ELON MUSK AND THE AGE OF THE CORPORATE LEVIATHAN / THE ECONOMIST

Elon Musk and the age of the corporate leviathan

For the world’s largest companies, the normal rules of corporate governance no longer apply

Elon Musk as a crowned giant whose body is made of colorful shareholder silhouettes rising above high-rise office buildings. He holds a dollar-sign sword in one hand and a Saturn-like globe topped with a rocket in the other / Illustration: Brett Ryder

In 1989 Francis Fukuyama famously and prematurely wrote that the world was seeing “the total exhaustion of viable systematic alternatives to Western liberalism”. 

A decade later Henry Hansmann and Reinier Kraakman, two American law professors, made a similar argument about the way companies are run. 

The world was converging on a superior model of shareholder capitalism, they argued: firms subordinating the interests of capital to managers, workers and states would soon crumble like the Berlin Wall.

Like Mr Fukuyama’s work, “The End of History for Corporate Law” takes a beating every time liberal capitalism fails, as it did in 2008, or its elites announce that firms should serve all of society rather than just their shareholders, as they did most energetically around 2020. 

Yet the essay’s thesis has by and large proved correct. 

Governments in Europe and Asia have been endeavouring to make their corporate rules more “shareholder friendly” in the image of America. 

The ascent of private equity is but a vast exercise in imposing shareholder supremacy.

Look to the giants of the corporate world, however, and the picture is very different. 

Above a certain size the ordinary rules of governance apparently cease to apply. 

Some firms reach a kind of escape velocity where the disciplining force of finance becomes too weak and the stakes for governments too high for ordinary rules. 

Among their ranks can be spotted not one stable vision of what companies are for, but four warring ones.

Of the 16 listed firms worth more than $1trn, seven are shareholder fundamentalists. 

None of Nvidia, Apple, Microsoft, Amazon, Broadcom, Eli Lilly or Micron is beholden to a government owner, though they put plenty of effort into staying in Uncle Sam’s good books. 

With a median age of 50, none bar Nvidia is run by its founder, and Jensen Huang owns only a small stake in the chipmaker. 

None has an elaborate statement of corporate purpose, since they are mostly content making heaps of money. 

All are American. 

Their adventures abroad are often held up as examples of the profit motive pushed too far. 

Eli Lilly pays much of its tax in Ireland. 

Apple has helped cement China’s dominance in manufacturing, while Nvidia has helped it remain in the artificial-intelligence race.

Next are the corporate paternalists, who believe that the problem with shareholder democracy is that its voters do not know what is best for them. 

Berkshire Hathaway’s shareholders submit to Warren Buffett, the conglomerate’s super-voting patriarch, because they believe he is a better judge of how to use (or, more recently, not use) their cash. 

Google, too, is controlled by largely benign founders. 

Shareholders of Meta suffer rather than celebrate Mark Zuckerberg’s iron grip on the firm. 

Little else could explain the vast amounts of cash it wasted on the metaverse, or its creepy camera glasses. 

(Snap, a much smaller social-media firm, also makes specs, and is controlled by its founders too.)

Meta and Google, which are constrained only by solvency, are competing to out-spend Microsoft and Amazon, which must ultimately appease all shareholders. 

Much of the capital is flowing to SK Hynix and Samsung, two South Korean chipmakers which recently joined the trillion-dollar club and make up the remaining paternalists. 

Their sudden and enormous success has led to a sudden and frantic debate about who is owed what. 

(In America this debate remains theoretical, because the profits mostly are.) 

Workers have extracted massive concessions, in the form of bonuses, by threatening to go on strike. 

Politicians have dreamed about what handouts could be funded by the firms’ profits. 

The domestic scramble to buy shares in the firms, often with borrowed money, has caused something like a moral panic.

The South Korean chipmakers also have much in common with TSMC and Saudi Aramco, the national champions that constitute the third corporate tribe. 

Any firm worth more than $1trn is strategically important. 

But this pair represent the totality of their home nations’ geopolitical significance. 

To most world leaders, Taiwan is a chip factory and Saudi Arabia an oilfield.

The final pair presents the strongest argument against the end of corporate history. 

SpaceX and Tesla, the rocket and car businesses run by Elon Musk, are governance inventions of a Hobbesian design: individual shareholders consent to hand over all of their rights to the world’s richest man, who then governs as he sees fit. 

Its boss sees profit as a means to visiting Mars, instead of a worthy end in itself. 

SpaceX shareholders’ votes count for nothing. 

The firm makes it hard for them to sue. 

And for many it is hard to sell: the early inclusion of SpaceX’s shares in major indices means most investors are passive supporters of Mr Musk’s enterprise, whether they want to be or not.

Almost nothing about Mr Musk’s corporate empire can be understood in the language of shareholder capitalism. 

That leads to discordant results when the analysts who speak it are required to express a view. 

This week Wall Street banks released their initial reports on SpaceX. 

“Not [free cashflow] positive on our forecasts before 2035, requiring, on average, $84bn of external capital needs per year from 2027-2034,” wrote Morgan Stanley, before saying the firm should be worth twice as much as it already is.

This is the end. My only friend, the end

Soon the ranks of giant public companies will grow. 

With which tribe are OpenAI and Anthropic likely to identify? 

Certainly not the fundamentalists. 

Both have a paternalistic strain and have supported redistribution, which makes the South Korean firms potential models. Yet they have none of their profits. 

Maybe the pair will become national champions, giving away a stake to the government, as OpenAI has reportedly floated. 

Or maybe the allure of absolute Hobbesian power will prove too great.