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The logic of the argument emphasizes managerial agency costs. When states support stakeholder interests, managers are forced to act against the interests of stock owners. In order to limit the extent to which private stock owner interests are compromised in this way, owners seek large controlling stakes and resist the separation of ownership and control.
Such strategies, in turn, strengthen the hand of banks and weaken securities markets. Thus, in countries where stakeholders have political power, owners strategically keep their holdings very concentrated and dispersion is blocked. In societies in which there has been no significant political movement for the defense of stakeholders over private stock owner interests, Roe claims, indirect mechanisms for the control of managerial agency costs can develop—minority protections, transparency rules, independent fiduciary systems for monitoring, active securities markets, and markets for corporate control.
Under such conditions, owners can diversify their holdings with less fear that dispersion will allow management to neglect their interests. Corporate growth under such political circumstances can follow the path Chandler suggested, where increasing capital needs are satisfied through the dispersion of ownership in the securities market. Roe uses this general theory to construct particular historical stories to account for dispersed or concentrated ownership in each of the five countries.
For the US case, he suggests that political concern to limit concentrated economic power—particularly that of financial institutions and labor—created a political and economic terrain where there were neither banking interests that could shepherd the development of closely-held large corporations, nor socialist interests that might have sought to place limits on managerial decision- making.
In Germany, Japan and France, neither of these two conditions held. Large banks could shepherd the growth of the corporate sector, while labor in Germany and Japan and the state in France were able to achieve significant stakeholder rights. Responding to different managerial agency costs, Roe argues that US owners allowed shareholdings to become dispersed while political power focused on legal and competitive mechanisms for the indirect control of managerial agency.
By contrast, in Germany, France and Japan owners sought to keep their holdings as concentrated as possible in order to control managers. This kept securities markets in those countries weak and improved the position of banks. First, the German economy between and had concentrated ownership and strong banks—but the latter were neither significant holders of corporate equity nor important lenders.
Moreover, legal protection for stock owners was also comparatively strong Cheffins Thus, relations between concentrated ownership and strong banks existed long before significant labor stakeholder legislation was imposed on corporations. Indeed, during the first twenty years of joint-stock enterprise in Germany there was a state-imposed ban on socialism and trade unions.
The lifting of that law seems neither to have encouraged nor discouraged owners from changing the concentration of their holdings. The number of corporations in the economy steadily increased up to , most remained closely held and relied on retained earnings for expansion, while an ever increasing minority grew to be more widely held Fohlin The lack of stakeholder threat and the presence of functioning securities markets did not induce closely held German firms to expand by diluting ownership or by increasing debt.
Pre Germany does not provide anything like unambiguous confirmation of this argument. For Roe, there is an attractive securities market in the United States because the possibility of relational banking was eliminated by political concerns to limit financial power. Roes does not view the relatively modest size of the late nineteenth century securities market and the absence of effective minority holder rights as an obstacle to dispersion.
Yet if German owners did not significantly exercise the option to cash out when they were constrained neither by banks nor strong limits on the securities market, why did those factors induce American owners to act in the opposite way? Finally, many have pointed out that Roe has a very difficult time accounting for the British case Cheffins , Franks et. Britain, like the United States, never developed a tradition of strong equity-based relational banking, though there were no legal or political barriers to such practices.
But when they did gradually begin to do so, Britain was ruled by a Labour government that energetically nationalized capital and imposed strong welfare measures on private firms. And when stakeholder threats to their interests became most acute, owners increasingly cashed out and allowed holdings to become dispersed. An alternative line of argument has emphasized legal differences among countries in explaining the propensity for either concentrated or dispersed ownership.
These economists attribute differences in corporate governance regimes, in particular the dispersion or concentration in holdings and the robustness of markets for external finance, to the extent of legal protection for minority shareholders and creditors.
They argue that common-law countries , such as the US and Britain, have very strong protections for minority shareholders and creditors, while civil-law countries, such as Germany, France and Japan, provide far fewer protections to minority shareholders or to creditors.
The strength of these protections, and their enforcement, is the mechanism that accounts for the relative dispersion or concentration of holdings—and indeed, the strength and depth of external finance possibilities more generally. Because minority protection is very weak in Germany, Japan, and especially France, owners have many options for exercising control over minority holders.
