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

By Mark J. Roe | Go to book overview

Conclusion

THE ANALYTIC RESULT is fundamental: the modern American public corporation is not an inevitable consequence of technology that demands large inputs of capital. Technology combined with the diversification demands of investors to yield the fragmented ownership of the public firm and the shift to centralized managerial authority, but that result became inevitable only because the United States fragmented its financial intermediaries. Politics confined the terrain on which the large American enterprise could evolve. That confinement allowed the public corporation with dispersed ownership, and not some other organization, to evolve.

The fragmentation of institutional capital meant that owners' power would shift somewhere. It shifted to managers, who obtained their power partly by default: the American public would not permit large, powerful financial institutions that would share power at the top, so the power to direct large corporations further centralized in managers' hands. Managers may not be political heroes to the average voter, but they are dispersed, which makes them less visible targets than financial institutions. And managers obtained and kept some of that power because they themselves have political influence.

My argument has two steps. One, the legal system limited control by financial institutions. The limitations came in three types: (1) prohibitions— for banks and, for most of the twentieth century, the big insurers; (2) fragmentation of financial institutions—they often could not own one another and could not readily network their portfolios to assert control jointly; and (3) fragmentation of institutional portfolios. Two, these limitations were not all technical, but often have a political explanation.

I have sketched the ideas of representative actors—Woodrow Wilson, Louis Brandeis, William Douglas—and examined the political analogues, which include the Armstrong investigation, the Pujo investigation, the Pecora hearings, and surveys of public opinion. They indicate a pervasive historical mistrust of financial power. Small financial institutions and, later, managers lobbied for restrictions. These ideas, investigations, and interests resulted in laws that prohibited banks from owning stock, prohibited bank holding companies from owning influential blocks of stock in an industrial company, restricted mutual funds from buying controlling blocks of industrial companies, and prohibited and then limited insurance companies from owning stocks. As I write, just after the conservative 1980s, when popular mistrust of accumulated power on the eastern seaboard was directed more at Washington than at Wall Street, it is easy to forget the deep mistrust that once divided Main Street and Wall Street.

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