Wall Street in the Third World? Corporate Ownership May Be a More Important Issue in Developing Countries Than Corporate Governance
Anderson, Robert E., Regulation
EXPERTS FROM DEVELOPED COUNTRIES often give advice to developing countries about the policies, laws, and institutions that are needed to promote economic development. A frequent problem with their advice, however, is that the experts only recommend what they know, namely, what exists in their own countries.
For example, experts from the United States or the European Union will usually recommend the laws and policies that exist in those countries. The experts often fail to take into account the weaker legal and political institutions in developing countries. That is true even for international institutions like the World Bank.
The advice on corporate governance presented in the previous article by Troy Paredes is a refreshing change from that offered by most other experts. He explicitly takes into account the weaknesses in the institutions needed to implement alternative models of corporate governance and the difficulty in strengthening those institutions. Consequently, he concludes that the U.S. market-oriented model is often inappropriate for developing countries, and he proposes alternatives.
Though Paredes takes into account institutional weaknesses in his discussion of corporate governance, he fails to do so in his brief discussion of corporate ownership. He does not automatically assume that the U.S. model of corporate governance is best for developing countries, but his analysis seems to assume that the U.S. model of corporate ownership is best or will soon be common in developing countries.
The U.S. model of corporate ownership creates a serious problem because the many small, dispersed shareholders have difficulty controlling company managers. It is rare for the largest shareholder in large U.S. firms to own more than a small percentage of the outstanding shares. Consequently, managers have less incentive to reduce costs and maximize profits, and they may divert profits to themselves in the form of higher salaries and fringe benefits. It is not surprising that top executives in U.S. firms are paid much more than in almost any other country.
Because the U.S. model of corporate ownership is much less common in other countries, the U.S. problem of corporate governance is not important in those countries. Firms outside the United States typically have large shareholders who have both the incentive and the ability to control the managers.
An unspoken assumption in much of the analysis of corporate governance, financial markets, and stock market regulation by U.S. experts seems to be that the model of corporate ownership in the United States is a natural result of, or even a requirement to achieve, economic development. Because this model exists in the most developed economy, it must be superior to that in less developed economies. As the economies of other countries develop, it is assumed that they too will naturally adopt the superior U.S. model of corporate ownership.
The U.S. model, however, is not a natural outgrowth of economic development, but instead was largely determined by politics, law, and regulation. For example, Mark J. Roe of Columbia University argues that it is the result of populist fears of concentrated economic power, pressure from various special interest groups, and the federalist political system.
It is not surprising that corporate governance has primarily been a problem in the United States. Concern about this dates back at least to 1932 when Adolf Berle and Gardiner Means observed that large companies are primarily controlled by a new class of professional managers because ownership is dispersed among thousands of shareholders, each of whom owns only a small fraction of the shares.
The U.S. model of dispersed corporate ownership is not a requirement for economic development as evidenced by the fact that it is uncommon in many other developed countries. For example, in the 372 large, publicly traded companies in Germany as of 1999, the median size of the largest voting block of shares totaled more than 50 percent of all outstanding shares. …