Kent Greenfield, "The
Role of Corporations in Society"
Political Determinants
of Corporate Governance:
Political Context,
Corporate Impact
Mark Roe
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Abstract:
Before a nation
can produce, it must achieve social peace. That social peace
has been reached in different nations by differing means, some
of which have then been embedded in business firms, in corporate
ownership patterns, and in corporate governance structures.
The large publicly-held,
diffusely-owned firm dominates business in the United States
despite its infirmities, namely the frequently fragile relations
between stockholders and managers. But in other economically
advanced nations with well-developed institutions and the technological
wherewithal for very large enterprises, ownership is not diffuse
but concentrated. It is concentrated in no small measure because
the delicate threads that tie managers to shareholders in the
public firm fray easily in common political environments, such
as those that prevailed in the latter part of the 20th century
in the rich continental European social democracies. Those social
democracies pressed managers to stabilize employment, to forego
some profit-maximizing risks with the firm, and to use up capital
in place rather than to downsize when markets no longer are
aligned with the firm's production capabilities.
Since managers must
have discretion in the public firm, how they use that discretion
is crucial to stockholders, and social democratic pressures
induced managers to stray farther than otherwise from their
shareholders' profit-maximizing goals. Moreover, the means and
institutions that align managers with diffuse stockholders in
the United States---incentive compensation, hostile takeovers,
and strong shareholder-wealth maximization norms---have been
weaker and sometimes denigrated in continental social democracies.
Hence, public firms there have had higher managerial agency
costs, and large-block shareholding persisted longer than it
otherwise would have, as shareholders' best remaining way to
control those costs.
Social democracies
may enhance total social welfare, but if they do, they have
done so with fewer public firms than less socially responsive
nations. These political issues, I argue, not only strongly
help to explain ownership concentration in Europe, but also
reveal a crucial political prerequisite to the rise of the public
firm in the United States, namely the relative weakness of such
political pressures on the American business firm.
THIS BOOK IS BASED
ON ROE'S CLARENDON LECTURES IN MANAGEMENT STUDIES AT OXFORD
Mark Roe is a professor
of corporate law at Harvard Law School.
The book can be
purchased at: amazon.com
