Donald H. Chew, Jr., founding editor of the Journal of Applied Corporate Finance, joins Ross Butler on Fund Shack to discuss the evolution of corporate finance and its impact on national wealth. Based on his latest book, The Making of Modern Corporate Finance, Chew explores the shareholder revolution, Japan’s stagnation, China’s middle-income trap, and private equity’s role in reshaping global markets. A masterclass in corporate & financial governance, offering insights into how corporate finance fuels economic prosperity.

📉 The Shareholder Revolution & the 1980s Breakup of Conglomerates

🦬 Corporate America in the 1970s suffered from inefficiency, with large conglomerates prioritizing stability over investor returns. The 1980s shareholder revolution broke up these inefficient structures, restoring a focus on productivity and capital efficiency, in contrast to Japan’s stagnation.

🎌 Japan’s Corporate Governance Failure: For three decades, Japan’s economy has stagnated as corporate structures resist shareholder influence and fail to optimize capital allocation. The lack of investor control has slowed productivity and exacerbated demographic challenges, leading to economic decline.

🐉 China’s Middle-Income Trap & Market Manipulation: Chew argues that China’s financial system mimics American capitalism in appearance but lacks key investor protections. State-controlled enterprises dominate capital allocation, IPO markets are manipulated, and foreign investors face barriers, all of which prevent sustained long-term economic growth.

🏢 Private Equity as a Force for Good: Despite criticism, private equity and activist investors drive corporate efficiency by restructuring underperforming companies. By enforcing financial discipline, improving governance, and maximizing efficiency, PE has been a key driver of economic growth.

🌍 The Global Financial Crisis: A Political Incentive Problem: Rather than a failure of capitalism, the 2008 crisis was driven by government policies encouraging subprime lending. Political incentives distorted the housing market, leading to systemic financial risk that was amplified by European banks.

📈 The Future of Corporate Finance & National Prosperity: Chew emphasizes that corporate finance is the foundation of national wealth creation. The U.S. stock market serves as a leading indicator of economic productivity, outperforming global peers due to a dynamic, investor-driven corporate culture.

♻️ ESG: Enhancing Value or Distorting Priorities? The debate over ESG investing centers on whether it aligns with shareholder value or imposes politically driven constraints. Chew contrasts Milton Friedman’s shareholder primacy with Michael Jensen’s concept of enlightened shareholder value maximization, arguing that long-term profitability must remain central to corporate decision-making.

🔗 SUBSTACK

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📧 Katie Mitchell: katie@linearb.media

CHAPTERS

00:00 Introduction to Donald H. Chew, Jr.

01:12 Transformation of American corporate finance

02:39 How investors reshaped corporate governance

04:39 Japan problem: Why investor control matters

07:09 Volkswagen vs. GM: Corporate governance case study

09:56 Japan’s ‘30-year slumber’ and the role of shareholder activism

12:29 China’s middle-income trap

14:56 The illusion of Chinese economic success

21:04 The real cause of the Global Financial Crisis

27:02 The dangers of bad financial metrics

32:00 The rise and fall of EVA

39:05 The overlooked role of PE in shaping corporate governance

45:02 Michael Milken and the rise of private credit

52:05 Best indicator of real productivity

55:00 New key metric for company success

1:00:02 Why Milton Friedman was right about profit

1:05:00 Is America heading for recession?