Strong Managers, Weak Owners: The Political Roots of American Corporate Finance

By Mark J. Roe | Go to book overview

Introduction

IN 1990, two of General Motors' largest institutional shareholders, unhappy with GM's declining market share, declining employment, and declining profits during the 1980s, sought to talk to GM's leaders about how to choose the successor to the retiring CEO. GM's management rebuffed the shareholders, two of the company's largest; it could get away with that rebuff because each owned less than 1 percent of GM's stock.

GM's ownership structure was not inevitable. One could imagine a halfdozen shareholders, each owning 5 to 10 percent of GM's stock and sitting in GM's boardroom. For GM's managers to rebuff such powerful shareholders who expressed concern over GM's declining market share in the 1980s and its enormous losses ($7 billion lost in North American operations in 1991) would have been unimaginable. While a half-dozen individuals with the wealth to hold that big a block of stock would require that a nation have an unusual distribution of wealth, it is easier to imagine that financial institutions could have held those blocks.

GM's ownership structure, which is typical of the large American firm— fragmented shareholders with small holdings and, until recently, no voice in the governance of the large firm—might seem to be the end result of a natural economic evolution. The dominant paradigm explaining the emergence and success of the large public corporation in the United States, articulated more than half a century ago by Adolf Berle and Gardiner Means,1 sees economies of scale and technology as producing a fragmentation of shareholding and a shift in power from shareholders to senior managers with specialized skills. Technology required firms to be so huge that their enormous capital needs could be satisfied eventually only by selling stock to many dispersed investors. Dispersion shifted power in the firm from shareholders to managers and ownership separated from control, creating an unwieldy organizational structure. But in a Darwinian evolution, the large public firm survived because it best balanced the problems of managerial control, risk-sharing, and capital needs, solving many of the problems created by the new large and unwieldy structures.

I mean here to change that paradigm. The evolution of the firm did not have to turn out as it did in the United States. I argue in Part II that economics alone cannot explain the shape at the top of the large public firm, that a political paradigm is needed to supplement or replace the economic one, because there are organizational alternatives to fragmented ownership,

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1
Adolf Berle and Gardiner Means, The Modern Corporation and Private Property (1933).

-xiii-

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