chatterjee et al., 2020; Novokmet

et al., 2018; Piketty et al., 2019), the uneven spread and outcomes of

the Covid-19 pandemic (see Stabile et al., 2020) have exacerbated this

concern. At the same time, the rise of populism has widely been

ascribed to a backlash against rising wealth and income inequality that

is associated with declining or stagnant standards of living, combined

with decreased access to “decent”jobs, as well as occupational and

income precarity (Berlet & Lyons, 2018; Han, 2016).

The firm is an essential part of the process of wealth and income

creation and distribution and, hence, plays a central role in mitigating

or exacerbating inequality. Firms are defined to include both private

or unquoted companies and public corporations. Both of these are

separate legal entities but differ with respect to their organizational

architecture and capacities (Veldman, 2019a) and their regulation and

associated disclosure requirements. Many of the proposed explana-

tions for increasing income and wealth inequality relate to how we

see or conceptualize firms and the nature of their corporate

governance (CG): performance pay (Lemieux et al., 2009), skill-based

technological change (Acemoglu, 2002; DiPrete, 2007), arbitrary man-

agement power (Gordon & Dew-Becker, 2007), diminishing bargaining

power of (low-level) employees (Card et al., 2004), superstar labor

markets (Kaplan & Rauh, 2009), increasing firm size (Mueller

et al., 2017), foreign competition (Autor et al., 2013), and Big Tech

firms or digital monopolies (Zingales, 2020). Firms make choices as to

the internal distribution of wages and wage security, retirement

benefits, and job security; these are molded by relative rights and

behaviors of owners and other stakeholders, which tend to follow

dominant patterns in specific institutional regimes, whether these be

national or broader (as in the case of financialization and platform cap-

italism). In many national contexts, these regimes have worsened, and

this has been linked to changes in CG (Schymik, 2018; Till &

Yount, 2019). More generally, there is increasing discontent about the

role that firms play in achieving society's goals, leading to calls for

them to consider responsibilities broader than shareholder wealth

maximization and to have other stakeholder interests entered explic-

itly into their objectives and decision making (Haldane, 2015;

Hart, 2020; Veldman et al., 2016).

This article reviews how the literature deals with ways in which

governance relates to, and impacts on, inequality. More specifically, it

systematically reviews and synthesizes papers from several research

areas in order to study the relationship between CG and the unequal

distribution and reallocation of wealth and income. It is generally

agreed that no one definition fully captures the study of CG, drawing

as it does from a variety of fields of study (financial economics, corpo-

rate finance, management, organizational studies, industrial relations,

etc.), so we begin by establishing a workable definition of CG.

1

We

maintain a broad definition and borrow from Blair (1995), who defines

CG as “the whole set of legal, cultural, and institutional arrangements

that determine what public corporations can do, who controls them,

how that control is exercised, and how the risks and return from the

activities they undertake are allocated”(Blair, 1995, p. 3) This defini-

tion has the benefit of being broad enough to include both internal

and external mechanisms that may or may not be mandated by law to

cover these areas of firm behavior (Goergen, 2018).

We expand this simple definitional framework to delineate the

conceptual link between CG and inequality.

2

The firm is central to

the issue of inequality because firms (both public and private) are the

main institution in society through which value is created and distrib-

uted. External and internal CG processes are the transmission mecha-

nisms through which societal forces are channeled through the

corporation and into the distribution of income and wealth. More than

simply determining “what public corporations can do,”CG constrains,

influences, and shapes both the goals that firms set and the actions

they take. In deciding how to organize itself, which products to mar-

ket, how to produce and price them, and how to distribute its surplus,

the firm makes decisions that determine which members of society

receive an income, how much each member obtains, and how volatile

this income may be. Wealth—the accumulation of income and owner-

ship of assets—directly and indirectly shapes and is shaped by firm

decisions and actions. For instance, maximizing shareholder value

affects the way a firm distributes value between workers and share-

holders to the benefit of the latter. Deciding to implement

performance-based compensation schemes may, inter alia, affect the

way risk is allocated between management and owners. More broadly,

CG can affect a firm's ability to prevent its goal setting and decision

making from being abused for the benefit of a select group of

stakeholders.

As an organizing principle, we divide the key aspects of CG into

those external and those internal to the firm. Our focus is on how

these aspects of CG can each affect inequality through their influence

on firm behavior. This is an important distinction because, for exam-

ple, national institutions or market conditions can certainly have a

direct effect on inequality across an economy on a top-down basis,

whereas internal ones may remake inequality from individual firms

upwards.

Finally, we recognize that causality does not run in one direction:

changes in inequality can themselves have an effect on CG arrange-

ments and firm behavior. Increasing disenchantment with the way

society creates and allocates income can change the level of support

for national institutional arrangements, lead to political action, and

result in changes to the way firms are governed. Similarly, consumer

backlash against specific firm practices can limit the set of actions

available to a firm. Figure 1 summarizes the framework described in

the preceding discussion.

We begin the review by focusing on external CG. A sizable litera-

ture exists on the effects of national institutions and their associated

CG structures on inequality. This work studies the effects of different

“bundles”of institutions and how this impacts on the firm. Central to

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