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The Future as History : The Prospects for Global Convergence in Corporate Governance and Its Implications
What forces explain corporate structure and shareholder behavior? For decades this question has gone unasked, as both corporate law scholars and practitioners tacitly accepted the answer given in 1932 by Adolf Berle and Gardiner Means that the separation of ownership and control stemming from ownership fragmentation explained and assured shareholder passivity. Over this decade, however, corporate law scholars have recognized that this standard answer begs an essential prior question: if ownership fragmentation explains shareholder passivity, what explains ownership fragmentation? Although the Berle and Means model assumed that large-scale enterprises could raise sufficient capital to conduct their operations only by attracting a large number of equity investors, contemporary empirical evidence finds that, even at the level of the largest firms, dispersed share ownership is a localized phenomenon, largely limited to the United States and Great Britain. Not only does the latest comparative research demonstrate that concentrated, not dispersed, ownership is the dominant worldwide pattern, but in-depth studies of individual countries show that share-holder activism increases in direct proportion to ownership concentration. As a result, these findings, in turn, suggest that the conventional governance norms in the United States may be more the product of a path-dependent history than the « natural » result of an inevitable evolution toward greater efficiency.
This essay is a contribution to the forthcoming Oxford University Press Handbook of Corporate Law and Governance edited by Jeffery Gordon and Georg Ringe. In the 1960s and 1970s, corporate law and finance scholars recognized that neither discipline was doing a very good job of explaining how corporations were really structured and performed. For legal scholars, Yale Law School professor and then Stanford Law School dean Bayless Manning confessed that corporate law has “nothing left but our great empty corporation statutes -towering skyscrapers of rusted girders, internally welded together and containing nothing but wind.” Michael Jensen and William Meckling made a similar comment with respect to finance. The theory of the firm was an “empty box” or a “black box” that provided no theory about “how the conflicting objectives of the individual participants are brought into equilibrium.” The result of Jensen and Meckling’s seminal reframing of corporate law in agency cost terms, and so into something far broader than disputes over statutory language, was that both Manning’s empty skyscrapers and Jensen and Meckling’s empty box began to be filled. The essay proceeds by tracking how corporate law became corporate governance – from legal rules standing alone to legal rules interacting with non-legal processes and institutions – through three somewhat idiosyncratically chosen but nonetheless related examples of how we have come to usefully complicate the inquiry into the structures that bear on corporate decision-making and performance.
The chapters in this book were presented at a conference on “The ‘New’ Corporate Governance” held at the Washington University School of Law in St. Louis. The conference was sponsored and hosted by the Center for Interdisciplinary Studies, along with support from the Whitney R. Harris Institute for Global Legal Studies, both of which are housed at the Washington University School of Law. The conference was held in honor of Joel Seligman – to whom this book is dedicated – and the contributions he has made to the study of securities regulation and corporate governance during his distinguished career. Before becoming the President of the University of Rochester in 2005, Joel Seligman served as the Dean and Ethan A. H. Shepley University Professor at the Washington University School of Law. This book is part of broader work through the Project on Commercializing Innovation at Stanford University’s Hoover Institution, which studies the law, economics, and politics of the range of legal and business relationships that can be used to bring ideas to market. We thank James E. Daily, who is a Postdoctoral Fellow and Administrative Director of the Project, for his excellent help editing the manuscript. More about the Project is available on the Web at www.innovation.hoover.org.
The author’s goal in this Essay is to consider how theories of the corporation have developed and changed over the last hundred and fifty years. Based on this survey, the author offer some observations about the role of such theories in discourse about corporate law and corporate activity.
Le constat maintes fois répété et à chaque fois surprenant des insuffisances du « système » et la recherche acharnée des solutions immédiates est le nouveau sport collectif des intellectuels. Il n’y a aucune raison pour que celui-ci soit réservé aux sceptiques des bienfaits de la main invisible. Le tour de force d’Eric Posner, Professeur de la Chicago Law School, et de l’économiste Glen Weyl, chercheur chez Microsoft, dans Radical Markets : Uprooting Capitalism and Democracy for a Just Society, en est la parfaite illustration. Où certains nous voient déjà abandonner le paradigme du marché libre, Posner et Weyl trouvent leur salut dans son extension à la société dans son ensemble. Dans cinq chapitres aussi déroutants que percutants, mélange savant de science-fiction et de philosophie politique, les deux auteurs proposent de réformer en profondeur le droit privé, le système électoral, le régime de l’immigration, le droit des sociétés et le régime des données personnelles, afin de combattre, tour à tour, toute trace de monopole. Ce bref compte-rendu n’ayant pas pour ambition de rendre justice à l’ensemble des combats menés dans Radical Markets, nous nous concentrerons dans ce qui suit sur la première et la plus radicale des propositions : abolir une bonne fois pour toutes la propriété privée et ce, pour déchaîner le marché libre.
