This paper examines legal rules covering protection of corporate shareholders and creditors, the origin of these rules, and the quality of their enforcement in 49 countries. The results show that common law countries generally have the best, and French civil law countries the worst, legal protections of investors, with German and Scandinavian civil law countries located in the middle. We also find that concentration of ownership of shares in the largest public companies is negatively related to investor protections, consistent with the hypothesis that small, diversified shareholders are unlikely to be important in countries that fail to protect their rights.

Law and Finance

This paper examines legal rules covering protection of corporate shareholders and creditors, the origin of these rules, and the quality of their enforcement in 49 countries. The results show that common-law countries generally have the strongest, and Frenchcivil-law countries the weakest, legal protections of investors, with German- and Scandinavian-civil-law countries located in the middle. We also find that concentration of ownership of shares in the largest public companies is negatively related to investor protections, consistent with the hypothesis that small, diversified shareholders are unlikely to be important in countries that fail to protect their rights.

This paper surveys research on corporate governance, with special attention to the importance of legal protection of investors and of ownership concentration in corporate governance systems around the world.

A Survey of Corporate Governance

This article surveys research on corporate governance, with special attention to the importance of legal protection of investors and of ownership concentration in corporate governance systems around the world. CORPORATE GOVERNANCE DEALS WITH the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment. How do the suppliers of finance get managers to return some of the profits to them? How do they make sure that managers do not steal the capital they supply or invest it in bad projects? How do suppliers of finance control managers? At first glance, it is not entirely obvious why the suppliers of capital get anything back. After all, they part with their money, and have little to contribute to the enterprise afterward. The professional managers or entrepreneurs who run the firms might as well abscond with the money. Although they sometimes do, usually they do not. Most advanced market economies have solved the problem of corporate governance at least reasonably well, in that they have assured the flows of enormous amounts of capital to firms, and actual repatriation of profits to the providers of finance. But this does not imply that they have solved the corporate governance problem perfectly, or that the corporate governance mechanisms cannot be improved. In fact, the subject of corporate governance is of enormous practical impor

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We use data on ownership structures of large corporations in 27 wealthy economies to identify the ultimate controlling shareholders of these firms. We find that, except in economies with very good shareholder protection, relatively few of these firms are widely held, in contrast to Berle and Means’s image of ownership of the modern corporation. Rather, these firms are typically controlled by families or the State. Equity control by financial institutions is far less common. The controlling shareholders typically have power over firms significantly in excess of their cash f low rights, primarily through the use of pyramids and participation in management.

/pdf/corporate-ownership-around-the-world-1zjebm7ik6.pdf

Corporate Ownership Around the World

In this reinterpretation of the evolution of the American corporation, the author demonstrates that the ownership structure of large US firms owes its distinctive character as much to politics as to economics and technology. His provocative examination addresses essential issues facing American businesses today as they compete in the new international marketplace. Why are large American corporations owned by hundreds of relatively small stockholders, while a handful of stockholders control big blocks of stock in German and Japanese corporations? Why are banks and other potentially large investors restricted by law from owning controlling interests in American corporations? Why are senior managers of US firms so powerful, while the actual owners are frequently far removed from day-to-day business, even when they are large financial institutions? These questions are debated regularly in both popular and scholarly media. This book provides the historical background to the discussion. This text offers a new perspective on the corporate upheavals of the 1980s and 1990s, when relationships among shareholders, boardrooms, and senior managers were thrown into upheaval. Numerous proposals are debated daily in the business press about how the relationships among these three groups should change to make corporations more productive and more effective competitors in the world market. Roe argues that lasting change will be difficult to achieve without understanding how political and social forces created and shaped the modern American corporation.

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

Corporate structures differ among the advanced economies of the world. We contribute to an understanding of these differences by developing a theory of the path dependence of corporate structure. The corporate structures that an economy has at any point in time depend in part on those that it had at earlier times. Two sources ofpath dependence-structure driven and rule driven-are identified and analyzed First, the corporate structures of an economy depend on the structures with which the economy started Initial ownership structures have such an effect because they affect the identity of the structure that would be efficient for any given company and because they can give some parties both incentives and power to impede changes in them. Second, corporate rules, which affect ownership structures, will themselves depend on the corporate structures with which the economy started Initial ownership structures can affect both the identity of the rules that would be efficient and the interest group politics that can determine which rules would actually be chosen. Our theory of path dependence sheds light on why the advanced economies, despite pressures to converge, vary in their ownership structures. It also provides a basis for why some important diferences might persist.

