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

By Mark J. Roe | Go to book overview

CHAPTER 1
Diffuse Ownership as
Natural Economic Evolution

THE PUBLIC CORPORATION—with its distant shareholders buying and selling on the stock exchange—is the dominant form of enterprise in the United States. Why? Technology dictated large enterprises as an engineering matter. The large throughput technologies that developed at the end of the nineteenth century—doubling the diameter of the pipe quadrupled the pipe's throughput—meant that cheaper production accrued to the firm with the largest scale. Only the United States had a continent-wide economy with low internal trade barriers, providing a market to those who could achieve the technologically feasible large-scale efficiencies. But getting the tremendous outputs from the new economies of scale eventually required large capital inputs to build the facilities and distribution system. Where could that capital come from?

Some of it came from internal growth as the firm retained its earnings; some of it came from investors. But individuals, even a small group of them, lacked enough capital. Alfred Chandler describes the railroads as the first of the modern business enterprises:

Ownership and management soon separated. The capital required to build a railroad was far more than that required to purchase a plantation, a textile mill, or even a fleet of ships. Therefore, a single ent[re]preneur, family, or small group of associates was rarely able to own a railroad. Nor could the many stockholders or their representatives manage it. The administrative tasks were too numerous, too varied, and too complex. They required special skills and training which could only be commanded by a full-time salaried manager. Only in the raising and allocating of capital, in the setting of financial policies, and in the selection of top managers did the owners or their representatives have a real say in railroad management.1

Even John Rockefeller in his heyday—the richest man in the country—held only a fraction of Standard Oil. New technologies allowed for vertical integration of several steps in production and distribution; transactions that once occurred across markets—making raw materials in one firm, manufacturing

____________________
1
Alfred D. Chandler, Jr., The Visible Hand—the Managerial Revolution in American Business 87 (1977).

-3-

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