A market for securities does not develop and deepen in these countries because there is little incentive to take non-controlling stakes in companies, while there is great incentive for owners to protect themselves against unwanted takeover attempts. Similarly, because legal protections for creditors are weak, bond markets do not develop and banks seek close relations with their clients in order to monitor their investments effectively.
But the explanatory mechanism they offer becomes questionable in light of the historical evolution of corporate governance in the five major cases considered above. Each of these countries had the same legal traditions throughout its industrial history, yet as we saw, the character of corporate governance and the density of stockholdings varied considerably within them over that period. Britain and Japan, in particular, experienced radical shifts in corporate governance arrangements without any significant change in their legal systems—at least not at the level of reliance on common vs.
Indeed, there are many empirical problems with the strong LLVS claim. For example, in the US and the UK dispersion of ownership significantly preceded the passage of strong minority rights protection statutes Coffee The lack of legal minority protection seems, therefore, to have been an obstacle to the emergence neither of robust securities markets nor dispersed ownership.
Something else must be at work in the evolution of corporate governance regimes than a simple difference in legal tradition and, specifically, the existence of strong legal protections of minority shareholders. Brian Cheffins , , , offers an alternative argument to account for the emergence of concentrated versus dispersed holdings systems that also emphasizes legal differences among countries. He argues that even in the absence of minority protections, dispersion can emerge if antitrust law favors horizontal merger over cooperation and investor sentiment is favorable toward securities, as can be seen from the cases of the early twentieth-century United States and late twentieth-century Britain.
In the late nineteenth-century US many industries were characterized by excessive competition and instability. Personal benefits of control were, as a result, very low for owners and they sought to reduce the level of competition and instability. Since cooperation was legally difficult to achieve, firms thus sought to create market stability through horizontal merger.
In itself, Cheffins points out, such mergers did not require the dispersion of ownership. By selling into the market, investors could diversify their own investment risks. Cheffins notes that traditional securities markets in the nineteenth-century US were very small and regarded as inappropriate for all but the most specialized investors. Such optimism had to do largely with the success of mergers themselves and with the public endorsement of them by prominent intermediaries, such as the Morgan Bank.
In the British case, mergers and investor sentiment took much longer to come together. During the early twentieth century, British mergers created holding companies rather than integrated new enterprises.
This, Cheffins claims, allowed owners to retain their private control benefits. Moreover, even though there was investor interest in corporate securities, the market proved to be too unstable and as a result, unattractive to owners as an alternative location for their investments. Only in the s, after laws stabilizing stock issues had quieted owner concerns and renewed equity enthusiasm emerged among investors, did stock begin to disperse in the merger wave that broke over the British economy between and the late s see also Franks et.
The difficulty in the argument concerns the moment when owners judge, after a merger, that cashing out is preferable to continued enjoyment of private control benefits.
Cheffins introduces empirical examples in both the US and British cases showing that owners were interested in cashing out and that the happy existence of an enthusiastic market of investors afforded them that possibility.
But it is not clear what caused those owners to prefer cashing out over continued private control. Diversification at that level—which was occurring—could in principle reduce investor risk while affording a higher return than would be possible in a diversified securities portfolio. Why did owners choose cashing out over this alternative option? Germany did not experience merger waves on the order of those in either the early twentieth-century US or the late twentieth century Britain.
Instead, around the same time as the great merger movement in the US, German owners solved the market instability problems that produced merger elsewhere by entering into cartel and syndicate Konzern arrangements. Corporate growth could in this way take place without eroding private control benefits relative to diversified securities portfolios.
Cheffins notices that his argument does not sufficiently resolve the puzzle. German owners in syndicates were exposed to the same problem of undiversified investment as owners within newly merged companies in the US and Britain.
The German market for securities was both deep and active—there were continuous new listings throughout the period up to World War I, and, indeed, there was a significant jump in listings that occurred during the period of cartelization. Moreover, he points out that investor protections in Germany were as strong as anywhere at the time.
Why, then, did private benefits of control continue to be more attractive to owners than cashing out? Ultimately, Cheffins following Schumpeter suggests that there was a cultural norm in Germany, particularly after the passage of the securities market law, discouraging gambling in the stock market.
This norm, he suggests, kept investor enthusiasm for the stock market low and hence restricted owner opportunity to cash out. But this claim based on no other historical authority than a passing remark by Schumpeter has all the markings of an answer advanced because the question would otherwise remain open.
