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

By Mark J. Roe | Go to book overview

CHAPTER 15
Trends in the United States

IN THE 1980s a tidal wave of mergers and leveraged buyouts tore apart and rearranged many large American firms. Today, the structure of American intermediaries and their role in corporate governance are in upheaval. Some intermediaries seek new, active roles. Regulators are also reexamining old patterns. The Treasury Department proposed ambitious plans, which stalled in Congress, to mix banking and commerce in ways that have been volatile in American history. The SEC reduced some restrictions on institutions' governance role. The 1990s trends for institutional investors may well be the result of trying to bridge the huge fault line that separated America's intermediaries from its managers.

Ownership is concentrating. True, that concentration is weak and pale, especially compared to that in Japan and Germany, but measured against an American baseline, the change is not minor. Institutions are also becoming more active, in three dimensions. They have been pressing managers at poorly performing firms more actively than before, either through direct contact or through pressure on the board. They have sought to turn back some legal impediments. And a few new-style intermediaries have emerged—Berkshire Hathaway, Corporate Partners—with Japanese-style or German-style blocks, suggesting that a new ownership pattern may be viable.

The German and Japanese systems are also changing. The German system depends on voting of proxies by banks, and there seems little economic reason for banks to make heroic transactional or political efforts on behalf of those for whom they vote proxies. The economic pressures in Japan on main bank stockholding seem great, and without other affiliated intermediaries—such as bank-controlled pensions, trusts, or mutual funds—it is hard to see how the system in its present form can continue. Yet unnoticed in this debate is the prospect that some American firms will evolve—weakly and oddly—toward German- and Japanese-style ownership. Functions historically moved persistently into American intermediaries. The next natural “stage” in American corporate finance might be intermediaries in the boardroom, or intermediaries electing directors whose loyalty runs to the intermediaries, not managers.1 The one American inter-

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1
Cf. Robert Clark, The Four Stages of Capitalism, 94 Harvard Law Review 561 (1981); Ronald J. Gilson and Reinier Kraakman, Reinventing the Outside Director: An Agenda for Institutional Investors, 43 Stanford Law Review 863 (1991).

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