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A Review
Mark J. Roe
January 1998
Available at http://ssrn.com/abstract=11366
their own sake, without either having any pie-maximizing goals or making
any distributive analysis; as a consequence, nations with such norms may
politically and visibly affect corporate governance case-by-case or across
the board. French governmental interventions to prevent layoffs, Germany's
mandated codetermination laws, and Japan's purported lifetime employment
can all be seen as having some amalgam of these politicized motivations.
Natural Experiments and Differing Origins. The basic tasks of corporate
governance are to monitor, motivate and select managers, organize the
financing of the firm, prevent managers, stockholders and debtors from
removing value from the firm, minimize conflict among financial
contributors, and (the issue usually not on the American agenda) help keep
the economic system legitimate. One reason to analyze comparative
corporate governance is to uncover different ways of reaching the same
ends. Although all successful systems must substantially achieve the
minimal goals of corporate governance, and, hence, successful systems may
all have a base of similarities, some systems might not rely as heavily as
does the US on incentive compensation, monitoring boards, takeovers,
proxy fights, and transparent securities market disclosure. Different
governance structures (that rely more heavily on big blocks, crossownership, family ownership, and government ownership) are the most
obvious contrasts with American structures, and their persistence suggests
that mechanisms other than the primary American mechanisms have thus
far done the job satisfactorily. The problem afflicting efforts to go beyond
that basic observation is that cross country comparisons have so much noise
that ascertaining which nations set of institutions works 'best' is hard, or
impossible. Moreover, persistence may indicate a group's positional power
inside the nation to get favorable rules, not the superior efficiency of the
resulting system.
By studying the differing origins of the systems, one can also appreciate
what determines the forms of governance. That is, what institutional
features led to big blockholders prevailing in Germany while securities
market-oriented devices prevailed in the US? For example, strong claims
have been made that differences in national politics explain differences in
corporate ownership structure and allocation of authority better than do
differences in industrial development. One can appreciate a nations
governance structure better by seeing the differences abroad and their
origins.
Political Differences. Rather than seeing, say, American-style securities
markets, with shareholders in the largest firms lacking influential blocks of
stock, as an inevitable evolutionary result, the prevalence of big
stockholding banks abroad causes us to rethink first premises (Roe 1994).
American banks and other financial institutions have been deeply affected
by American politics, from the early nineteenth-century destruction of the
Second Bank of the United States with President Andrew Jacksons ringing
populist veto of its recharter in 1832, to the decision to confine the CivilWar-created national banks to a single physical location, to the McFadden
Acts confirmation of narrow limits on bank-branching, to the limits in the
Bank Holding Company Act of 1956 on banks capacity to own industrial
stock and influence nonbanking businesses. Along the way, law blocked
the major life insurers from owning stock, via the populist Armstrong
investigation of 1906. Investigations such as the Pujo investigation of 1911
and the Pecora investigation of 1933 chilled financiers governance activity
at least for a time, and antitakeover laws of the late 1980s confirmed that
politics in America often tries to dampen financial influence in the
corporation.
Similarly, with an eye on the big blocks abroad, analysts have
reexamined the American ownership structure, and revisionists, looking at
the substance of the Berle-Means announcement of the scattering of
ownership and finding those claims to be overstated, have found pockets of
big blocks (not held by banks, to be sure, and usually for companies smaller
than the Fortune 100 or 200). The evolutionary impulse might thus be, not
as Berle and Means anticipated, inevitable movement toward widespread
scattered stockholding and diversified small holdings, but rather toward
noticeable blockholding, or a mixture of the two.
Comparisons abroad put the American structure into relief. In Germany
and Japan, large banks have historically played a much bigger role in their
economy than do Americas banks. (With fractional reserve banking
declining the world over, the comparative question then becomes whether
large stockholding institutions in todays world, fast-growing mutual
funds and pension funds, perhaps associated with the slow-growing
fractional-reserve banks will play a role abroad. Corporate governance
may once again be an epiphenomenon, derivative of other features of a
national economy, namely how financial institutions, corporate law and
family wealth are organized.) In Germany today, more than 85% of the
large firms have blockholders owning more than 25% of the firm (Franks
and Mayer 1997), a result not present for most large American firms. As for
financial institutions, which own some but far from most of these blocks,
those foreign nations lacked Americas populist history; indeed, they lacked
democracy for much of the relevant period. During the nineteenth century
American politics barred banks from stockownership and, at the beginning
of the twentieth century, barred life insurers as well. Thus when the public
corporation was about to be born, American financial institutions could not
play a mutual stockholding role. And, at historical moments when
American politics, for example, confirmed that banks could only branch
ability to retain control of the business while raising new capital but
blockholding facilitates innovation in old firms, which is more important?
