My initial post cited some of the more striking divergences among common-law jurisdictions with respect to shareholder governance powers, illustrating that shareholders in the UK and jurisdictions following its lead are far more powerful and central to the aims of the corporation than are shareholders in the US. I left off with the natural question: Why?
Over recent decades a number of economic and political theories have been developed to explain divergences between corporate governance systems, but none of them offer a compelling explanation of the core divergence that I identify within the common-law world. As I explore at some length in the book, extant theories tend to adopt a global perspective capable of explaining macro-level divergences between broad categories of corporate governance systems – notably between those systems emphasizing protection of dispersed minority shareholders, which predominate in common-law jurisdictions, and those emphasizing constraint upon the innate power of blockholders, which predominate elsewhere. Highly influential examples of such theories include the “varieties of capitalism” literature (typified by Peter Hall and David Soskice’s excellent edited volume), which contrasts “liberal market economies” emphasizing market-based exchange, shareholders’ interests, and labor market flexibility with “coordinated market economies” emphasizing use of cooperative coordination mechanisms to incentivize stable, long-term, firm-specific investment; and Mark Roe’s “social democracy” theory, which associates the persistence of blockholding and stakeholder-oriented corporate law with left-leaning social democratic politics and dispersal of share ownership and shareholder-oriented corporate law with right-leaning rejection of social democracy. In each case a global binary distinction is drawn, and each approach provides substantial insight into the macro-level divergences between (say) Germany’s co-determination system – aptly described as a “coordinated market economy” exemplifying Roe’s left-leaning paradigm – and (say) the US or the UK, each of which is aptly described as a “liberal market economy” and an exemplar of Roe’s more right-leaning paradigm.
The problem for such binary global theories arises when we focus within the category of common-law countries themselves – because as compelling as their accounts of the divergences between Germany and either the United States or the United Kingdom may be, neither these nor the other theories canvassed in my book can account for the divergences among common-law countries themselves. The varieties of capitalism literature offers no clear means of translating the broad divergences identified into more granular accounts of divergences within a given category of countries. And Roe’s social democracy theory cannot be squared with the fact that UK share ownership substantially dispersed during a period when social democracy prevailed in British politics, or the fact that the more left-leaning UK long has been, and remains, substantially more shareholder-centric than the more right-leaning US.
The alternative theory that I develop resembles the foregoing in emphasizing the centrality of politics in the formation of corporate governance systems, and in recognizing the significance of institutional complementarity across regulatory systems. Yet I part ways with them in arguing that the manner in which external regulatory structures interact with corporate governance may change fundamentally as ownership disperses (as it has, to varying degrees, across the common-law countries that I examine). This, it bears emphasizing, effectively amounts to a rejection of the possibility for a holistic global theory of corporate governance.
Unlike in the highly concentrated ownership systems that prevail elsewhere – where left-leaning, stakeholder-oriented regulatory structures may well correlate with weaker shareholder orientation in corporate governance (again, think Germany) – in countries where share ownership has substantially dispersed, the correlation may actually reverse. Focusing on the prevailing politics of social welfare protection, I argue that whereas stronger left-leaning social welfare policies and legal structures have freed up UK corporate governance to focus intently on shareholders without precipitating political backlash in favor of employees and other stakeholders, the opposite occurred in the US, where weaker social welfare policies tended to inhibit strong-form shareholder-centrism. Australia and Canada, for their part, exhibit social welfare-corporate governance equilibria more closely resembling that struck in the UK – though they have, of course, followed their own unique paths to this outcome, reflecting idiosyncrasies of history, culture, and politics.
Given the wedge driven between the interests of shareholders and those of other stakeholders in the hostile takeover context, it will come as no surprise that these transactions bring the social welfare dynamics described above into stark relief. In the UK, a shareholder-centric takeover regime – requiring shareholder approval to adopt defenses – coalesced under the 1964-1970 Labour government of Prime Minister Harold Wilson. How could this have happened when such an approach to takeovers would appear so directly to contradict the interests of Labour’s core constituency? Labour leaders appear to have concluded that consolidation of British industry could improve stable job opportunities, and that the extensive British welfare state could buffer the downsides for employees. In the US, on the other hand, a stakeholder-centric regime coalesced (at the state level) during the right-leaning years of the pro-takeover Reagan administration, reflecting concerns regarding the potential harms to employees in a country where social welfare protections, such as they were, largely remained job-linked. Similarly telling dynamics unfolded in Australia, where a more stakeholder-centric approach was embraced in the 1970s and the 1980s – reflecting concerns stemming from the fact that state-based social welfare remained patchy – yet a more shareholder-centric approach coalesced in the 1990s – a shift not inhibited by the social welfare concerns of prior decades because Australia’s state-based social welfare programs were more firmly established. These and other examples are elaborated in some depth in the latter chapters of my book, illustrating that corporate governance systems do not map onto a left-right political continuum so cleanly as many accounts arising from the comparative political economy and comparative legal literatures tend to suggest.
The deep relationship between corporate governance and social welfare policy also tends to cast post-crisis reforms in a different light. Following the crisis, both the US and the UK have responded by empowering shareholders (a response that I argue reflects a misappraisal of the ultimate source of excessive risk-taking in the financial system). Yet the US has simultaneously enhanced certain social welfare protections, including health care, while the UK has not. This presents a natural experiment of sorts, as my theory would lead one to predict that the US approach will exhibit greater resilience in the face of future crises than the UK approach will. In any event, as I suggest in the book’s conclusion, lawmakers and regulators considering either augmenting shareholder powers and/or cutting social welfare spending ought to remain mindful of the social and political instabilities that could result – and the difficulty of predicting the long-term costs and consequences.
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