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

By Mark J. Roe | Go to book overview

CHAPTER 3
Diffuse Ownership as Political Product

AN ALTERNATIVE EVOLUTIONARY PATH
AND ANOTHER PARADIGM

The size and technology story fails to explain the fragmented ownership patterns of American corporations fully. Think about it. Fragmented securities markets are not the only way to move savings from households to the large firm. There is at least one clear contender with the securities markets, namely, the powerful financial intermediary, which would move savings from people to firms and could take big blocks of stock, sit in boardrooms, and balance power with the CEO. Enterprises could have obtained economies of scale and investors could have obtained diversification through large intermediaries that brought small investors and large firms together. But American law and politics deliberately diminished the power of financial institutions in general, and often their power to hold the large equity blocks, inducing the adaptations I discussed in chapter 2. The origin of the modern corporation lies in technology, economics, and politics.

Although individuals rarely have enough money to hold a big, influential block of stock, institutions do. The four dominant institutions are banks, insurance companies, mutual funds, and pension funds. Respectively, they hold assets of $4.9 trillion, $2.3 trillion, $1.2 trillion, and $3.4 trillion.

These four types of institutions, which hold nearly all of the corporate assets held by U.S. financial intermediaries,1 clearly could influence big firms. But portfolio rules, antinetworking rules, and other fragmenting rules disable them from systematically having influential blocks. The following chapters show the detail, but these rules can be summarized: Banks, the institution with the most money, have been barred from owning stock or operating nationally. Mutual funds generally cannot own control blocks. Insurers can put only a fragment of their investment portfolios into any one company's stock, and for most of this century the big insurers were banned from owning any stock at all. Pension funds are less restricted, but they are fragmented; securities rules have made it hard for them to operate jointly to assert influence. Private pension funds are under management control; they are not yet ready for a palace revolution in which they would assert control over their managerial bosses.

____________________
1
Board of Governors of the Federal Reserve System, Flow of Funds Accounts—First Quarter 1993, at 86, 92, 96, 98.

-21-

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