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11

Top , Directors and Corporate Control

GERALD F. DAVIS and MICHAEL USEEM

Theory and research on the relations among was widely dispersed. Research in top managers, company directors, , this tradition flourished in the 1980s, as and external contenders for corporate control – of under-performing firms became broadly, the field of corporate – common and restive institutional investors experienced a remarkable flowering during made their influence known. Studies focused the 1990s. Early work addressed the central on assessing the effectiveness of devices such puzzle raised by the widespread separation of as having boards numerically dominated by ownership and control among large American outsiders, tying compensation to share price, , namely, why would any sensible or ensuring susceptibility to outside person – much less thousands or millions of (Walsh and Seward, 1990, provide a review). them – invest their savings in run Following the dictates of financial , by unaccountable professional managers? As ‘effectiveness’ was commonly measured via Berle and Means (1932) framed the problem, market reactions to various actions by those who ran such ‘managerialist’ corpora- top management and/or the board. The results tions would pursue ‘prestige, power, or the of these studies provided proof of which gratification of professional zeal’ (1932: 122) actions and structures promoted in lieu of maximizing profits. Weak share- value, and which promoted ‘managerial holders could do little to stop them. Yet gener- entrenchment’ of the sort feared by Berle and ations of individuals and financial institutions Means. continued to invest in these firms. Why? research during the Answering this question led to the creation 1990s expanded from a narrow focus on large of a new theory of the firm that portrayed the corporations to a broader concern with issues public as a ‘nexus of .’ In of political economy. The transition of state the contractarian model, the managers of the socialist societies to market economies, and corporation were disciplined in their pursuit of the spread of financial markets to emerging shareholder value by a phalanx of mecha- economies around the globe, infused the nisms, from the way they were compensated, puzzle of managerialism with enormous policy to the composition of the , to relevance. What mechanisms could be put in the external ‘market for corporate control.’ place to inspire the confidence of investors in Taken together, these mechanisms worked to businesses housed in distant and often unfa- vouchsafe shareholder interests even when miliar cultures? The place of financial markets Spetch11.qxd 5/18/2001 4:14 PM Page 234

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in the project of globalization, as a means to an empirical theory of the corporation, it can channel investment funds from wealthy equally be considered a prescriptive theory, nations to emerging markets with limited local that is, not an explanation of what is but a capital, assured that corporate governance vision of what could or should be. Its influence would be a topic of intense interest for years on public policy debates during the 1980s is to come. evident in documents of the time (Davis and The decade of the 1990s saw three develop- Stout, 1992) and in the subsequent spread of ments that moved the governance literature the rhetoric of shareholder value. But it is beyond the simple assessment of mechanisms important to recognize that corporate man- in US firms. The first development was the agers are quite skillful in their use of this examination of the governance structure of rhetoric (Useem, 1996). Declarations of share the firm – the set of devices that evolve within buy-backs are met with share price spikes, the to guide managerial decision- whether or not they are subsequently imple- making – as an ensemble. Rather than regard- mented (Zajac and Westphal, 1999). The ing any particular aspect of the firm’s structure announcement of a new compensation plan is as essential, researchers began to study them met by more positive reactions from the stock as complements or substitutes. Compensation market when described as means of aligning strongly tied to share price may act as a sub- management with shareholder interests than stitute for a vigilant board, for instance, while when the identical plan is described as a a vigilant board is not sufficient to make up for tool; naturally, managers a poorly integrated top management team. gravitate toward the sanctioned rhetoric Governance structures, in , were configu- (Westphal and Zajac, 1998). And even earnest rations of interdependent elements (Beatty and attempts to meet the demands of Zajac, 1994; Anderson et al., 1998). for transparency and accountability, as pre- The second development was the growth of scribed by the agency theory of governance, comparative and historical governance often have unintended consequences. Firms research, which highlighted the idiosyncrasy that improve the quality of their disclosure of the American system. American-style cor- attract more transient institutional investors, porate governance, aimed at ‘solving’ the which in turn increases the volatility of their problems created by the separation of owner- share prices – exactly the opposite of what was ship and control, is only one of several possi- anticipated (Bushee and Noe, 1999). In short, ble governance systems and reflected a the dominance of the American system path-dependent developmental trajectory. A described by the agency theory of governance range of alternatives is consistent with eco- may take the form more of rhetoric than real- nomic vibrancy, and the American system is ity, a point worth bearing in mind in the ongo- not the crown of creation (Roe, 1994). Indeed, ing debates about the convergence of national even among wealthy economies with well- systems of corporate governance. developed corporate sectors, corporations with If the prototypical research question in the separated ownership and control were quite corporate governance literature of the 1980s rare as late as the mid-1990s (LaPorta et al., was ‘Is it better for shareholders for a corpora- 1999). Moreover, empirical findings on the tion’s board to have more “outside” direc- dynamics of the American system often held tors?’, the characteristic question of the early only for specific times; for instance, the 21st century is ‘What ensemble of institutions takeover market of the 1980s, when hostile best situates a nation for economic growth in a ‘bust-ups’ were common, was much different global, post-industrial, information-based eco- from takeovers of the 1990s, when friendly nomy?’ Put another way, the vital questions deals were the norm (Davis and Robbins, going forward are not about why some stalks 1999). The nexus of contracts approach of corn in a field grow taller than others, but seemed increasingly like a theory of US cor- about the characteristics of soil and farming porate governance in the 1980s rather than a techniques that make corn in some fields grow general theory of the firm. taller than in others. Thus, research has come The third development was the articulation to span levels of analysis from within the of a reflexive stance on the theory of gover- organization to the nation-state and beyond. nance. While agency theory can be viewed as Behind this development is a recognition that Spetch11.qxd 5/18/2001 4:14 PM Page 235

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With and across societies

One or many? Varieties of capitalism Economic institutionalism Dependency theory World systems analysis

How do shareholders and How do corporations shape other stakeholders influence society? the corporation? Between the corporation Company impact on national Power and dependency theories and its political economies frameworks stakeholders Political influence of corporate Socially-responsible elites models Perpetuation of stratification

Within the corporation

Who are top managers and Does top management company directors? leadership make a difference? Top management teams Comparison of top management Board composition across Social origins of company Evaluation of top management’s leaders impact within companies

Figure 11.1 Research on top management, company directors and corporate control

what works for a particular firm is highly definitively. Much prior research relied on contingent on its institutional surround, that archival data several steps removed from the the institutional surround in a particular nation phenomenon (for example, crudely classifying reflects its history and level of economic devel- directors as ‘insiders’ or ‘outsiders’ depending opment; and that ‘what works’ for a national on whether they were current employees of the economy depends in turn on its place in the firm). Crude data led, unsurprisingly, to crude larger world system. Firms and economies, in results (see Pettigrew, 1992 for a critique). short, are embedded in larger social and insti- Progress has certainly been made in moving tutional structures that critically condition their beyond simple dichotomies of directors as structures and performance (Polanyi, 1957; inside or outside. Pettigrew and McNulty (1995, Granovetter, 1985; Bebchuk and Roe, 1999). 1998), for instance, have done much to unpack We would like to be able to report that the the processes and power dynamics of the board- earlier questions have now been answered room through gathering extensive qualitative Spetch11.qxd 5/18/2001 4:14 PM Page 236

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data from directors on ‘critical incidents.’ But the firm, we then ask, who are top managers an ‘embedded’ perspective makes clear that and corporate directors, and does their leader- there is unlikely to be a generalized answer to ship make a difference? These questions con- questions of corporate governance. nect to studies in diverse disciplines, including Moreover, global financial integration has the sociology of elites, strategy research on top spurred major changes in corporate gover- management teams, the study of organizational nance regimes around the world, for better or demography, and research across fields on worse. Policy in this area is guided to a great leadership. Relevant chapters elsewhere in this degree by research and theory, making it both handbook include Thomas and Porac’s chapter a vibrant intellectual domain and a consequen- on ‘Strategy and cognition;’ Chakravarthy and tial one. Law and economics scholars become White’s ‘Strategy Process’; and McGrath’s Federal judges and treasury secretaries, well- ‘, small firms and wealth cre- known economists serve at the World Bank ation’. Between the firm and its stakeholders, and IMF, and corporate directors take short we ask, how do shareholders and stakeholders courses at business schools to learn their . influence the corporation, and how do corpo- Corporate governance is an area where, at all rations in turn shape society? These questions levels of analysis, good research can have an link to stakeholder models of the corporation, impact. research on power and dependence in organi- Figure 11.1 maps out the terrain and locates zation theory, studies of business and society, research on top management, company direc- socially responsible business, the study of tors, and corporate control in the larger acade- political economy, power elites, and inequal- mic discourse. Our aim in this chapter is to ity. Whetten, Rands and Godfrey’s chapter assay developments in this area at the begin- ‘What are the responsibilities of business to ning of the 21st century and outline promising society’, elsewhere in this handbook, reviews areas for future research. We must, of neces- additional relevant work. Finally, at the level sity, be highly selective: research on top man- of the nation-state, we ask, is there evidence of agement and corporate governance spans convergence in management practice and cor- multiple disciplines, from and porate governance around the world? The , to management and strategy, to socio- question of societal convergence or diver- logy and political science. As research has gence has been an animating question in proliferated, so have reviews (see, for instance, economics – particularly in the work of Blair, 1995; Shleifer and Vishny, 1997; institutionalists such as Douglass North – in Zingales, 1997). Even definitions of the object the political science literature on ‘varieties of of study vary widely: Shleifer and Vishny state capitalism,’ in sociological theories of moderni- that ‘Corporate governance deals with the zation, dependency, and world systems, and ways in which suppliers of finance to corpora- in the popular literature on globalization. tions assure themselves of getting a return Interested readers are encouraged to read on their investment’ (1997: 737), while Blair Kogut’s chapter in this handbook on ‘Strategy, (1995: 3) argues that corporate governance management, and globalization.’ implicates ‘the whole set of legal, cultural, and institutional arrangements that determine what publicly traded corporations can do, who con- trols them, how that control is exercised, and ONE CAPITALISM OR MANY? how the risks and returns from the activities they undertake are allocated.’ We take the Around the world, large corporations are the broadest definition, and as such implicate a most visible institutions of modern capitalism. wide range of disciplines. A few thousand corporations produce the bulk As our embedded framing would suggest, of the world’s economic output and employ a we review research across levels of analysis. significant part of the world’s labor force. We start by outlining and critiquing the con- What forces determine who wields corporate tractarian model of corporate governance, power and how it is used? The answer is best which has dominated the academic discourse framed in terms of institutions – ‘the humanly in law and economics as well as the policy devised constraints that structure political, eco- debates around . Within nomic and social interaction’ (North, 1991: 97). Spetch11.qxd 5/18/2001 4:14 PM Page 237