It is easy to provide counter examples of late nineteenth and early twentieth-century Germans who, unlike Schumpeter, discerned no norm discouraging speculative trading in the stock market. The point, here, is not to suggest that Simmel is a better authority than Schumpeter, but rather to point out that in the existing state of research the available evidence to support such a cultural argument is very contradictory.
A final set of arguments seeking to account for cross-national variations in the evolution of corporate governance arrangements, and particularly for the dispersal or non-dispersal of holdings, emphasizes the positive or negative role of well-positioned interest groups or classes. They claim that openness to trade and cross-border capital flows creates pressure for financial market development: better law eg.
Under such conditions, competition from new entrants in domestic industrial and financial markets makes it difficult for large players to protect monopoly rents.
Control in many directions--by large banks over credit markets, by large firms over product markets, by banks over firms, or even by owners over corporations-- is undermined, and competitive and dynamic arms-length market relations appear.
According to Rajan and Zingales, concentrated holdings, relational banking, bank-driven financial systems, etc. In a similar way, their structural argument offers a plausible if not always explicit explanation for the significant shift in bank control and shrinkage in the number of firms participating in the German securities market, as well as the capacity of the French state and industrial elites after to control both the capital market and large firms.
In each case, incumbent actors exploited the absence of foreign competition in trade and capital markets to establish control and protect excessive rents. In particular, industrial firms, long hostage to financial control by domestic banks, eagerly exploited new financial openness to raise capital in international markets.
As a result, all three economies became more open, and their corporate governance structures became more dispersed and arms- length. Suggestive as this argument is in accounting for the evolution of late twentieth-century financial systems, there are empirical problems in linking financial system development to variations in corporate governance. The authors present data for showing how surprisingly from a twenty-first century perspective financially developed and relatively economically open were both France and Germany.
The persistence of concentrated holdings, despite structural conditions favoring competition and the free flow of capital, apparently has to be explained by something else. Dispersion of ownership, active securities markets and market- based financial systems are the result of more than simply the existence of free movement in goods and money across borders. In large part, the market for securities was created to negotiate managerial continuity within such enterprises as original owners retired and also to accommodate the fusion of property rights during the great late nineteenth-century merger wave.
In both cases, stock was distributed within a very elite circle of investors. They also carefully monitored enterprises and, significantly, had the power to challenge management if dividend payments were missed. Ultimately such practices were outlawed and replaced with clear rules regarding stock voting rights. Yet by that time stock had diffused so broadly that the effect of the new regulations simply legitimized stockholding and fostered even greater diffusion.
Rather, it resulted from systematic management efforts to dilute the power of stock owners through the creation of greater liquidity in the securities market. Dispersion emerged not out of a market logic, but out of an organizational power logic. Why were American mangers able to exploit the structural potential of the nascent securities market against relational owners, while German and Japanese managers seem rather to have worked together with major owners to enhance enterprise competitiveness in the context of comparably liquid markets?
But it does not account for or appear even to notice6 the possibility that managerial interests are equally contingent and unconstrained by structure.
It remains unclear how to explain the observed patterns of dispersion and concentration in holdings, both across cases and within cases over time. Strikingly, the cases contain far greater heterogeneity in the pattern of holdings, the character of finance, and the role of stakeholders and government than the explanatory theories seem to be able to handle.
Seeming success in one area is contradicted by anomalous development in another. The five countries surveyed all include examples of dispersion and concentration, arms-length and relational finance, and stockholder and stakeholder governance.
Otherwise the cases display remarkable heterogeneity—stakeholderism and relationality in the United States, robust securities markets in pre Germany, Japan, and France. Moreover, improbable combinations abound—such as the particularly intimate role of German banks within corporations with dispersed ownership and more arms-length ties to closely-held corporations in the pre period, or the strong stakeholder commitments of diffusely-held American corporations after One reason the debate has trouble coping with this heterogeneity is that it is far too wedded to the unitary evolutionary sequence of organizational forms that is postulated in the Chandlerian model of corporate development: family firm, entrepreneurial firm, modern managerial enterprise.
Within this unitary developmental trajectory, heterogeneity appears either as transitional or as an example of blockage. But much recent work in business history, economic sociology, political economy, and business economics calls into question this reliance on the Chandlerian paradigm. On this alternative account, the Chandlerian large-scale joint-stock enterprise is viewed as an historically specific entity that emerged at a specific historical moment the late nineteenth and early twentieth century under specific historical conditions, and largely in the United States.