Or can both be combined in the same economy? Casual empiricism
(America has excellent venture capital markets and excellent securities
markets; most other nations except Britain lack both) suggests that
securities markets are useful in putting together a vibrant venture capital
industry. Whether nations without good securities markets can piggy-back
on the securities markets of those that do, by going public abroad, or
whether the truly important option for the innovating entrepreneur is the
exit option (which a good merger market might provide even without a
good securities market) remains to be seen.
A simple normative claim could be derived from the persistence of
differing forms and the uncertainty of where each form might have a
comparative advantage. Policymakers might, rather than evaluate which
form is, net, advantageous, design a set of ground rules that would allow
each form to compete inside a nation. The simple normative claim may well
be best, but the possibility of complementarities at the national level (see
below) complicates this competitive prescription.
Political Similarities. Similarities of political impulse across several
nations are important and at first not obvious. The similarities of impulse
suggest that domestic democratic politics affects all nations corporate
governance systems, but like variation in species, that political influence
differs in different nations. One can see this commonality most easily if one
hypothesizes a general democratic impulse to regularize employment. This
impulse can be seen as part of the basis for American antitakeover laws,
when widespread hostile takeovers in the late 1980s created uncertainty for
American employees. (Whether the uncertainty was justified (Lichtenberg
and Siegel 1990), or media-induced could be debated.) Behind much
takeover legislation was the active participation of labor (see
Pennsylvanias production of an antitakeover law: Roe 1994) or legislators
belief that employee-voters preferred both to dampen the wave of late 1980s
takeovers and to slow down the disassembling of conglomerates. Similarly,
the impulse to regularize the workplace is one force that contributed to
German codetermination, under which employees have half of the seats of
the supervisory board of most large firms. Because the German supervisory
board chooses the CEO and appoints the management board, these
codetermined board seats reduce the chance that the board would elect a
CEO who would want to change the firm rapidly in a way that affected
employment. In America, the political impulse to slow down capitalmarket-induced change led legislators to dampen the takeover wave; in
Germany the political impulse to slow down capital-induced changes led
the German Bundestag to expand codetermination.
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sized and small firms, and to subsidize workers whose jobs straight
competition would eliminate; these political impulses are often reflected in
rules that affect corporate governance. As long as political coalitions in
those nations can support those results in the political sector, by assembling
coalitions that beat those in the nation who lose from the political decisions,
then the inferior governance can remain stable. Third, incumbents reap
benefits from their governance systems; when, to improve a system,
incumbents must initiate change that reduces the incumbents benefits,
change will be slow.
Another potential pitfall is to ignore complementarities. When one finds
a difference and attributes, say, some German strength to codetermination
or blockholding, or some American strength to takeovers, one might
mistakenly jump to conclude that other nations should mimic these
strengths. But because these strengths are sometimes embedded with
institutional complementarities, mimicking an isolated institution may be
useless, or even detrimental. (On the general issue of complementaries, see
Milgrom and Roberts 1994.) For example, American-style 1980s takeovers
may have forced firms to adapt, focus, and reduce value-decreasing
diversification, but America's fluid labor markets (with short periods of
unemployment and, usually, easy job availability) made the pain of
takeover-induced transitions smaller in the US than it might have been in
the more rigid labor markets of continental Europe or Japan. Similarly,
German codetermination may enhance employee commitment there, but not
on balance be helpful in the United States because (a) German
codetermined supervisory boards do not have as wide a range of functions
as American boards, and (b) German blockholders historically have played
a bigger role inside the German firm, sometimes as lender and stockholder,
than have American financial institutions, and these blockholders have
informal sources of information and authority, yielding a countervailing
power that would not be present in the United States if the US used
codetermination. A recommendation to enhance, say, the role of labor in
American firms because its role appears (if it appears) to be positive in
German firms in developing the right kind of human capital, may
mistakenly take the German institution out of its context and ignore
complementary institutions, such as the prevalence in Germany of
blockholding, and plant-floor level workers councils, and low labor
mobility. (And vice versa: blockholding may be more politically palatable
in a society that has codetermined large businesses, like Germany, or an
articulated commitment to lifetime employment, like Japan.) Lastly but still
similarly, a recommendation to enhance the possibility of takeovers in
Germany or Japan, if they seemed to enhance productivity, may also require
a change in the foreign labor markets for the takeovers to be palatable.
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