impossibility of soc dem in U.S.

Doug Henwood dhenwood at panix.com
Thu Sep 16 10:25:15 PDT 1999


"Political Preconditions To Separating Ownership from Control:

The Incompatibility of the American Public Firm with Social

Democracy"

BY: MARK J. ROE

Columbia University School of Law

Document: Available from the SSRN Electronic Paper Collection:

http://papers.ssrn.com/paper.taf?abstract_id=165143

Contact: MARK J. ROE

Email: Mailto:mroe at law.columbia.edu

Postal: Columbia University School of Law

435 West 116th Street

New York, NY 10027 USA

Phone: (212)854-5441

Fax: (212)854-7946

ABSTRACT:

The large public firm dominates business in the United States

despite its critical infirmities, namely the frequently fragile

relations between stockholders and managers. 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 the continental European social democracies.

Social democracies press managers to stabilize employment, press

them to forego even some profit-maximizing risks with the firm,

and press them to use up capital in place rather than to

down-size when markets no longer are aligned with firm's

production capabilities. Since managers must have discretion in

the public firm, how they use that discretion is crucial to

stockholders, and social democratic pressures on managers induce

them to stray from their shareholders' preference to maximize

profits. Moreover, the means that align managers with diffuse

stockholders in the United States--incentive compensation,

transparent accounting, hostile takeovers, and strong

shareholder-wealth maximization norms--are harder to implement

in continental social democracies. Hence, public firms in social

democracies will, all else equal, have higher managerial agency

costs, and large-block shareholding will persist as

shareholders' next best remaining way to control those costs.

Indeed, when we line up the world's richest nations on a

left-right 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; social

democracies may enhance total social welfare, but if they do,

they do so with fewer public firms than less socially-responsive

nations. 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 absence of a strong social democracy and the

concomitant political pressures it would have put on the

American business firm.



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