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A nation’s system of corporate governance straightforward matter to rank economies by can be seen as an institutional matrix (North, their economic vitality, select the top per- 1990) that structures the relations among own- former, and abstract the crucial elements of its ers, boards, and top managers, and determines institutional matrix. The experience of the the goals pursued by the corporation. The 1990s suggested to many commentators that nature of this institutional matrix is one of the the American model of capitalism principal determinants of the economic vital- was the obvious winner (see, Soros’s [1998] ity of a society. By hypothesis, getting the critical account and Friedman’s [1999] affir- institutions of corporate governance right mative account of free market triumphalism). means ensuring that those who run corpora- The American economy experienced the tions make decisions that lead to superior longest expansion in its history, generating national economic performance. This means millions of new jobs, countless new business making sure that top managers and their super- starts, and a long boom. This visory board are appropriately responsive to contrasted sharply with its rich-country rivals, signals from the product markets and the capi- particularly Japan, as well as with the emerg- tal markets (Gordon, 1997). Thus, corporate ing markets that entered deep slumps in the governance can be seen as the institutional late 1990s. Moreover, the American model matrix that links market signals to the deci- appeared especially amenable to a world of sions of corporate managers. borderless capital, in which geography was of According to Douglass North (1990: 6), little concern in the process of matching ‘The central puzzle of human history is to investment flows to business opportunities. In account for the widely divergent paths of his- principle, even a nation with little indigenous torical change. How have societies diverged? savings could achieve prosperity by adopting a What accounts for their widely disparate [eco- system of American-style investor capitalism nomic] performance characteristics?’ Accepted and opening itself to foreign investment. In the theory in economics predicts that through words of Treasury secretary Larry Summers, trade, national economies would converge in ‘Financial markets don’t just oil the wheels of institutions and thus performance, as inferior economic growth – they are the wheels’ (Wall institutions were weeded out and politicians in Street Journal, 8 December 1997). weaker economies adopted the policies of The institutional matrix that makes up the stronger ones. Yet economies are immensely American system of corporate governance is diverse in their institutional structures and per- codified in the contractarian approach to the formance, leading to an enormous gap firm, also known as agency theory. Agency between rich and poor nations (see Firebaugh, theory was developed primarily within finan- 1999 for a recent assessment). Two questions cial economics to describe the various mecha- arise from this observation. First, given that nisms that ‘solve’ the agency problems created large corporations are disproportionately by the separation of ownership and control, by responsible for the economic wellbeing of a ensuring managerial devotion to increasing society, is there a best model of corporate gov- the company’s share price: ernance? That is, is there an institutional matrix that reliably encourages corporate Managers’ wealth is tied to share price through managers to make choices leading to eco- numerous devices, including outright owner- nomic growth for a society? Second, can an ship, stock options, and compensation keyed to institutional matrix be emulated? The struc- stock performance that align executive and tures of particular may be shareholder interests. Because share price copied with more or less fidelity, but the insti- does not necessarily reflect detailed inside tutions of corporate governance, such as a information about how well the firm is being system of corporate and securities law, operate managed, firms have adopted other devices to largely at a national level and thus entail politi- monitor managers, including shareholder- cal choices. Is it possible for a nation to move elected boards of directors that ratify important from one system of corporate governance to decisions (Fama and Jensen, 1983), concen- another? trated and thus powerful ownership blocks for The first question – what is the right firms whose performance is difficult to monitor model? – is deceptively simple. It should be a (Demsetz and Lehn, 1985), efficient managerial Spetch11.qxd 5/18/2001 4:14 PM Page 238

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labor markets that ensure that managers are press to herald the emergence of American-style paid over the long run according to their con- . ‘Unfettered Anglo-Saxon capital- tribution (Fama, 1980), and high debt that com- ism is finding it difficult to cope with the pels managers to meet regular payment hurdles present’ and thus American corporations and optimal returns to capital markets (Jensen, should be encouraged to form keiretsu-like 1986). If all these mechanisms fail and bad groups, which ‘insulate management from management drives the firm’s share price down short-term stock-market pressures without cre- far enough, superior managers will acquire ating incompetent managers’ (Thurow, 1992: control of the firm, fire incumbent managers, 19, 281). In short, the most productive and run the firm better themselves; they are economies got that way because their systems rewarded for their trouble by their personal of corporate governance, sometimes called gain from the recovery of firm value, while communitarian or relationship capitalism, shareholders are compensated by the premium muffled the signals from impatient financial paid. Thus, capital markets ensure that the markets and encouraged cooperation among structure of the nexus of contracts that survives firms and their suppliers – exactly the opposite is the one that minimizes agency costs and of the American system of investor capitalism. maximizes shareholder wealth. Managers who Determining the best system of governance – sought to sell company shares that, say, made it investor capitalism, ‘crony capitalism,’ or too difficult for shareholders to remove them if something else – thus turns out to be far from they did a poor job or paid themselves too trivial. Indeed, choosing which measure of per- much would find few buyers. Thus, managers formance to use and which time period to focus have built-in incentives to propose organiza- on yields rather divergent results – while the US tional structures that limit their own discretion economy expanded continuously from 1992 (Davis and Thompson, 1994: 144–5). through 1998, expanding the time horizon to a full decade creates a rather different picture. Each element of the theory – from manage- From 1989 to 1998, both Germany and Japan ment compensation and board composition to experienced substantially higher productivity the structure of ownership and dynamics of growth than the US, Germany displayed a takeovers – has received extensive research higher per capita growth in GDP, and Japan attention as it applies to large US corporations, recorded lower average unemployment (The particularly during the 1980s (see virtually any Economist, 10 April 1999). Locating the effec- issue of the Journal of Financial Economics tive ingredient in a national economy’s institu- published during this period). If a cross- tional matrix may be a hopeless endeavor and national adoption of American corporate gov- the safest course may be to call it a draw among ernance institutions proved desirable, agency the three major contenders (cf. Roe, 1994). theory provides the blueprint: in the words of Even the pleasing simplicity of an abstract one recent review, ‘the Anglo-American gov- ‘governance model’ may imply more coher- ernance system, born of the contractarian par- ence than is warranted. The American system adigm, is the most flexible and effective is often referred to as the Anglo-American system available. Indeed, notwithstanding its system because key elements are held to be idiosyncratic historical origins and its limita- common between the US and the United tions, it is clearly emerging as the world’s Kingdom. Yet even these two are rather diver- standard’ (Bradley et al., 1999: 8). gent on several dimensions, which suggests But questions of institutional transfer are strong limits on the extent to which institutions premature. Those with long memories recall can be adopted across cultures. In the UK, for that at the beginning of the 1990s, it was the instance, the positions of chairman of the Japanese and German systems that served as board and the chief are held the world’s models, and pundits advocated a by different persons on more than four out of system of bank-centered relationship capital- five boards among the largest 500 firms; the ism to cure the social disruption caused by shared understanding is that ‘the CEO runs the America’s myopic shareholder orientation. company and the Chair runs the board’ The virtues of ‘Toyotaism’ and the remarkable (Pettigrew and McNulty, 1998). In contrast, success of East Asian economies emulating three quarters of Fortune 500 firms in 1999 Japanese business organization led the business were led by CEOs who also held the chair’s job, Spetch11.qxd 5/18/2001 4:14 PM Page 239

