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

By Mark J. Roe | Go to book overview

CHAPTER 17
Managers as the Problem?

INSTITUTIONS ARE UNFIT to run enterprises; the hopes for them must be more modest. The model institutional overseer would not micromanage the firm from day to day, but be ready to make changes during crisis and hold the managers accountable during the interim. Enhanced institutional voice could improve managerial performance, not by directing day-to-day operations, but rather (1) by enhancing managerial accountability, (2) by personifying shareholders (which could make managerial disloyalty psychologically harder), and (3) by improving the flow of information to senior managers from outside the firm.

In this chapter, we analyze the basics: making managers more accountable. This matters most for big firms that have large sunk organizational and physical capital and compete in imperfect product markets. For these firms, the other mechanisms of managerial control—product market and capital market competition, for example—are weak, and internal controls become more important. Upheavals in the boardrooms at GM, Sears, American Express, Westinghouse, Kodak, and IBM show that once-strong firms can slowly fail without product markets quickly forcing improvement. Had these boardrooms been better structured to have directors and managers see what was coming, the slide might have been arrested earlier than it was.

Boardroom problems did not create these firms' problems; changing markets, technologies, and regulations did. But governance—how those at the top of the firm react—could, were it better, have influenced whether those firms handled adversity well and prospered, or weakened. Derivatively, governance influenced whether the firms employees continued to make a good living, whether the firm's communities were stable, and whether the firm's customers had to find new suppliers.


ACCOUNTABILITY

American managers have often not been held accountable for their performance. Allowing enhanced institutional voice could increase that accountability; it could work if the institutions did not become overlords. Managers, who would tell institutions (or more accurately, tell the institutions'

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