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PS Say More


Katharina Pistor
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This week, Project Syndicate catches up with Katharina Pistor, Professor of Comparative Law at Columbia Law School and Director of the Law School’s Center on Global Legal Transformation.

Project Syndicate: The United States Business Roundtable, which comprises the CEOs of some of America’s largest corporations, recently called for an end to putting shareholders first, in favor of a governance model that accounts for workers, communities, and other stakeholders. If US CEOs are serious about abandoning the shareholder-primacy model, you recently wrote, they should support fairly comprehensive legal reforms. What changes are most urgent, and how likely do you think the US is to implement them?

Katharina Pistor: It is not for the CEOs of corporations to declare whom they wish to serve, because they are agents, not principals. The fact that they have openly done so underscores the weaknesses of the existing corporate governance framework. If shareholders – who are widely regarded as principals – cannot keep their agents in check, who can?

Like shareholder governance, stakeholder governance requires accountability. Giving some stakeholders minority seats on the board will not be enough. Consider the challenge for employee-stakeholders: as long as they can be fired at will, how can they ensure that their interests are protected? And without organizations, such as unions, they will not be able to overcome their collective action problems.

The accountability challenge also arises with regard to environmental issues. It is not enough for individual companies to promise to reduce their emissions, because that will undermine their competitiveness vis-à-vis companies that don’t. Market pressures are likely to drive them to renege on their promises. That is why company-based governance regimes must be complemented by clear – and effectively enforced – regulatory targets.

PS: In 2013, you observed that “commitments never to raise taxes have left the [United States] dependent on debt finance – and, more frightening, on those who are ready to veto refinancing it.” Six years later, another round of tax cuts has pushed the projected budget deficit into record territory. At the same time, relations with China, the largest single foreign holder of US debt, have soured. How serious are America’s financing risks now?

KP: As a lawyer, I would argue that managing debt finance, including the refinancing of past debt, is fundamentally a matter of credibility. As long as the US remains a credible debtor in the eyes of its creditors, it will be able to refinance is debt. That credibility depends not only on the cost of debt finance, but also on the politics around sustaining a large deficit.

The spectacle that US policymakers have repeatedly created as they debate whether or not to raise the debt ceiling does not contribute positively to perceptions of US credibility. To be sure, it would take a major event to reverse this perception, given the longstanding status of US debt as a safe asset. But it is worth noting that it is easier to destroy credibility than it is to build it.

PS: In your book, The Code of Capital, you explain how “capital is created behind closed doors in the offices of private attorneys,” arguing that this is one of the biggest reasons for the widening wealth gap between holders of capital and everyone else. What changes to the “code” would do the most to address rising inequality?

KP: I argue in my book that capital is coded in law. The holders of capital assets enjoy certain legal privileges: priority in cases of competing claims; durability, which allows capital to grow; convertibility, which enables past gains to be locked in; and universality, which ensures that all of the other privileges are retained globally. These privileges are guaranteed by the institutions of private law, including collateral, trust, corporate governance, bankruptcy, contracts, and property rights.

Allowing private parties to use these institutions in a rather flexible manner is part and parcel of a market economy. The problem arises when the private use of law undermines its purpose as a public good. After all, law is the means by which democracies govern themselves.

Yet that is exactly what has been happening in recent decades, as governments lean toward allowing private parties and their lawyers to choose whichever legal system best suits their interests. Curtailing private actors’ ability to opt out of legal systems is vital to ensure that societies retain their capacity for collective self-governance.

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Pistor recommends

We ask all our Say More contributors to tell our readers about a few books that have impressed them recently. Here are Pistor's picks:

  • Rethinking Money: How New Currencies Turn Scarcity into Prosperity

    Rethinking Money: How New Currencies Turn Scarcity into Prosperity

    An inspiring read about how to design more inclusive and resilient money and payment systems. Instead of simply digitizing the existing system (central bank digital currencies) or privatizing it (through Libra), we could draw lessons from cooperative payment systems and use technology to scale them.

  • 1931: Debt, Crisis, and the Rise of Hitler

    1931: Debt, Crisis, and the Rise of Hitler

    This book serves as a stark reminder of the political dimension of debt. I love history, and as a German national, I was taught early on the importance of studying it, not because it will necessarily repeat itself, but rather because it holds lessons that are critical to understand the present.

From the PS Archive

Pistor explored the governance implications of the water crisis in Flint, Michigan. Read the commentary.

Pistor exposed the flaws in European Union creditor countries’ vision of Europe’s future. Read the commentary.

Around the web

At an event in Washington, DC during the Libra hearings, Pistor explores the legality and significance of private money in a world that seems reticent to adopt it. Watch the video.

Pistor explains how the state has long used law to back private money – with dire consequences. Read the article.

Answering questions about her book, The Code of Capital, Pistor provides insight into what transforms mere wealth into an asset that automatically creates more wealth. Watch the interview.;

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