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and seasoned directors are virtually unanimous seem as remote as Kafka’s castle – they are in viewing the forced separation of the two nonetheless intensely personal at the top. A jobs as undesirable because of the ambiguity handful of individuals make the defining it creates about ‘who’s in charge’ (Neiva, decisions, whether to launch a new product, 1995). On another contrasting front, 22% enter a promising region, or resist a tender of the typical Fortune 1000 firm’s directors offer. It is they who set the rules and fix the are ‘insiders’ (executives of the firm), while procedures that come to constitute the imper- the comparable figure in the UK is roughly sonal bureaucracy. 50% These facts are attributed to cultural Top management is the catch phrase for differences in the boardrooms of the two those who work at the apex, and companies nations, and neither nation shows much sign often define their ‘top’ as no more than the of budging in the other direction (Davis, seven or eight most senior officers. Their color 1998). Thus, even between the two named photos adorn the annual report’s early pages. practitioners of Anglo-American corporate They speak for the company to inquisitive governance, there are sharp divergences on journalists and skeptical analysts. They are the such basic matters as the organization and ‘they’ when employees grumble about nasty composition of the board. There are also, work or shareholders gripe of shortchanged notably, sharp differences in economic perfor- expectations. mance, favoring the US. Adopting Anglo- To much of the world beyond the company American governance practices is evidently walls and capital markets, however, top man- not sufficient to ensure superior economic per- agement is personified almost solely by the formance for an economy, even supposing one chief executive. Readers of the American could determine what these practices were. business press know that Jack Welch ‘runs’ These cultural differences notwithstanding, General Electric, Michael Eisner rules Walt the attractions are undeniable in emulating Disney Company, and Warren Buffett is American corporate governance for firms seek- Berkshire Hathaway. Attentive Japanese recog- ing outside investment. The number of non-US nize that Fujio Cho drives Toyota and Germans firms listed on the New York that Jurgen Schrempp steers DaimlerChrysler. increased from 96 in 1990 to 379 in 1998, while It is enough to know the commanding general, the value of US equity investment abroad it seems, to anticipate the strategy of attack. increase more than six-fold during the same The upper apex of top management is what period (Useem, 1998; New York Stock really counts. Exchange, 1999; , 1999). Academic researchers had long been drawn Effectively borderless financial markets are per- to the same pinnacle of the pyramid, partly on haps the strongest force in encouraging the the conceptual premise that the chief executive adoption of American corporate governance and is the manager who matters, and partly on the its valorization of ‘transparency’ and ‘account- pragmatic ground that little is publicly known ability.’ But while a particular firm may come to about anybody except the CEO. We have thus adopt an American model of governance – just benefited from a long accumulation of work on as many manufacturers sought to adopt the their family histories, educational pedigrees, Toyota model of production in the 1980s and and political identities, and we know as a result 1990s – a system of governance, as an institu- that their origins are diverse, credentials splen- tional matrix embedded in a particular culture, is did, and instincts Republican. More contem- far less prone to such wholesale change (cf. porarily, we have learned much about their Coffee, 1998). Species may adapt, but it is far tangled relations with directors and investors more difficult for an entire ecosystem to do so. as well. To know the CEO’s personal rise and board ties is to anticipate much of the firm’s strategic intent and performance promise. They WHO ARE TOP MANAGERS AND are also a good predictor of the CEO’s own fortunes – an elite MBA degree accelerates COMPANY DIRECTORS? movement to the top, a prestigious background attracts outside directorships, and a handpicked Though market capitalism can epitomize imper- board enhances pay and perquisites (Belliveau sonality – and some company headquarters et al., 1996; Useem and Karabel, 1986). Spetch11.qxd 5/18/2001 4:14 PM Page 240

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The conceptual and pragmatic underpinnings study of 54 US multinational corporations, for for shinning the light solely on the CEO, how- example, found when top managers brought ever, have eroded in recent years, as compa- more foreign experience to the executive suite, nies redefined their operations and researchers their companies moved more production off- reconceived their methods. A central thrust of shore and booked more sales abroad. company restructuring during the past two But other inquiries yielded more complex decades has been to transform the chief execu- results, as seen in a study of 32 US tive’s office into the office of the executive. At companies in the wake of industry deregulation many companies, CEOs have fashioned teams in 1979. The researchers focused on competi- among their top officers that meet frequently tive moves such as price-cutting, advertising and resolve jointly, their vertical control giv- campaigns, and fresh routes. They assessed ing way to lateral leadership. Henry Schacht the extent to which the companies’ top execu- served as chief executive of Lucent Techno- tives varied in their educational backgrounds logies from 1995 to 1997, and upon taking (engineering, economics, business, law), func- office, he devoted his first six months to build- tional specialization (finance, marketing, oper- ing a shared strategy and culture among his top ations), and years with the company, and they 14 officers. Unless his top managers were all discovered that the with top manage- working from the same script, he believed, the ment teams diverse in these areas were more spin-off from AT&T would not succeed. He likely to take competitive actions but slower to certainly would not be capable of making it make their moves. Overall, they found that succeed on his own. companies with greater diversity at the top Observers and consultants during the 1990s built greater market share and generated consequently came to extol the pragmatic greater operating profits (Sambharya, 1996; virtues of ‘top management teams.’ If well Hambrick et al., 1996). formed, executive teams could assure prosper- Yet even this widening of research attention ity; if poorly led, they could spell disaster. beyond the chief executive has not broadened Predictably, stock analysts and professional enough. Many companies have expanded the investors frequently came to appraise not only concept of top management to include one, the capabilities of the chief but also the lieu- two, or even three hundred senior managers tenants before they recommend stock or buy whose decisions have significant bearing on shares (Hambrick et al., 1998; Katzenbach, firm performance. Prior to its merger with 1997; Katzenbach and Smith, 1992). Travelers in 1998, for instance, had Similarly, academic researchers expanded designated the bank’s senior-most 300 execu- their field of view from the chief executive to tives as its ‘corporate leverage population,’ the entire upper echelon. They applied fresh and its 300 most vital jobs as its ‘corporate strategies, ranging from personal interviews to leverage positions.’ For Citibank, its future lay direct observation and internet surveys, to in the hands of 300 managers, not 3. Or acquire data on top managers other than the consider how top management is defined chief executive who now matter far more to at ARAMARK Corporation, a $6.5-billion company performance and stock analysts – if managed-services firm with 150,000 employ- still not to the editors of Who’s Who. A host of ees worldwide. Its chief executive, Joseph studies have subsequently confirmed what many Neubauer, formed an Executive Leadership executives already appreciated – a better predic- Council in the 1990s comprising the top 150 tor of a company’s performance than the chief executives in the company, including business executive’s capability is the quality of the team unit presidents, staff vice presidents, top gen- that now runs the show. To pinnacle analysis has eral managers, and corporate department been added top team appraisal (Finkelstein and heads. The Council charts company strategy Hambrick, 1996; Useem, 1995). and exchanges best practices, and it is, in the In conducting such studies, researchers have words of Neubauer, the firm’s ‘leadership also discovered that the devil is in the detail, team.’ Its members are ‘free to make their own with a top team’s composition and culture decisions,’ says the CEO, but also ‘as leaders,’ affecting company actions and results in ways they’re ‘all accountable’ for company results. that do not neatly fit into tidy frameworks. Top management, then, has expanded in the Some research results are straight-forward. A minds of company managers and, to lesser Spetch11.qxd 5/18/2001 4:14 PM Page 241

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extent, academic researchers, from the boss to loss in 1992, for instance, General Motors did the boss’s team to the boss’s court. Presiding split the roles, installing an outside chairman – over them are the directors, those elected rep- John G. Smale, retired chief executive of resentatives who in law must serve as fiducia- Procter & Gamble – to breathe down the neck ries of the investor electorate but in fact have of new chief executive Jack Smith. Whatever virtually no contact with their electoral base. the separatist penchant and however well it may Their working contact is almost entirely con- have served General Motors, research reveals fined to the top management team, and in the that such a division creates no advantage for nexus of that relationship – the ‘commanding company performance. But for some investors, heights’ of the – are fash- persuasive preconceptions still prevail over ioned the strategies and decisions that drive the research facts, and they press for common prac- company’s future and determine the country’s tices around the world (Baliga et al., 1996). prosperity (Yergin and Stanislaw, 1998). Another example can be seen in US investor If companies make semiconductors and con- preference for non-executive directors, believ- crete much the same way the world around, they ing the board’s capacity for vigorous monitor- organize their directors in almost as many ways ing of top management to be a direct function of are their national economies. Boards of large its independence from top management. The publicly-traded companies in the US range in California Public Employees’ Retirement size from 4 to 35 directors (at least among the System advocates that ‘a substantial of Fortune 1000), averaging 11 members. Boards the board consists of directors who are inde- average 12 directors in Italy, 11 in France, and pendent.’ The Council of Institutional Investors 9 in UK, with standard deviations of 3 to 4 avows that ‘at least two-thirds of a corpora- directors. But cross-national comparability in tion’s directors should be independent.’ TIAA- size is about as far as it goes. American boards CREF prefers that ‘the board should be tend to include only two or three insiders, while composed of a substantial majority of indepen- Japanese boards rarely include even two out- dent directors.’ Yet recent studies yield ambi- siders. German and Dutch governance is guous support for the premise. Yes, independent built around a two-tier governance structure, directors often behave in more shareholder- employees holding half of the upper tier seats. friendly ways, but they also may be less likely British and Swiss governance is designed to dismiss under-performing executives and around a single-tier, management-dominated less prone to render useful strategic guidance structure. Some systems give formal voice to (California Public Employees’ Retirement labor, others none – German law requires that System, 1999; Council of Institutional Inves- labor representatives serve on the board, while tors, 1999; Millstein and MacAvoy, 1998; French law places labor observers in the board- TIAA-CREF, 1999; Ocasio, 1994; Westphal, room. American law mandates nothing, but 1999; Bhagat and Black, 1999). some boards have added a labor leader on their The diversity in directorship practices is own (Charkham, 1994; Charkham and Simpson, likely to diminish, however, for a second, more 1999; Chew, 1997; Conyon and Peck, 1998; factual reason. Certain practices do engender Franks, 1997; Hunter, 1998). better performance, regardless of the setting, Such variety of national practices may well and as companies increasingly compete world- diminish for two reasons. First, as equity mar- wide for customers and investors, they are kets internationalize, with companies seeking likely to adopt what indeed does prove best. A capital from all corners of the globe, investors case in point here is the number of directors on predictably prefer relatively consistent the board. Research on team success suggests models that they believe will optimize share- that bigger is not better when boards exceed 15 holder value and performance transparency. or 20 members. When the number of directors Their mental models of what’s right may not climbs far above middle range, the engagement indeed by right, but that is beside the point. of each diminishes, and so too does their capa- Consider the preference expressed by some city to work in unison. Study of the boards of institutional investors in the US for a board 450 large US industrial firms in 1984–91 chair who is not a sitting executive, believing reveals that, net of company size, manufacturing that separation improves monitoring. Under pre- sector, and inside ownership, companies with ssure from investors in the wake of a $6 billion smaller boards displayed: stronger incentives Spetch11.qxd 5/18/2001 4:14 PM Page 242

