Ownership and Control: Rethinking Corporate Governance for the Twenty-First Century

Article excerpt

Blair, Margaret M. Ownership and control: Rethinking corporate governance for the twenty-first century. Washington, DC, The Brookings Institution, 1995. vii + 371 pp. Tables, figures, appendices, bibliography, index. ISBN 0-8157-0948-X (hardback); 0-8157-0947-1 (paperback).

The backdrop is the 1980s' wave of hostile takeovers and leveraged buyouts (LBOs), the savage downsizing of once stable, large corporations, the lavish pay packages that the boards of these same corporations have awarded their executives, and concerns over the competitiveness of United States firms in a global economy. For Margaret Blair, a senior fellow at the Brookings Institution, all these factors pose the question of whether there has been a breakdown in corporate governance - defined broadly as "the whole set of legal, cultural and institutional arrangements that determine what publicly traded corporations can do, who controls them, how that control is exercised, and how the risks and returns from the activities they undertake are allocated".

The question is deceptively simple: if the business of corporate management ought to be the maximization of total wealth creation by the enterprise ultimately for society as a whole, is this the same as saying that management's job is to maximize the value of owners' shares? Throughout the twentieth century, which witnessed the rise of the publicly traded corporation and the consequent separation of ownership from control of the corporation, the conventional answer to this question has been "yes". For Blair, however, the "common assertion that `shareholders are the owners' of large corporations is a highly misleading statement that often does more to obscure the important issues than to illuminate them". There may be more to "total wealth maximization" for society than the maximization of shareholder value alone.

The author evaluates at length the three dominant views of how corporate governance arrangements affect corporate performance and national wealth. The first, the "finance model", is the traditional view of the corporation owned by shareholders and managed in their interests. Those who have argued the overall salutary impact of the takeover and LBO mania of the 1980s have typically argued from the finance model's perspective that shareholder interests did and should predominate over entrenched management interests. The second view - that of "market myopia" - runs somewhat counter to the logic of the first. Here the (much discussed) argument is that managements have enslaved themselves to shareholder interests through excessive attention to impatient financial markets, thereby sacrificing the long-term health of the corporation to short-term results for shareholders. The "outsider" model of US corporate governance is contrasted with the "insider" models of Japan and Germany, where interlocking boards of directors, and stable relations with banks, suppliers and employees all lead to a longer-term perspective. The insider model, Blair thinks, has advantages, but may now err in its relative disregard of shareholder value, and, in the mid-1990s, has grown sluggish and inflexible.

The third view holds that, while shareholders are fully mindful of their short- as well as long-term interests, these interests may not be optimal for society. The proponents of this view include community activists and others who would assign a broader social role to the corporation. …