https://www.jstor.org/stable/pdfplus/1229459.pdf

A Theory of Path Dependence in Corporate Ownership and Governance

In a broad-based democracy, not all contracts will survive. Even some efficient contracts will be banned, if enough people dislike them. Thus if the average voter dislikes powerful private financial institutions, politics will, all else being equal, ban them. Interest groups cancel one another out. One group wants powerful financial institutions and another, such as small-town bankers, does not. The small-town bankers have a leg up in the political infighting, because popular opinion is on their side, leading to a ban on some arrangements that a less regulated economy might produce. Or, to recast the problem in agency cost terms, managers would like to be free from the oversight that powerful financial intermediaries might provide, and in the modern era, politicians might side with managers when the managers’ goals of thwarting takeovers align with a public wary of too many hostile takeovers. The politician can satisfy the managerial interest group and be popular at the same time. Agency costs move into the political arena; some contracts are banned, and whether the substitutes that arise are always perfect ones, without additional costs, is an open question. Law restricted the dominant financial institutions from the end of the nineteenth century onward. American banks were fragmented geographically, lacking the size to take big slices of capital of the large American firms emerging at the end of the nineteenth century. Banks’ products and portfolios have been further restricted: they were barred from the securities business and from owning stock. Their affiliates were also restricted in the stock they could own. Insurers could not buy stock for most of this century. Mutual funds cannot easily devote their portfolios to big blocks and face legal problems if they go into the boardroom. Pensions cannot take very big blocks without legal and structural problems; the big private pensions are under managerial control, not the other way around. These rule were neither random nor economically inevitable. While public interest goals of keeping financial intermediaries prudent and stable explain some of the rules, they do not explain all of them. Two dominant themes lay behind many of the rules: American public opinion, which mistrusted private large accumulations of power, and interest group politics. There were winners in fragmenting financial institutions. These winners had a large voice in Congress, and their goals matched public opinion. For example, small banks wanted to shackle large ones and succeeded in getting and keeping branching limits, banks on banks in the securities business, banks on bank affiliates’ moving outside of banking, and deposit insurance (which, by guaranteeing depositors that they will be paid if the bank fails, helps smaller, weaker banks more than it helps more solid, often bigger banks). These features of the political economy of American finance became foundational for corporate finance and the separation of ownership from control.

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

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

The claim I advance is that the large firm's ownership structure is too often analyzed as one arising solely from organizational imperatives and technical foundations. The political and social predicates that make the large firm possible and that shape its form can deeply affect which firms, which ownership structures, and which governance arrangements survive and prosper, and which do not. To be concrete, much political analysis can be made to fit a principal-agent model. For ownership to separate from control, managers must be sufficiently aligned with shareholders. But the ways in which some polities settle conflict - or the ways in which the corporate players team up to work together - can affect the degree to which managers ally with shareholders and, concomitantly, how easy it is for ownership and control to separate. Managers' agendas can differ from shareholders'; tying managers tightly to shareholders has been central to American corporate governance. But in other economically advanced nations, ownership is not diffuse but concentrated. It is concentrated in no small measure because the delicate threads that tie managers to shareholders in the public firm fray easily in common political environments, such as those in common in continental European in the late 20th century. Politics can press managers to stabilize employment, to forego some profit-maximizing risks with the firm, and to use up capital in place rather than to downsize when markets no longer are aligned with the firm's production capabilities; these political tendencies correspond closely to managers' historical tendencies, even in the United States. Since managers must have discretion in the public firm, how they use that discretion is crucial to stockholders, and common political pressures induce managers to stray farther than otherwise from their shareholders' profit-maximizing goals. Owners may be reluctant to turn the firm over to independent managers if managers would more willingly expand and make hard-to-reverse investments. The polity may refuse to give distant shareholders the tools that roughly align managers with shareholders, and it may denigrate the private means that align the two. And some of these political results are easily to implement in weakly competitive product markets, the kind of markets that give managers yet more discretion. Hence, public firms in such polities, all else equal, have higher managerial agency costs, and large-block shareholding has persisted as shareholders' best remaining way to control those costs. Indeed, when we line up the world's richest nations on a left-right political continuum and then line them up on a close-to-diffuse ownership continuum, the two correlate powerfully. True, the effects on total social welfare are ambiguous; such polities may enhance total social welfare, but if they do, they do so with fewer public firms than less socially responsive nations. These results strongly suggest that the corporate governance and ownership characteristics are linked, directly or indirectly, to basic political configurations in the wealthy West. European structures, for example, may link more tightly to Europe's late 20th-century politics than to technical institutions, and the technical institutions may derive from late 20th-century politics as much as anything else. We thus uncover not only a political explanation for ownership concentration in Europe, but also a crucial political prerequisite to the rise of the public firm in the United States, namely the weakness of social democratic pressures on the American business firm.

Mark J. Roe

Papers

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

A Theory of Path Dependence in Corporate Ownership and Governance

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

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

Political Determinants of Corporate Governance