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for their chief executive, greater likelihood of of their investment at minimum risk. The most dismissing an under-performing CEO, and straightforward measure of the achievement of larger market share and superior financial per- this goal is growth in the price of the firm’s formance. In parallel study, the same is found shares, and effective managers are those that to prevail among large companies in Denmark, successfully endeavor to maximize share France, Italy, Netherlands, and UK (Yermack, price. Governance systems vary widely in 1996; Conyon and Peck, 1998). the means by which owners can influence It is not surprising, then, to see companies managers – owners might have a direct say in worldwide migrating toward smaller boards in corporate strategy and in selecting members of a search of improved performance. In their the top management team, they might delegate 1999 report to the stockholders, Sony’s chief these functions to a board but ensure that com- executive Norio Ohga and co-CEO Nobuyuki pensation and other incentives are aligned Idei, wrote that they had launched a new ‘cor- with share price maximization, or they might porate reorganization’ to ‘maximize shareholder rely on mechanisms such as takeovers to ensure value.’ A central feature of their reorganiza- managerial devotion to share price. Corpora- tion is to improve their directors’ ‘monitoring tions where management was not held account- ability,’ and, to that end, Sony reduced its ros- able for achieving the corporation’s goals ter of 35 directors to just 9. Japan Airlines would attract little outside support: as Gilson moved parallel fashion. The company had (1996: 333) puts it, ‘any successful [gover- reported losses during three of its past five nance] system must have the means to replace years, and its largest investor, Eitaro Itoyama poorly performing managers.’ This is the (holding 3.4% of its shares), had announced a essence of the ‘agency problem’ identified by campaign to oust top management to ‘save Berle and Means (1932) in managerialist cor- JAL.’ To improve its directors’ effectiveness porations with dispersed ownership. and, hopefully, company performance, the air- The problem of managerialism, however, line shrank its board from 28 directors to 15 turns out to be of surprisingly little relevance and required that they stand for yearly outside the US and the UK. In virtually every rather than bi-annually (Institutional Share- other economy, even the largest businesses are holder Services, 1999; Sony, 1999). typically owned by controlling shareholders. Directors in principle protect owner inter- A study of the largest 20 corporations in 27 of ests, direct company strategy, and select top the world’s richest economies found that ‘con- management. In practice, they had concen- trolling shareholders – usually the State or trated more on strategy and selection and less families – are present in most large companies’ on owner interests. But the rising power of (La Porta et al., 1999: 473), while another investors has made for greater director focus survey found that ‘a large majority of listed on creating value and less coziness with top companies from Continental European coun- management. American and British directors, tries have a dominating outside shareholder or following the ‘Anglo-Saxon’ model, are investment group’ (Goergen and Renneboog, already more focused on value than most. But 1998: 2). While minority shareholders may directors in other economies can be expected have little direct influence on the management to slowly gravitate toward the mantra of share- of such firms, controlling shareholders pre- holder supremacy as well. sumably act to ensure the pursuit of share- holder value since it is their own. Outside the wealthiest tier of nations, stock markets are of HOW DO SHAREHOLDERS AND OTHER relatively less significance, and thus manageri- STAKEHOLDERS INFLUENCE THE alist corporations are unimportant. The influ- CORPORATION? ences of owners on managers are direct and unproblematic. The Uncommon Problem The general idiosyncrasy of the American of the Separation of Ownership system received surprisingly little attention and Control from corporate governance scholars before the publication of Mark Roe’s book Strong Imagine that the owners of a public corpora- Managers, Weak Owners in 1994. Prior to this, tion had a simple goal: to maximize the value ‘the corporate governance systems of other Spetch11.qxd 5/18/2001 4:14 PM Page 243

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nations were largely ignored because the The pole for market-centered (as opposed to American system was though to represent the relationship-based) capitalism is clearly the evolutionary pinnacle of corporate gover- United States. In contrast to corporations nance. Other systems, with different institu- throughout the rest of the world, large American tional characteristics, were either further corporations have relatively dispersed owner- behind the Darwinian path, or at evolutionary ship. Roughly three-fourths of the 100 largest dead-ends; neither laggards nor Neanderthals US corporations lack even a single ownership compelled significant academic attention’ block of 10% or more. Of the 25 largest com- (Gilson, 1996: 331). panies in 1999, the largest single shareholder In the late 1990s, however, a flourishing averaged only 4% of the holdings, while the research interest focused on documenting and comparable percentages are 11 in Japan, 18 in explaining the diversity of systems of gover- Germany, and 19 in France (Brancato, 1999). nance. New systems of corporate and securi- The dispersion of ownership in the US ties laws were installed in transitional East effectively rules out the direct control avail- European economies to facilitate the process able in firms where a single family or bank of privatization (with varied success – see owns most of the shares. Dispersed sharehold- Spicer and Kogut, 1999), and enthusiasm for ers therefore delegate control to a board of financial markets as a tool for development in directors that they elect to act as their agents in emerging markets created a practical need for choosing and supervising the top management understanding of cross-national variation in team. Control by minority shareholders gener- institutional structure (see the World Bank’s ally extends only as far as buying and selling corporate governance agenda at www.world- shares, and voting for directors and other mat- bank.org/html/fpd/privatesector/cg/ ters on the annual proxy. Minority sharehold- index.htm). Nations vary in the extent of legal ers almost never have a say in the selection of protection for shareholders and the quality of top managers, or even in who ends up on the enforcement, and the strength of legal protec- board. Indeed, by some accounts inattention is tion for shareholders is positively related to the only sensible course of action for dispersed the degree of ownership dispersion. In other shareholders (‘rational ignorance’), as the cost words, managerialist corporations are most of being well informed about the governance common in countries with strong investor pro- of the firm is not outweighed by the marginal tections, while concentrated ownership is most benefit of improved corporate performance common when investor protection is weak (La that might result from informed voting or Porta et al., 1998). Stock markets are larger, activism (Fama, 1980). But while in other and there are more public corporations per contexts this collective action problem would person, when investor protections are stronger result in management unaccountable to share- (La Portaet al., 1997). holders, investors in US corporations can rest The single biggest factor distinguishing easy because of the well-developed set of nations with strong legal protections for institutions that have arisen to ensure share investors, and thus large capital markets and price maximization without their active partici- more dispersed ownership, was the origin of the pation (see Easterbrook and Fischel, 1991). legal system. Countries whose derived from a tradition, which includes most English-speaking countries as Takeovers well as former British colonies, have stronger shareholder protections than countries with The most essential mechanism for enforcing civil or ‘code’ law (La Porta and Lopez-de- attention to share price is the takeover market Silanes, 1998). Absent strong legal protections or ‘market for corporate control.’ By hypothesis, against the types of self-aggrandizing managers a poorly-run corporation will suffer a low stock contemplated by Berle and Means, and sensible market valuation, which creates an opportu- people would avoid investing in companies nity for outsiders with better management with dispersed ownership because they would skills to buy the firm at a premium from share- fear the loss of their investment. Concentrated holders, oust the top management team, and ownership allows control of management with- rehabilitate the firm themselves, thus increas- out relying on uncertain legal enforcement. ing its value (Manne, 1965). This provides an Spetch11.qxd 5/18/2001 4:14 PM Page 244

