Thursday, April 1, 2010

Cheffins and Bank on Berle and Means

As the various contributions to the Berle symposium in the Seattle University Law Review appear on SSRN, be sure to keep in mind Brian Cheffins and Steven Bank, "Is Berle and Means Really a Myth?" Business History Review 83 (Autumn 2009): 443-74, which is available here. It commences:
In their famous 1932 book, The Modern Corporation and Private Property, law professor Adolf Berle and economist Gardiner Means claimed: “In the largest American corporations, a new condition has developed . . . [T]here are no dominant owners, and control is maintained in large measure apart from ownership.” Their assessment had a profound and enduring influence on debates about governance of public companies. As James Hawley and Andrew Williams observed in 2000, “The phenomenon Berle and Means identified in 1932—the divorce of ownership from control—would come to dominate most thinking about issues of corporate governance for the rest of the twentieth century.” Or, as Robert Monks and Nell Minow said in the 2008 edition of their text on corporate governance, “Most people begin the study of ownership in the context of the public corporation with . . . Berle and . . . Means.”

The impact that the separation of ownership (in the sense of ownership of equity stakes in companies) and control (in the sense of having the authority to determine corporate policy) has had on the analysis of corporate governance can be readily explained. As Monks and Minow say, “Public companies have managers with agendas different from [those of] their owners.” Correspondingly, when corporations lack shareholders who hold sufficiently sizable stakes to exercise influence over the board of directors and the executives the board appoints, “agency costs” generated by inattentive or self-serving managers become a major potential concern. Various market-oriented mechanisms, such as monitoring by outside directors, performance-oriented compensation, and the market for corporate control, help to align the interests of management and shareholders. However, as the wholesale destruction of shareholder value in major publicly traded U.S. financial corporations during the recent market turmoil (e.g., AIG, Bear Stearns, Citigroup, and Lehman Brothers) illustrate, major gaps in managerial accountability can remain. Hence, as law professor Ronald Gilson has said, “The intellectual mission of American corporate governance took the form of a search for the organizational Holy Grail, a technique that bridged the separation of ownership and control by aligning the interests of shareholders and managers.”

In this paper, we survey from a historical angle the literature concerning the separation of ownership and control. Our departure point is a series of papers challenging the received wisdom on this subject. Business historian Leslie Hannah, in a 2007 paper, sought to debunk conventional thinking concerning the historical evolution of ownership and control; his main target was “the erroneous belief that America led in divorcing ownership from control.” Economists João Santos and Adrienne Rumble, in a 2006 article, highlighted the ownership stakes commercial banks hold in large U.S. public companies through trust businesses they operate, remarking that “the extent of banks’ control over firms’ voting rights . . . is surprising given the often-claimed separation between banking and commerce in the United States.” Fellow economist Clifford Holderness, in a 2008 article entitled “The Myth of Diffuse Share Ownership in the United States,” relied on his research on ownership patterns in a sample of publicly traded companies to argue “that most public corporations in the U.S. have large-percentage shareholders, and the ownership concentration of U.S. corporations is similar to the ownership concentration of corporations elsewhere.”

Using Hannah’s chosen reference date of 1900 as our departure point, we revisit Berle and Means’s classic analysis and put into context the arguments advanced by Hannah, Santos and Rumble, and Holderness. In so doing, we take into account sources now largely neglected. For instance, while Holderness has said that the 1980s yielded “the first papers to study ownership concentration after [a] fifty-year hiatus,” we discuss various empirical studies of ownership and control conducted between the mid-1930s and 1980. Our literature survey indicates that U.S. corporate governance has never been characterized by a wholesale divorce of ownership from control. On the other hand, the United States of 1900 was not the haven of family capitalism that Hannah suggests. Likewise, banks have never been as influential as stockholders as Santos and Rumble imply, nor has block-holding been as pervasive as Holderness indicates. Thus, the Berle and Means orthodoxy remains a valid starting point for analysis of U.S. corporate governance, both in historical and contemporary terms.