The conditions that sustained that corporate form were not present in nineteenth- century America; nor were they completely hegemonic even within the twentieth-century US economy Berk , Scranton , Lamoreaux et al This alternative literature shows that where the conditions conducive to the emergence of the Chandlerian corporation were absent or not hegemonic , alternative organizational forms emerged with different boundaries, value-generation processes, management structures, labor relations, contests for control and possibilities for opportunism, etc.
In short, alternative conditions produced very different governance dilemmas and structures within and across organizations. Moreover, the alternative literature argues that the evolution of governance practices within the large-scale Chandlerian enterprise, where and when it emerges, should be seen as co-evolving through encounters, discussions, and processes of experimentation with many other enterprise forms.
From this perspective, heterogeneity in governance forms within a given national economy is not a problem. It is an expression of basic economic process—indeed, it is something that is constantly reproduced by that process itself. An alternative literature specifically devoted to the analysis of historical heterogeneity in corporate governance has yet to emerge.
The only historical literature that has an explicit concern for the heterogeneity of governance forms in the industrializing economy is nearly a century old. Not surprisingly, German Historical School and British historical economists are most prominent in this older literature, but even American writers a century ago were concerned to systematically catalogue alternative governance arrangements.
Schmoller surveyed a broad array of arrangements governing relations between owners, managers and stakeholders ranging from manorial and household production systems oikos and producer cooperatives Genossensschaften, artels , to the governance structures in early trading houses and shipping enterprises, guilds, and domestic putting-out systems.
Schmoller focused on the ways power was allocated and value generation was controlled in these organizations. In the household economy, power was centralized and hierarchical. Efforts were made from the top of the hierarchy to direct and capture the value generated by the disparate production processes in the household. By contrast, cooperative arrangements avoided hierarchy, coordinated the flow of production collaboratively, and distributed rents across all participants normally according to an agreed upon formula.
Schmoller explored a wide array of possible variations on each of these governance forms: partnerships, profit-sharing arrangements, collective ownership, etc. In his view, this historical variety served as resources for governance experiments in the industrial economy emerging around him. Schmoller was fascinated by organizational plasticity and the range of possibilities for constituting relations among owners, workers and managers in his own time. And he was acutely aware of the conceptual and practical interchange among organizational fields in the economy, society and politics, as well as the constitution and continuous recomposition of organizational practices in economic life.
This organizational form was conceived as a mechanism for achieving limited liability without the creation of a joint- stock enterprise.
It required a contract and insisted on a very generally specified governance structure. But the intention was to facilitate a broad array of specific forms of governance— cooperative-egalitarian, family-autocratic, profit-sharing, passive participations, etc. Indeed, Koberg points out that calls for the creation of such a legal form of incorporation came strongly from cooperative enterprises and small and medium-sized family firms.
Both required additional capital to grow, but they were not attracted to the specific framework for governance imposed by German joint-stock enterprise law—cooperatives because they resisted hierarchy, and SMEs because they did not want to distribute authority away from the family. Passage of the new law allowed such firms to expand while avoiding becoming joint-stock enterprises.
This alternative legal enterprise form was a smashing success both in Germany and, later, in France. The GmbH and SARL forms quickly proliferated and soon massively outnumbered the joint- stock company and the simple partnership as a percentage of total enterprises in both economies. One implication of this study, of course, is that a major factor accounting for the comparatively low numbers of joint-stock enterprises in Germany and France, both in the past and the present, is that there were very attractive alternatives available to expanding companies which allowed them to govern themselves in a more congenial manner.
More of this kind of close historical work on the variety of legal and organizational mechanisms for the governance of industrial enterprise is plainly needed. But it will only be possible to advance the debate if stereotyped national models are put to the side and researchers seek to explore the range of viable possible governance forms through careful, archivally-based historical studies of specific governance practices, across all the major industrial economies.
Andrews and Stanley Hoffman, eds. Lamoreaux and Daniel M. Raff, eds, Coordination and Information. Bradford, , "Did J. Morgan's Men Add Value? Lee, ed. Kashyap, , Corporate Financing and Governance in Japan. Katz, Robert B. Samuels, Richard J. I und II. III und IV. Zur Social- und Gewerbepolitik der Gegenwart.
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