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economic safety net for shareholders and an elsewhere in the world. The second result is a opportunity for outsiders who detect underval- decisive shift in the rhetoric of management ued firms. Moreover, it provides a mechanism toward ‘shareholder value,’ to the virtual exclu- to discipline top managers that fail to serve sion of other conceptions of corporate purpose. shareholder interests, as they generally end up This is realized in efforts at managing investor unemployed following a takeover. In the con- relations (Useem, 1996), in the kind of spin tractarian model, the market for corporate con- that management puts on practices such as trol is the visible hand of Darwinian selection, compensation plans (Westphal and Zajac, weeding out badly run firms and protecting 1998), and in more tangible actions such as shareholders from bad management. Internal acquisition and divestiture strategies. US manu- control mechanisms may fail, as boards are facturers in the 1990s eschewed diversifica- compromised by ‘cronyism,’ and thus the hos- tion in favor of ‘strategic’ (horizontal) mergers tile takeover – as an objective, market-based and acquisitions, resulting in behemoths in oil, mechanism – is an essential weapon in the defense, autos, and other sectors that would armory of the contractarian system (Jensen, have been unthinkable in previous decades. 1993). US public policy in the 1980s made it Notably, this shift toward a monomaniacal considerably easier for outsiders to mount hos- focus on shareholder value occurred in spite of tile takeover bids, and the result was a massive the fact that – in stark contrast to the 1980s – wave of takeovers in which nearly one-third of hostile takeovers had virtually disappeared in the largest publicly-traded manufacturers the 1990s, and takeover targets were no longer faced takeover bids (Davis and Stout, 1992). ‘underperforming’ firms but rather those that Reams have been written about the US were strategically attractive to acquirers takeover wave of the 1980s (see Blair, 1993) (Davis and Robbins, 1999). Evidently, the but the high points are easily summarized. The hostile takeover is less essential to investor typical target had a low stock market valuation capitalism than had previously been thought. relative to its accounting or book value, as one would predict based on the contractarian model (Manne, 1965; Marris, 1964), and the Shareholder Activism source of this low valuation was often exces- sive diversification by firms Hostile takeovers are a rather blunt instrument (Davis et al., 1994). Conglomerates were typi- for transferring corporate control, and the cally purchased with the intention of busting message they send is not especially fine- them up into more focused components, which grained. But short of takeover, the channels of were sold to buyers in related industries shareholder influence are surprisingly limited (Bhagat et al., 1990), while non-targets restruc- in the US (see Davis and Thompson, 1994). tured to achieve industrial focus and avoid The formal means of shareholder voice is unwanted takeover (Davis et al., 1994). In the through proxy voting at the annual . US, takeovers are regulated both at the federal Shareholders vote on who serves on the board and state level, and by the early 1990s most of directors, which accounting firm audits the states had passed legislation to make takeovers firm’s books, whether to approve certain types attempted without the consent of the target’s of plans, and other board of directors extremely difficult. Thus, significant matters such as mergers, changes in hostile takeovers virtually disappeared in the the corporate charter, or changes in the state of US after 1989. . Almost without exception, Two results of the 1980s hostile takeover these votes consist of approving (or not) pro- wave stand out. The first is that the manufac- posals put forth by the current board of turing sector overall ended the decade much directors–competing director candidates, or more focused than when it began, and the competing proposals, are extremely rare. The trend toward within-firm focus continued primary means of direct shareholder voice is unabated through the mid-1990s (Davis and through shareholder proposals. Any share- Robbins, 1999). With a few notable excep- holder owning a non-trivial stake in the corpo- tions, such as General Electric, the industrial ration can submit a proposal relevant to the conglomerate would appear to be a thing of corporation’s business to be included in the the past in the US, in spite of its prevalence proxy statement and voted on by shareholders. Spetch11.qxd 5/18/2001 4:14 PM Page 245

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But the board may exclude proposals relating it would have had no binding force on Cracker to the ‘ordinary business’ of the corporation, a Barrel’s board. Shareholder proposals are term of art defined fairly broadly by the Secu- advisory (‘precatory’) only and cannot be used rities and Exchange Commission, the regula- to compel management or the board to take tory body responsible for governing the proxy any specific actions (see Davis and process. Thompson, 1994, for a discussion of the limits The most famous and controversial case of of shareholder voice). In other words, once the 1990s involved Old they have delegated authority to the board of Country Stores, Inc., a restaurant chain head- directors, dispersed shareholders have almost quartered in Tennessee. In 1991, the corpora- no legal standing to intervene further on mat- tion announced a policy that it would not ters of strategy and management. Why, then, employ individuals ‘whose sexual preferences do activist shareholders bother? In the US, fail to demonstrate normal heterosexual values’ the most prominent corporate governance and fired more than a dozen gay employees. activists are public pension funds run by politi- Subsequent public protests led the company to cal appointees, and thus some skeptics see rescind the policy, but it did not explicitly their motivation as political rather than eco- include gays in its anti-discrimination policy, nomic, and their qualifications as wanting and gays continued to be fired. An institutional (Useem et al., 1993). One seasoned director investor, the New York City Employees’ said of activist pension fund officials, ‘These Retirement System (NYCERS), submitted a guys are not part of the business community. proxy proposal in 1991 calling for Cracker They’re politicians’ (Neiva, 1996). In its 1994 Barrel to add explicit prohibitions against proxy statement, Cracker Barrel management employment discrimination based on sexual said of NYCERS: ‘Your management is con- preference to its employment policy state- vinced that the proponents of Proposal 3 are ment. Cracker Barrel sought to exclude the attempting to circumvent the legislative proposal under the ordinary business excep- process by using corporate proxies as a forum tion, which had previously been considered to to promote a ‘social policy’ concerning gay cover employment matters, and in October and lesbian sexual preferences, thereby forc- 1992 the SEC issued a ‘no-action letter’ (indi- ing your Company to do what Congress has cating that it would not take action against declined to force companies to do. Your man- Cracker Barrel for excluding the proposal agement is also convinced that the proponents from its proxy materials). The SEC’s position of this proposal are more interested in gay and prevailed in court in 1994, and thus all lesbian concerns as a social issue than in any employment-based matters were put beyond economic effect these concerns may have on the scope of shareholder voice. The business your Company.’ case for NYCERS’ position seemed clear: Yet research suggests that activist pension employment discrimination may subject the funds are motivated by financial concerns, not corporation to protests, tarnished , politics. Funds that pursue a buy-and-hold lost business, and class action lawsuits, to the indexing strategy (which benefit from a gene- detriment of shareholder value; yet the SEC ral rise in the value of their portfolios) tend to held even such highly consequential employ- field generic proposals for the purpose of pro- ment matters to be ordinary business by defi- moting shareholder-oriented governance gene- nition (McCann, 1998). In May 1998, the SEC rally, while actively-managed funds (which eventually reversed its position on Cracker can realize shorter-term trading gains) tend to Barrel to allow ‘employment-related propos- focus on firm-specific governance proposals, als that raise sufficiently significant social consistent with the argument that the econom- policy issues’ (cited in Ayotte, 1999). In ically appropriate style of activism varies with October of that year, after a year-long battle, the fund’s investment style (Del Guercio and NYCERS’ proposal appeared on Cracker Hawkins, 1998). Proposals sponsored by pen- Barrel’s proxy statement, receiving 5.5 million sion funds (as opposed to individuals or reli- votes (shares) in favor and 26.5 million votes gious groups) get higher favorable votes on against. average, occasionally achieving a majority What is perhaps surprising is that even if vote (Gillan and Starks, 1998). And while NYCERS’ proposal had won a solid majority, there is little evidence that shareholder Spetch11.qxd 5/18/2001 4:14 PM Page 246

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activism has an immediate positive impact on July 18, 1999). ‘Sell’ recommendations are the share price of target firms, targeted firms therefore almost non-existent. Moreover, on do respond with significantly more gover- average analysts are not especially accurate: nance changes than non-targets (Del Guercio according to Malkiel (1996: 169), ‘Security and Hawkins, 1998). Thus, one survey of the analysts have enormous difficulty in perform- literature on shareholder activism concludes ing their basic function of forecasting earnings that activism has had modest effects on gover- prospects for the companies they follow.… nance structures but negligible impact on earn- Financial forecasting appears to be a science ings and share price (Karpoff, 1998). It is that makes astrology respectable.’ In short, possible that activism has a more diffuse while analysts may be seen as a means to pro- impact by raising the visibility of directors mote shareholder interests, this function fre- who had previously toiled in anonymity; as quently goes unrealized. one director put it, ‘If you kill one wildebeest, Although takeovers, shareholder activism, then all the other wildebeests will start running and financial analysts are fixtures on the a little faster’ (Neiva, 1996). Perhaps activism American corporate landscape, and are uniquely serves to raise the general awareness of share- suited to managerialist corporate governance, in holder value and shareholder-oriented gover- the 1990s they spread beyond the borders of the nance practices. It is hard not to conclude, US and the UK. In continental Europe, 1999 however, that this would be pushing through was a watershed year for hostile takeovers. In an open door. the first three months of the year, 13 hostile bids were unveiled, compared to 55 in the prior nine years, and the value of the proposed deals was Financial Analysts far greater than the value of all prior hostile deals in the history of Europe (Economist, 17 If takeovers are too blunt an instrument and April 1999). In Italy, Olivetti made a successful shareholder activism too diffuse, then finan- bid for the far lager Telecom Italia, the former cial analysts may serve as a more intermediate Italian state telephone company and the sixth- form of influence on behalf of shareholders. largest telecom organization in the world. In Analysts investigate companies in order to France, Banque Nationale de Paris (BNP) render judgments on their prospects (to be simultaneously bid for banking rivals Societe realized in future earnings) and thus to esti- Generale and Paribas, while oil giant TotalFina mate their appropriate valuation. Analysts are bid for Elf Aquitaine. Remarkably, Paribas, often allowed privileged access to corporate which was advising Total on its bid, had execu- executives and facilities and are in a position tives on the boards of both Total and Elf; to give strategic and governance advice Societe Generale’s chair was on the board of directly to senior managers, something rarely Total, BNP’s chair was on the board of Elf; afforded to the firm’s own shareholders Elf’s chair was on the board of BNP, while (Useem, 1996). In principle, the rewards go to Total’s chair was a BNP director. Even the the most accurate analysts, giving them incen- dense ties of the French financial elite were not tives to act as corporate watchdogs. In prac- sufficient to withstand the economic attractions tice, however, analysts are rarely dispassionate of these deals. Due to much more stringent legal observers: those that work for firms doing restrictions, it remains to be seen whether hos- business with a corporation they follow give tile takeovers will catch on outside Europe. systematically more positive evaluations than Shareholder activism, on the other hand, has those that work for other firms, and analysts achieved a global reach, partly through the are discouraged from giving negative evalua- actions of American institutional investors and tions of potential clients of their employer partly through indigenous governance activists. (Hayward and Boeker, 1998). As New York The California Public Employees’ Retirement Times financial writer Gretchen Morgenstern System (CalPERS), a pension fund for govern- put it, ‘What analysts are selling increasingly ment employees in California, promulgated today is not the ability to plumb a company’s corporate governance standards for Britain, business and uncover investment gems or France, Germany and Japan, and formed scams but rather the ability to make investors an alliance with Hermes (the pension fund buy the they follow’ (New York Times, manager for British Post Office and British Spetch11.qxd 5/18/2001 4:14 PM Page 247

