Download Historical Patterns of Corporate Control in the United

Historical Patterns of Corporate
Control in the United States
Marco Becht (ULB) and Bradford DeLong (UCB)
October 2002
Stylized Facts About U.S.
Corporate Control Today
• Trusts and holding companies (pyramids) widespread in
1900.
• Most companies widely held by 1936-1940 (but not as
much as Berle and Means claimed).
• Today, very few listed U.S. companies with a 10%+
blockholder.
1. American Exceptionalism?
• The conventional wisdom is that corporate control in the United States
is anomalous--the United States having neither dominant "universal
banks" overseeing and monitoring operating-company managers, nor
pyramids of holding companies with a "founding family" at its head
overseeing and monitoring operating-company managers
• Instead it has a much more decentralized, opportunistic, and catch-ascatch can system of corporate oversight.
• To what extent is this picture an accurate picture of the structure of
corporate control in the U.S. since 1945? Since 1890?
• To what extent is at a sharpening of real but relatively minor
differences?
2. Railroads
• The United States was the leader in having extraordinarily large (for
the time) private railroad companies after the Civil War.
• It was also the leader in railroad company corruption.
• Did this experience of the Gilded Age and the Robber Barons play any
role in shaping the subsequent evolution of the U.S. system?
3. How Healthy Was J.P. Morgan
in the 1920s?
• In a powerfully-argued book, Strong Managers, Weak Owners: The
Political Roots of American Corporate Finance, Mark Roe argues that
American corporate finance exceptionalism emerges out of historical
accidents.
• The Progressives hated the idea of finance capitalism, and sought the
destruction of centers of private power in finance for ideological
reasons. The Great Depression created a demand to "do something"
about the mess in Wall Street. And so the Progressive program was
dusted off, pulled down from the shelf, and put into practice.
• To what extent is this a full and fair description of the origins of
American corporate finance exceptionalism? To what extent were
American finance capitalists already in trouble even back before the
New Deal and the Great Depression?
4. Why No Pyramids?
• Mark Roe's argument in Strong Managers, Weak Owners provides a
potential explanation for the absence of "universal banks" from the
American scene. But what is the explanation for the absence of
founding family-controlled pyramids of companies?
• If Italian small shareholders are happy knowing that the Agnelli family
is overseeing their investments, why didn't Americans generate a
similar demand for oversight by Astors, Carnegies, Mellons, Fords-and today Gateses and Allens?
• Listing restrictions cannot be the full explanation because they are
endogenous. The PUHC Act was very important for the dismantling of
utility companies--but came relatively late.
5. Family Portfolios: Control and
Diversification
• Even if there was little demand from small shareholders for oversight
by Industrial Statesman families, the founding families themselves had
a powerful interest in keeping not just cashflow but control in their
hands.
• Back in the 1980s Shleifer and Vishny argued that many more
American firms had controlling groups than the tradition presentation
of the stylized facts allowed. But even they found relatively little in the
way of blockholders, or family-run industrial groups.
• Why didn't American founding families seek to invest their wealth in a
way that guaranteed both (a) control and (b) diversification?
6. “Retail Push” and Corporate
Control
• From the Civil War days of Salmon P. Chase and Jay Cooke, American
finance has appeared to have a strong "push retail" element--starting
with Jay Cooke selling Civil War bonds to individuals, continuing with
Jay Cooke selling railroad bonds to individuals, and continuing on up
to the present day with Stillman and Vanderlip at the National City
Bank and then Merrill Lynch after World War II.
• To what extent was this "retail securities channel" stronger in America
than in other countries?
• What difference did the existence of this "retail securities channel"
make for the American pattern of corporate oversight and control?
7. Sheer Size Means Large
Families Get Lost in the Noise?
• Another possible hypothesis is that America does have powerful
"founding families"--but that the scale of the country is so big that they
aren't noticed. Who in America would pay attention to an industrial
empire the size of the Wallenbergs, however large they loom in
Sweden?
• Is the absence of "founding families" in America simply an artifact of
the country's large size?
• Are families important, but not in listed companies?
8. Continental Market Made
Firms too Large?
• An alternative size-based hypothesis is that the continental market
established in the late nineteenth century caused scale economyexploiting firms to grow so large that it was next to impossible for any
"founding family" to maintain control over more than a small number
of firms.
• On this interpretation, the anomaly is not that "founding families"
behaved differently, but instead that the large early growth of firms
made their task of solidifying control next to impossible. Is there any
truth in this possible explanation?
9. Britain and the U.S.
• The conventional wisdom counterposes the "Anglo-American" system
of finance to a "Continental European" or perhaps a "GermanoJapanese" system.
• But Britain and America are not identical.
– For one thing, were British firms' board elections "contestable" in a way
that American firms' board elections apparently have not been for
generations?
– For another, America led Britain by half a century or so, in Alfred
Chandler's estimation, in the ability of family-started firms to use financial
markets to expand to take advantage of serious economies of scale.
• Where did the differences between Britain and America come from,
and how important are they?
10. Are We Looking in the
Wrong Place?
• Should we be looking for the origins of “American
exceptionalism” in antitrust and product market
competition instead of in finance?
• Sherman Act
– Move from “pooling” to “trusts”
– Move from “trusts” to “holding companies”
• Breakup of Standard Oil
– Rockefellers lose control
– The “money trust”
• SEC
• Public Utilities Holding Companies Act
– 1938? Very important...
Inheritance Law - Estate Tax
• Trusts
– Fiduciary duty to disperse
• Hershey
• Prudent Man Rule
Empirical Challenge
• Trace ownership and voting control 1870-2002
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–
–
–
–
–
–
Shareholder lists (from early on)
10% insider holdings from 1936 or so (Securities Act 1933-34)
Williams Act (1965 or so)
Today Section 13 1934 Act
5% voting blocks
Annual meeting records?
Voting rights?
• Disclosure-cash flow
Empirical Challenge
• Ambition
– Trace ownership from shareholder registers (Franks-Meyer-Rossi
style)
– If that fails, piece together as many “glimpses” as possible...
Four Sources of Data
•
•
•
•
Meeting records (control)
Shareholder lists (cash flow)
Insider ownership (10%+ starting in ~1936)
Williams Act (~1965) (proxy statements-5%+ voting blocks)
Keeping Control without
Ownership
• How and why?
• Board composition
• Takeover defenses
– Statutory (voting caps)
– Poison pills, et cetera...
The End of the Public
Corporation?
• Role of income tax rate reduction in the making of CEO
fortunes?
Ways in Which American Market
Functions...
• Stock price declines
– Followed by hostile takeovers
• Takeover defenses: poison pills, et cetera
• What does the Delaware Chancery do?
– Followed by anxious board
• Which induces management to do value maximization
• Which replaces management
• How effective is this at solving the Berle-Means problem?
– Not very...
• Advantages of American system
– Universal banks: who will guard the guardians? Problem
– Pyramids: tunnelling problem
Plans for Future...
• Current Plan: June conference in Canadian Rockies
• Marco Becht’s Entrepreneurial Activities
– INSEAD to run European conference
– European Corporate Governance Network to find money to fund
conference
– Non-technical write-ups for the Financial Times