Private Equity Podcast | American corporate finance & the wealth of nations, with Donald H.

Donald H. Chew, Jr. has been the editor of the Journal of Applied Corporate Finance for 45 years. In this episode, Donald gives his big picture take on the central role of American-style corporate finance in driving wealth and prosperity. 

We discuss:

• What is the right metric for assessing long-term company value creation?
• How activist investors helped fix America’s broken corporate governance model of the 1970s to usher in 40+ years of growth. 
• Why the Chinese economy is not on the same trajectory. 
• Why the Japanese economy has suffered a 30 year downturn (yes it’s a corporate governance problem).
• How the same thing could happen in Europe.
• The link between failure of the 1970s conglomerates, the GFC, Japan’s economic catastrophe and modern ESG.

Drawing on Donald’s recent book, The Making of Modern Corporate Finance: A History of the Ideas and How They Helped Build the Wealth of Nations, this is the story of how activist investors helped (to coin a phrase) Make American Corporate Finance Great Again. 

Insights  

The Shareholder Revolution and the 1980s Breakup of Conglomerates
Corporate America faced stagnation in the 1970s, with bloated conglomerates prioritizing stability and full employment over efficiency and investor returns. The 1980s saw a reassertion of investor control, breaking up these conglomerates and restoring focus on shareholder value. The transformation led to a surge in U.S. productivity and economic expansion, contrasting with Japan’s stagnation under its model of corporate governance that prioritized employment over efficiency.

Japan’s Corporate Governance Failure
Japan’s economy has been in stagnation for 30 years, a result of corporate structures that resist shareholder influence, limit workforce reductions, and prioritize stability over profit maximization. The failure to optimize capital allocation has led to declining productivity and even population shrinkage. Today, Japan’s business leaders are beginning to recognize the value of shareholder activism as a tool for economic revival.

China’s Middle-Income Trap and Financial Market Manipulation
Donald argues that China’s financial system is a “caricature of American capitalism.” While massive infrastructure and construction projects give the illusion of economic success, state-controlled companies fail to generate long-term value. IPOs are manipulated, capital is trapped within inefficient state-owned banks, and foreign investment remains limited due to a lack of investor protections. The absence of effective corporate governance is stalling China’s economic transition.

Private Equity and the Active Investor Model
Private equity and activist investors have played a pivotal role in improving corporate governance worldwide. By taking control of underperforming companies and refocusing on efficiency and profitability, private equity has demonstrated its ability to drive superior returns and economic growth. While often criticized, Donald argues that private equity’s approach to financial discipline is essential for long-term corporate health.

The Global Financial Crisis: A Failure of Political Incentives
Rather than being a failure of capitalism, the global financial crisis was driven by political incentives that encouraged subprime lending and artificially expanded home ownership. Government-backed entities like Fannie Mae and Freddie Mac distorted the housing market, leading to unsustainable risk-taking. European banks, seduced by artificially high-rated mortgage-backed securities, compounded the problem. The crisis, Donald suggests, highlights the dangers of political interference in free markets.

The Future of Corporate Finance and National Prosperity
Donald’s book argues that corporate finance is the foundation of national economic prosperity. The U.S. stock market serves as a forward-looking indicator of productivity, outperforming global peers due to a more dynamic and investor-driven corporate culture. While GDP remains a lagging and often misleading economic metric, corporate financial performance provides a more accurate picture of wealth creation.

Has ESG Diluted the Profit Motive?
Donald examines whether ESG (Environmental, Social, and Governance) initiatives align with shareholder value or create a new set of vanity metrics that can distort corporate priorities. He contrasts Milton Friedman’s shareholder primacy with Michael Jensen’s concept of enlightened shareholder value maximization, arguing that corporate social responsibility must be balanced against long-term profitability to avoid the pitfalls of politically driven economic policies.

Final Thoughts: America’s Economic Resilience
Despite concerns over political instability, Donald remains optimistic about the resilience of American corporate finance. Unlike the centralized economic models of Japan and China, U.S. corporations are structured to adapt and thrive. The ability of businesses to restructure, cut costs, and refocus on shareholder value will continue to drive American prosperity, even in turbulent political times.

Podcast Sponsor:
This episode was designed and produced by Linear B Group, a leading content marketing agency focused on financial and professional services.

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Contact Information: About Fund Shack: Fund Shack is a private equity podcast and digital media channel for alternative investment professionals. Fund Shack is produced by Linear B Group Limited.