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Telecom staff) to increase their mutual heft in Gaetano Mosca, Vilfredo Pareto, and issues of international corporate governance kindred ‘elite’ theorists early articulated the (CalPERS document can be found at www. all-powerful view, but C. Wright Mills cap- calpers-governance.org/principles/interna- tured it best in his classic work, The Power tional/). Given the vast growth of US institu- Elite (1956). Company executives, in his acid tional investment in equities outside the US, account, had joined with government officials American-style investor activism is poised to and military commanders in an unholy alliance go global. Already, investor pressures are cred- that later observers, including US president ited with forcing the ousters of Cie. De Suez’s Dwight D. Eisenhower, would later dub the chair in 1995 and Olivetti’s chair in 1996 ‘military–industrial complex’. Seen from this (Useem, 1998). In South Korea, Jang Ha Sung parapet, top management and their allies exer- formed the People’s Solidarity for Participatory cise commanding control over the company Democracy to press for corporate governance and the country. In E. Digby Baltzell’s cri- reform, and while he met with little success tique, The Protestant Establishment (1987) prior to the Asian financial crisis of 1997, he and G. William Domhoff’s rendering, Who has subsequently become ‘the darling of the Rules America (1967), they have even come to international crowd’ and has formed successful constitute a self-conscious class, favoring alliances with foreign institutional investors to descent over deed. Others discern comparable press for governance changes (Economist, 27 customs in British business and elsewhere March 1999). In France, Colette Neuville (Bottomore, 1993; Scott, 1990, 1997). To the formed the Association for the Defense of extent that top management is indeed all- Minority Shareholders to push for corporate powerful, shareholders and directors possess a governance reform and to strengthen investor silver bullet for righting whatever has gone protections in takeovers (Business Week, 18 wrong: install new management. September 1995). Both non-local and indige- For the community of management schol- nous investors can draw on the principles and ars, Jeffrey Pfeffer (1978, 1981) well articu- tactics of shareholder activism in the US. Given lated the opposite, all-powerless view with the the relatively weak minority shareholder pro- contention that market and organizational con- tections outside common law countries, how- straints so tied top management’s hands that it ever, it is likely that any such activism will have was much the captive, not a maker, of its own modest impact at best (La Porta et al., 1998). history. Production technologies and competi- tive frays in this view are far more determin- ing of company results than the faceless DO TOP MANAGERS REALLY MAKE executives who sit in their suites. Structures matter, personalities don’t. It counts little who A DIFFERENCE? serves in top management, and, by extension, on the board. Managers and directors are con- If shareholders are increasingly insistent that trolling and caste-conscious in Mills’ and board directors require top managers to deliver Domhoff’s critique, while they are both steadily rising returns on their investments, powerless and classless in Pfeffer’s hands. If investor activism is premised on a critical top management is quite as powerless as the assumption that top managers can make the latter imagery suggest, investors seeking new difference. While the premise may seem intu- management are surely wasting their time. itively obvious to those inhabiting this world, Though probably less often than university it is far from self-evident to those who study it. deans, company executives do complain of a Observers diverge from the assumption of influ- seeming helplessness at times. Yet almost ential executives in two opposing directions, anybody in personal contact with top managers one viewing top managers as all-powerful, reports just the opposite. Direct witnesses others seeing them as all but powerless. Jay typically describe instead a commanding pres- Lorsch had examined company boards with ence of their top management, an organiza- both views in mind, and his book title well tional dominance. It is the senior executives captures the bi-polar thinking about the clout who shape the vision and mobilize the ranks, of company executives as well: Pawns or and it is they who make the difference Potentates (1989). between success and failure (Tichy, 1997; Spetch11.qxd 5/18/2001 4:14 PM Page 248

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Charan and Tichy, 1998). Also consistent with likelihood of a CEO’s exit in the wake of a the concept of the prevailing executive is evi- stock free fall is increased by as much as half. dence from the flourishing executive search And investors are often the engines behind the industry, where companies pay hundreds of turnover. Study of Japanese companies stunned headhunting firms millions of dollars to find by a sharp reversal of fortune, for example, the right men and women for the executive reveals that those whose top ten shareholders suite. They are engaged, in the phrasing of a control a major fraction of the firm’s stock are widely circulated assessment by McKinsey & more often than others dismiss the president Co. (1998), in a ‘war for talent.’ It would and even bring in new directors (Kaplan, hardly be deemed warfare or worth millions if 1994a, 1997; Kang and Shivdasani, 1997). senior managers made so little difference To obtain a metric for the longer-term value when they arrived in office. that a chief executive brings to a company, we Investors themselves think otherwise as turn to several studies that have examined well. When companies announce executive company results several years after a chief succession, managers and stock ana- executive has left office, not just several days. lysts are quick to place a price on the head of The successor brings a distinctive blend of tal- the newly arrived, and, depending on the per- ents to the office, and if those talents make a sonality, billions can be added to or subtracted difference, the firm’s performance should be from the company’s capitalization. On the different as well. Net of confounding factors addition side, consider the appointment of such as the company’s sector and economy’s Christopher Steffen as the new chief financial momentum, investigators do find that com- officer of Eastman Kodak in 1993. Steffen had pany performance does vary with executive been hired to help turn around a company personality. Yet compared to the firm’s struc- whose earnings and stock price had been lan- ture and identify, the chief executive’s contri- guishing. He was characterized as the ‘white- bution can seem modest. After all, if Bill Gates knight who could save retired as chief executive at or Jack stodgy Eastman Kodak.’ Investors applauded Welch at General Electric, these companies his hiring. The company’s stockprice soared in are such product juggernauts that their succes- the days that followed, adding more than $3 sors are sure to look good for some years to billion to the company’s value. In an immedi- come. But in absolute terms, the studies report, ate clash with chief executive Kay Whitmore, performance can rise or fall by as much as 10 however, Steffen resigned just 90 days later. to 15% over several years after the CEO’s Investors dumped Kodak shares with vigor, departure depending upon the specific succes- driving the company’s value down the sor. To put that in perspective, think of a new day by $1.7 billion, further affirming his worth manager of a professional baseball team that in the eyes of discerning investors. It would had won 80 games and lost 80 games during seem that just a single individual with the right the past season. If the new manager’s limited talent could augment a company’s value by talents lead the team to win 15% fewer games billions in days (Useem, 1996). next season, the team’s win-loss record would On the subtraction side, consider the selec- drop from .500 to .425, and the coach will tion of John Walter as the new chief operating become the heel. If instead the new manager’s officer and CEO-apparent of AT&T in 1996. excellent talents would yield 15% more wins, In the five trading days that followed, in a the team’s record rises to .575, and coach will period when little else was transpiring in the be the hero (Lieberson and O’Connor, 1972; market, AT&T’s value dropped by $6 billion. Thomas, 1988). One business writer had hailed Christopher As strong as they are, these results may still Steffen as the ‘three-billion-dollar man.’ John underestimate the difference that top manage- Walter might comparably be dubbed the ‘six- ment makes now compared to the past. In a billion-dollar disappointment’ (Rigdon, 1993). study of 48 large manufacturing firms among The importance that investors and directors the Fortune 500, the researchers asked two attribute to top management for growing their immediate subordinates of the chief execu- fortunes can also be seen in the ultimate pun- tives of the extent to which their boss, the ishment for failure to do so: dismissal. CEO: was a visionary: showed strong confi- Whether the US, Japan, or Germany, the dence in self and others, : communicated high Spetch11.qxd 5/18/2001 4:14 PM Page 249

