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

By Mark J. Roe | Go to book overview

CHAPTER 2
Fragmentation's Costs

GENERAL MOTORS lost billions in the 1980s and early 1990s, laid off tens of thousands of employees, and saw a big part of its once huge share of the American automotive market go to foreign competitors. Its managers were said to be out of touch and its board inattentive until GM lost an awesome $7 billion in 1991 in core North American automotive operations. Although ownership structure could not explain all of GM's problems, it might explain some of them, particularly its decade-long slowness in reacting to crisis. Could the costs of some of the problems afflicting firms with dispersed ownership have been reduced by concentrated ownership? While I'll save the inquiry into potential costs and benefits for Part V, I outline here the basic costs of organizing our large firms as we do.

The costs fall into three categories: problems with managers, problems with securities markets, and problems with organizing industry. Problems with managers are obvious. Dispersion in small holdings creates a collective action problem for shareholders, making managers less accountable in a way that can hurt performance, particularly when the firm faces unusual problems. Senior managers in the large public firm are among the least directly accountable in American society. While other groups also have low direct accountability—tenured faculty at solvent universities come to mind—few of them have tasks as important as those of senior managers at leading firms.

Problems with securities markets arise from the difficulty of transmitting complex, proprietary, and technological information from inside the firm to the American securities market. If scattered shareholders cannot understand complexity, and if managers cannot be rewarded for what shareholders cannot understand, firms may abandon some long-term, technologically complex projects.

Overlapping ownership—a financial institution that owns a big block in both a supplier and its customer—can sometimes improve the organization of industry. Firms, suppliers, and customers all need to coordinate their activities, and in the United States often do so in big, vertical firms. Overlapping ownership could allow them to stay separate. It could help keep firms smaller and nimbler, reducing the number of slow-moving vertically integrated behemoths. Flat organization at the top might work better when technological change quickly makes many managers' training obsolete. Psychological and sociological theories indicate that nonhierarchical forms may function better in some new industries in today's world.

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