Corporate Governance in Europe : A Critical Review of the European Commission’s Initiatives on Corporate Law and Corporate Governance
European corporate law and corporate governance are moving ahead beyond expectation. Some British voices called this “a renaissance in the past decade”. In December 2012, the European Commission came forward with an Action Plan that combines both corporate law and corporate governance rules and contains sixteen disparate initiatives partly to be implemented through Directives, partly through non-legal measures. Meanwhile a fight on the Draft Shareholder Rights Directive is going on in the European Council and the Parliament, with major compromises pending in 2015. Further corporate law harmonization measures are under way, in particular the proposal of Single-Member Private Limited Companies. The European Court of Justice’s case law has a far-reaching impact on the free movement of corporations in the European Union, but is not able to singlehandedly create European corporate law with decisions based on the freedoms of the Treaty. On this background the article analyzes seven critical areas of European Corporate Law and Governance as of 2015: Empowering shareholders and institutional investors; controlling shareholders, groups of companies and related party transactions; new European corporate forms; corporate and bank governance; free transfer of seat without new incorporation; corporate finance and capital maintenance and European takeover law reform. The article ends with looking into the goals, methods and scope of European corporate law-making. Free mobility and minimum protection have to be balanced. Transparency as a method of regulation strengthens private autonomy and supports market forces. Harmonization must be limited to the core areas of corporate law, and national and European corporate law will need to complement one another. It remains to be seen whether the codification plans of the Commission and the private model law initiatives will produce convincing results. In sum any step to more European law in the before-mentioned core areas should not only be left to the forces or deadlocks of political compromise, but in order to be really useful will need to be addressed in a careful, ongoing, policy-oriented, economic and comparative law discussion.
Corporate governance, i.e. the system by which companies are directed and controlled, has become a key topic for legislation, practice and academia in all modern industrial states. The financial crisis has highlighted the problems. Yet one goes astray if one does not understand how the unique combination of economic, legal and social determinants of corporate governance functions in each country. A functional comparative analysis based on reports from 33 countries and with references to economic literature may help. After dealing with the concepts, instruments (including soft law) and sources of corporate governance, the Article analyses the regulation and practice of the various actors in corporate governance: mainly the board and the shareholders, but also labor, gatekeepers (in particular the auditors), the supervisors and the courts. In the end, a great deal of convergence appears, though many pathdependent differences remain.
Despite the apparent divergence in institutions of governance, share ownership, capital markets, and business culture across developed economies, the basic law of the corporate form has already achieved a high degree of uniformity, and continued convergence is likely. A principal reason for convergence is a widespread normative consensus that corporate managers should act exclusively in the economic interests of shareholders, including noncontrolling shareholders. This consensus on a shareholderoriented model of the corporation results in part from the failure of alternative models of the corporation, including the manager-oriented model that evolved in the U.S. in the 1950’s and 60’s, the labor-oriented model that reached its apogee in German co-determination, and the state-oriented model that until recently was dominant in France and much of Asia. Other reasons for the new consensus include the competitive success of contemporary British and American firms, the growing influence worldwide of the academic disciplines of economics and finance, the diffusion of share ownership in developed countries, and the emergence of active shareholder representatives and interest groups in major jurisdictions.
Since the dominant corporate ideology of shareholder primacy is unlikely to be undone, its success represents the “end of history” for corporate law. The ideology of shareholder primacy is likely to press all major jurisdictions toward similar rules of corporate law and practice. Although some differences may persist as a result of institutional or historical contingencies, the bulk of legal development worldwide will be toward a standard legal model of the corporation. For the most part, this development will enhance the efficiency of corporate laws and practices. In some cases, however, jurisdictions may converge on inefficient rules, as when the universal rule of limited shareholder liability permits shareholders to externalize the costs of corporate torts.
Why does corporate governance–front page news with the collapse of Enron, WorldCom, and Parmalat–vary so dramatically around the world? This book explains how politics shapes corporate governance–how managers, shareholders, and workers jockey for advantage in setting the rules by which companies are run, and for whom they are run. It combines a clear theoretical model on this political interaction, with statistical evidence from thirty-nine countries of Europe, Asia, Africa, and North and South America and detailed narratives of country cases. This book differs sharply from most treatments by explaining differences in minority shareholder protections and ownership concentration among countries in terms of the interaction of economic preferences and political institutions. It explores in particular the crucial role of pension plans and financial intermediaries in shaping political preferences for different rules of corporate governance. The countries examined sort into two distinct groups: diffuse shareholding by external investors who pick a board that monitors the managers, and concentrated blockholding by insiders who monitor managers directly. Examining the political coalitions that form among or across management, owners, and workers, the authors find that certain coalitions encourage policies that promote diffuse shareholding, while other coalitions yield blockholding-oriented policies. Political institutions influence the probability of one coalition defeating another.
Equity ownership in the United States no longer reflects the dispersed share ownership of the canonical Berle-Means firm. Instead, we observe the reconcentration of ownership in the hands of institutional investment intermediaries, which gives rise to “the agency costs of agency capitalism.” This ownership change has occurred because of (i) political decisions to privatize the provision of retirement savings and to require funding of such provision and (ii) capital market developments that favor investment intermediaries offering low-cost diversified investment vehicles. A new set of agency costs arises because in addition to divergence between the interests of record owners and the firm’s managers, divergence exists between the interests of record owners—the institutional investors—and the beneficial owners of those institutional stakes. The business model of key investment intermediaries like mutual funds, which focus on increasing assets under management through superior relative performance, undermines their incentive and competence to engage in active monitoring of portfolio company performance. Such investors will be “rationally reticent”—willing to respond to governance proposals but not to propose them.
We posit that shareholder activists should be seen as playing a specialized capital market role of setting up intervention proposals for resolution by institutional investors. The effect is to potentiate institutional investor voice, to increase the value of the vote, and thereby to reduce the agency costs we have identified. We therefore argue against recent proposed regulatory changes that would undercut shareholder activists’ economic incentives by making it harder to assemble a meaningful toehold position in a potential target.