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performance expectations and standards, turn against a poorly appreciated or understood personally exemplified the firm’s vision, company as quixotically as they did against values, and standards, and demonstrated per- the Asian nations when Thailand devalued its sonal sacrifice, determination, persistence, and currency in July 1997. courage. The investigators also assessed the Skillful top management work with profes- extent to which the firms faced environments sional investors is thus becoming more of a that were dynamic, risky, and uncertain. virtue since money managers and stock ana- Taking into account a company’s size, sector, lysts have become less tolerant of languishing and other factors, they found that these execu- results and are better able to demand stellar tive capabilities made a significant difference performance. Moreover, globally minded in the firm’s net profit margins among compa- investors are now comparing opportunities nies that faced highly uncertain environments. worldwide, and top and their When the firms were not so challenged, how- performance are judged less against their ever, the chief executive’s qualities had far domestic neighbors and more against the best less of an impact on performance (Waldman anywhere. To assure investor favor and et al., 1999). assuage doubt, companies and directors are Top management matters more, it seems, therefore increasingly likely to stress execu- when it is less clear what path the company tive ability to deliver the strategy story to the should pursue. Given the intensification of stock analysts and, ultimately, share value to global competition and technological change the money managers. Research confirms that in many markets, leadership is thus likely to when chief executives present their strategies make more of a difference in the future than in to groups of stock analysts, institutional inter- it has in the past. We remember wartime prime est and stockholding does indeed rise (Byrd ministers and presidents better than peacetime et al., 1993). While some top managements leaders, and the same is likely to be true for will be tempted to create defenses against company executives. Thus, it not surprising shareholder pressures, more are likely to be that directors are observed to replace failing drawn to affirmative measures, including executives more quickly now than in years improved disclosure of information and past (Ocasio, 1994). Similarly, directors are stronger governing boards (Useem, 1998). observed to more generously reward success- ful executives than in the past. For each addi- tional $1,000 added to a company’s value in HOW DO CORPORATIONS SHAPE 1980, directors on average provided their chief SOCIETY? executive an extra $2.51. By 1990, the differ- ence in their payments had risen to $3.64, and by 1994 to $5.29. Put differently, in 1980 the At stake in discussions of corporate gover- boards of companies ranked at the 90th per- nance and top management are questions of centile in performance gave their CEOs $1.4 corporate power and accountability, and ulti- million more than did boards whose firms mately of the welfare of society. Corporations ranked at the 10th percentile (in 1994 dollars). are legal fictions, created by systems of law to But by 1990, the boards had expanded that gap serve social ends for consumers, workers, and to $5.3 million, and by 1994 to $9.2 million investors. Systems of corporate governance (Hall and Liebman, 1998). are, in essence, genres – styles of thinking The specific leadership or teamwork capa- about the corporation, its purposes, to whom it bilities that do account for the varying perfor- is accountable. There is a long-standing antin- mance among top managers is beyond the omy between the social entity model of the scope of this chapter. But broadly speaking, corporation and the property or contractarian leadership within the company is a critical conception (Allen, 1992). The entity concep- component. Unless the troops are mobilized tion, central to organization theory, sees cor- and their mission understood, they are porations as ‘containing’ members, for whom unlikely to deliver the value top management the corporations provide various goods (for wants. But so too is leadership out and up, example, income security, social identity) as building confidence and understanding among part of a social . In the most expansive the money managers and stock analysts who can version of this view, corporations directly Spetch11.qxd 5/18/2001 4:14 PM Page 250

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shape almost every aspect of society. According shareholders are the appropriate constituency to Perrow (1991), ‘the appearance of large for the corporation to serve because maximi- organizations in the United States makes organi- zing their interests automatically serves the zations the key phenomenon of our time, and interests of the corporation’s other constituen- thus politics, social class, economics, technol- cies. Shareholders have the best incentives to ogy, religion, the family, and even social psy- monitor and, if necessary, replace manage- chology take on the character of dependent ment that goes astray. As Gilson (1981) mem- variables.… [O]rganizations are the key to orably put it, ‘if the statute did not provide for society because large organizations have shareholders, we would have to invent them’. absorbed society.’ The social entity concep- Note that this case does not rest on anything tion of the corporation is associated with com- sacred or mystical about shareholders and their munitarian or relationship-based capitalism, in property rights. Compare the apologia pro- which law and custom accord the corporation vided by Al Dunlap, former CEO of Sunbeam obligations beyond shareholder wealth maxi- famous for his expansive approach to layoffs: mization (Thurow, 1992; Bradley et al., 1999; ‘The shareholders own the company. They are Blair and Stout, 1999). my number-one constituency, because they In contrast, the contractarian model takes take all the risk. If the company goes bust, they the notion of the corporation as a legal fiction lose their life’s savings. I can’t give them their to its logical extreme: it is nothing more than a money back.’ Of course, actual ownership pat- nexus of contracts among freely contracting terns are quite different from this ‘widows and individuals, with no further ‘entitivity.’ This orphans’ portrayal: most large US firms are yields a substantially more circumscribed owned primarily by highly diversified institu- view of how the corporation shapes society, tional investors, and individuals who focus namely, through its impact on economic their investments in one particular firm are growth. Although the contractarian model typically employees of that firm, whose inter- denies the existence of the corporation as a ests are more complex. In the sophisticated social entity with obligations to any con- version of contractarianism, shareholders are stituencies other than shareholders, the most as much a legal fiction as the corporation sophisticated theoretical rationale for the con- itself. It just happens that they are, by hypoth- tractarian model is framed in terms of social esis, part of a social welfare-maximizing genre welfare. In stylized form, it runs as follows. of corporate governance. As Allen (1992) puts Firms maximize social welfare by maximizing it, this conception of the corporation ‘is not profits. The pursuit of profit leads firms to premised on the conclusion that shareholders offer goods or services that the public will vol- do “own” the corporation in any ultimate untarily pay for (thus benefiting consumers), sense, only on the view that it can be better for and creating those products provides employ- all of us if we act as if they do’. ment (thus benefiting workers). A firm’s share As a corporate genre, the contractarian price is the best measure of its sustainable approach is as distinctive to the US as profitability into the future, according to the Faulkner and Hemingway. The emphasis on well-documented efficient market hypothesis voluntarism and individual liberty, and the (according to Jensen [1988] ‘no proposition in suspicion of viewing the corporation as a any of the sciences is better documented’ than social entity with obligations to constituencies the efficient market hypothesis). Thus, as a other than shareholders, are recurrent themes measure of corporate performance, share price in American law and economics (Allen, 1992; is ideal, and devices that encourage corporate Bradley et al., 1999). According to Roe managers to maximize share price thereby (1994), these individualist themes coupled achieve a trifecta of benefiting consumers, with a populist mistrust of concentrated eco- workers, and shareholders simultaneously. nomic and political power to produce the man- These benefits may be unintentionally under- agerialist corporation as we know it. Roe’s mined when firms pursue other ends in addi- (1994) study told a path-dependent tale of the tion to shareholder value (as advocated in the American system in which the obvious ‘solu- social entity conception), because serving two tion’ to the problem of managerialism – con- (or more) masters may lead in effect to serving centrated ownership in the hands of financial none (Friedman, 1970). As ‘residua claimants’, intermediaries – was repeatedly prevented by Spetch11.qxd 5/18/2001 4:14 PM Page 251

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legislation driven by fears of concentrated 1990s, systems of relationship capitalism, in economic power. At each point when corpo- which dominant owners (banks or families) rate control threatened to become concentrated are tied together into social networks, came to in a few hands, populist political pressures be called ‘crony capitalism,’ reflecting the prevented such centralization. Thus, American changing evaluations of personalistic vs corporate governance evolved like an eco- arms’ length business ties. Dominant share- system in an idiosyncratic climate, getting by holders may encourage profit maximizing, but as best it could, given its constraints. Along they may instead use the corporation to pursue the way a number of means to ensure corpo- their own ends, which need not contribute to rate attentiveness to share price evolved, general economic welfare. Managers in including most notably the takeover mecha- family-controlled firms are difficult for out- nism. In many cases, these were second-best side shareholders to oust, no matter how bad solutions that arose because the first-best was their performance, and the impact can extend ruled out; the end product is the institutional to dozens of firms through control pyramids equivalent of a Rube Goldberg invention: it (Morck et al., 1998). While the ventures of ain’t pretty, but it gets the job done – in this well-connected cronies may be lavishly instance a riveting on shareholder value. funded, promising business ideas generated by The histories of present-day institutions those outside the network are denied access to lend themselves to alternative interpretations, capital and die on the vine. ‘The opacity and even within a general evolutionary frame- collusive practices that sustain a relationship- work. In contrast to Roe, Coffee (1998) argues based system entrench incumbents at the from the recent evidence that the managerial- expense of potential new entrants,’ rendering ist corporations characteristic of the American the economic system resistant to reform system are the product of legal success. Rather (Rajan and Zingales, 1999: 14). Moreover, than seeing political pressures as preventing economies characterized by concentrated concentrated ownership, he sees strong legal wealth in the hands of ‘old money’ families protections as allowing managerialism and all grow more slowly than economies without the benefits of a system of arms’ length invest- such families, again suggesting a political ment without the intervention of powerful entrenchment that limits economic adaptabil- intermediaries. Along similar lines, Modigliani ity (Morck et al., 1998). and Perotti (1998) portray arms’ length finan- Recent research in financial economics thus cing (via securities markets) and network- suggests that social welfare is enhanced by a based relationship capitalism as functional strong independent state and undermined by alternatives–if reliable legal enforcement is concentrated inherited wealth and power. The available, then a managerialist system cen- implications are ironic. Whereas Berle and tered on financial markets is possible. In con- Means feared that dispersed ownership would trast, the absence of reliable legal enforcement create a class of managers with control over prompts the formation of ‘noncontractual large corporations but little accountability to enforcement mechanisms’– often realized in shareholders, the late 20th century assessment bank-centered networks. In other words, it is suggests that concentrated ownership leads relationship-based systems that are the poor to cronyism, political favoritism, and weak cousins of the more arms’ length system, and economic growth. The irony runs deep. not the other way around. ‘Managerialist’ firms in the US pursue share- The value of having a dominant corporate holder value with little regard for other owner with direct control over management, stakeholders, while firms with concentrated as opposed to dispersed (and presumably pow- ownership elsewhere in the world cannot help erless) shareholders that delegate authority to but attend to other stakeholders. Yet the explicit a board, has been an object of faith since Berle ignoring of other stakeholders may ultimately and Means wrote their famous book. But yield more favorable benefits for them. research in the 1990s, echoing the populist The tradeoffs in social welfare of treating sentiments described by Roe (1994), has the corporation as a social entity vs as a nexus- instead emphasized the social and economic of-contracts are thus quite subtle. The difficulty costs of concentrated economic power. After of displacing managers that are unsatisfactory the East Asian financial crisis of the late to investors is seen as a critical failing of Spetch11.qxd 5/18/2001 4:14 PM Page 252

