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

By Mark J. Roe | Go to book overview

CHAPTER 9
Pension Funds

WITH BANKS and insurers out of the picture, and mutual funds nearly so, pension funds—the fastest-growing stock market player in recent decades— are the final frontier for finding powerful intermediaries. From 1970 to 1993, pension funds grew from owning only $81 billion in equity, less than 9 percent of the stock market, to owning over $1.5 trillion, nearly one-third of the market (see Table 4), more than mutual funds, insurers, and bank trusts combined.1 If aggregated, today's pension funds have a control block in most major American firms.

Social change induced the rise of huge pension funds: rising wealth after World War II, increasing life spans, increasing preference for earlier retirement, and changing mores—adult children cared for their elderly parents with decreasing alacrity—made retirement savings important. Demand for pensions increased, and employers were a natural vehicle to satisfy it. Accidentally, corporate managers at those employers ended up controlling huge pools of equity capital, and they tended to induce the private pension funds to be passive in corporate governance.

In this chapter I trace the history of the rise of private pension funds. The social change story is central, but incomplete. Pension funds became important partly by default; their relative importance today resulted in no small part from the earlier suppression of banks and insurers as powerful intermediaries.

Managers also came to control pension funds partly because of labormanagement politics and antitrust issues. After a brutal, headline-grabbing series of strikes in 1946 and 1947, Congress barred unions from completely controlling new pension funds. Simultaneously, General Motors, threatened by an antitrust attack, barred its pension fund from taking big blocks of other companies' stock. These two institutional features, rooted in American politics, helped to produce pension fund patterns that persist to this day.

In 1974, Congress passed ERISA, the Employee Retirement Income Security Act, which, with no discernible governance-related motive, confirmed the preexisting structure of corporate governance by encouraging pension

____________________
1
Board of Governors of the Federal Reserve System, Flow of Funds Accounts—First Quarter 1993, at 112 (1993 data); Board of Governors of the Federal Reserve System, Flow of Funds Accounts, Assets and Liabilities Outstanding, 1957–1980, at 39 (corporate equities–line 1) ($906.2 billion in corporate equities outstanding in 1970); Federal Financial Institutions Examination Council, Trust Assets of Financial Institutions: 1991, at 11 (1989).

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