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relationship capitalism because it renders a change in the end itself, to the reduction of firms too lethargic in the face of change (see profits, or to the nondistribution of profits Gordon, 1997). Without the prospect of out- among stockholders in order to devote them to side takeover or other mechanisms that focus other purposes. decision making on shareholder value, corpo- rations are too slow to exit low-growth indus- Indeed, as we have seen from our discussion tries by closing plants and laying off employees of the Cracker Barrel case, the board of an (Jensen, 1993). When Krupp-Hoesch Group American corporation would not necessarily made a hostile takeover bid for steel rival be required to attend to other constituencies Thyssen in March 1997, Thyssen workers even if their own shareholders wanted it! fearful of the inevitable job losses mounted a (Blair and Stout [1999: 251] make a com- demonstration at Krupp headquarters, pelting pelling case that the discretion of the board of Krupp’s CEO with eggs and tomatoes. Krupp directors over the use of corporate resources is was convinced by local political leaders to sus- ‘virtually absolute’ under American corporate pend the bid and enter into friendly negotia- law, and this discretion can be used to imple- tions. As the two firms sought to hammer out ment something like a social entity model. a joint venture agreement, 25,000 workers They recognize, however, that custom among massed at Deutsche Bank headquarters in law and economics scholars – if not the law Frankfurt to protest the bank’s role in the itself – treats the shareholders as the sole own- takeover – Deutsche Bank was helping to ers and legitimate ‘stakeholders’ of the corpo- finance Krupp’s bid, but it also had a repre- ration, and this notion has achieved the status sentative on the Thyssen board – and the final, of doxology among American corporate man- friendly agreement resulted in considerably agers in the 1990s [Davis and Robbins, 1999].) fewer lost jobs at Thyssen. One person’s The beneficial effects of the shareholder- ‘industrial lethargy’ is another person’s job oriented corporation on society thus rest on the security. stylized argument at the beginning of this In the US, by contrast, layoffs are so com- section – that corporations serve consumers, mon as to arouse little comment, and it is dif- workers, and shareholders best when they ficult to imagine mass protests in response to focus exclusively on maximizing share price. takeovers. (The US Department of Labor esti- mates that 40% of the American labor force changes jobs in any given year.) It is hard to ISAWORLDWIDE MODEL FOR TOP imagine mass protests against dispersed share- MANAGEMENT AND CORPORATE holders, and public debate over the social obligations of the corporation has virtually GOVERNANCE EMERGING? disappeared. Indeed, those corporations that try to serve the ends of stakeholders other than We have described corporate governance as an shareholders find it difficult to do so. In the institutional matrix that structures the relations 1919 case of Dodge vs Ford Motor Co., the among owners, boards, and top managers and Michigan Supreme Court laid down a founda- determines the goals pursued by the corpora- tional view of the purpose of the corporation in tion. The corporation is a legal fiction, and dif- a contractarian world: ferent systems of governance represent different genres, with relationship capitalism There should be no confusion of the duties (in which the corporation is treated as a social which Mr. Ford conceives that he and the entity) and investor capitalism (in which the stockholders owe to the general public and the corporation is a nexus-of-contracts) as the two duties that he and his co-directors owe to pro- major distinct sub-types. Can both types sur- tecting minority shareholders [i.e., the Dodge vive, or will global trade and investment flows brothers]. A business corporation is organized prompt a Darwinian struggle in which one and carried on primarily for the profit of the system drives out the other, leading to global stockholders. The powers of the directors are convergence? to be employed for that end. The discretion of The question of societal convergence – is directors is to be exercised in the choice of it possible, likely, or desirable – has been means to attain that end, and does not extend to mulled over by sociologists (Guillen, 1999) Spetch11.qxd 5/18/2001 4:14 PM Page 253

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and economists (North, 1990) for decades. It is (Morck et al., 1998). Moreover, relationship fair to say that the majority opinion, if not the capitalism centered around powerful financial consensus, is that convergence has not institutions has clear advantages over financial occurred in the past and is unlikely to occur in market-based in facilitating rapid economic the future. But the institutions of corporate development; a well-trained government governance, and the means of organizing top bureaucracy guiding investment flows through management, are considerably more circum- affiliated banks can create an infrastructure of scribed in scope. While the flow of trade basic industry quite rapidly (Evans, 1995). across national borders may not induce con- Thus, the most sophisticated accounts of the vergence (North, 1990), the flow of global link between national systems of corporate capital dwarfs that of trade and can have far governance and economic vitality do not more important impacts for corporate organi- assume that there is one best way, but that the zation. The economic benefits of opening an best system is contingent on a nation’s level of economy to international investment, particu- economic development. In an exemplary work larly through financial markets, are great, at of this sort, Carlin and Mayer (1998) find that least in theory – it can increase the availability ‘there is a positive relation in the less devel- and reduce the cost of capital for both new and oped countries between activity in bank established businesses, thereby boosting eco- financed industries and the bank orientation of nomic growth overall. But these benefits of the countries and a negative relation between financial markets require corporate gover- concentration of ownership and activity in nance practices that reassure arms’ length high skill and external financed industries. In investors that they will get a return. The US in more developed countries, the relations are particular is seen as having evolved a well- precisely reversed.’ Thus, forcing an American articulated system of institutions for ensuring system of governance on less-developed that shareholders can make arms’ length nations could be disastrous. On the other hand, investments in corporations with a reasonable it suggests that nations that have moved from degree of confidence that management will do ‘emerging’ to ‘developed’ may benefit by its job as well as possible. Given the manifest affecting a shift from relationship capitalism benefits of the contractarian model, some to investor capitalism, however unlikely this commentators see movement toward this may be in practice (Rajan and Zingales, 1999). system as ‘inexorable.... The nature of this The picture shifts when one considers not movement is unarguably in the Anglo- nations but firms. For the largest global corpo- American direction rather than the other way rations with the greatest need for capital, such around’ (Bradley et al., 1999: 80). Others see as those listing on the New York Stock a global spread of American-style manage- Exchange, movement toward the American ment as extremely unlikely, and the purported style appears almost inevitable, just as adop- benefits as ephemeral (Guillen, 1999). In tion of the Toyota system of manufacturing short, there is no sign of convergence in the seemed inevitable for the largest manufacturers scholarly literature on convergence. (see Useem, 1998). In his thoughtful discus- Before answering the question, it is worth sion of the convergence debate, Coffee (1998) asking it well. Those examining convergence argues that formal convergence is unlikely but often focus on very different unit of analysis. ‘functional convergence’ is plausible. His At the national level, impediments to conver- argument runs as follows. Firms with higher gence on American-style corporate gover- stock market valuations have advantages in nance institutions are imposing. Common law, acquiring other firms around the globe and thus which is an inheritance of many former British are more likely to survive global industry con- colonies and relatively few other nations, is solidations. As large global corporations seek especially shareholder-friendly, civil law, the benefits of higher market valuations by list- which characterizes most nations in the world, ing on American stock exchanges, they thereby is not (La Porta et al., 1998). The quality of become subject to US legal standards. This legal enforcement also varies widely by moots the issues raised by La Porta et al. nation. Entrenched and politically powerful (1998): firms, in effect, choose their legal economic interests are unlikely to abandon the regime, and nations need not seek to become basis of their economic dominance easily ‘more American’ for their indigenous firms to Spetch11.qxd 5/18/2001 4:14 PM Page 254

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gain the benefits of American-style governance. management mattered little. When shareholders The outcome of this process could be a world were far smaller and decidedly quieter, when in which the largest global corporations ‘look airline and telephone directors comfortably American,’ while nations retain their distinct enjoyed inconsequential board , the national institutions of governance for smaller composition of the governing body mattered domestic firms. little either. During the past decade, however, In short, the most plausible scenario is for a all of this has changed in the US and UK, with global standard of governance to emerge for other economies close behind. As shareholders the largest global corporations, while national have sought to reclaim authority over what they variation persists both in institutions of owned, they have brought top management governance and in the practices of small- and and company directors back in. Company medium-sized domestic corporations. The strategy and financial results can no longer be impediments for nations to move substantially understood without understanding the capabi- toward the American system are almost cer- lities and organization of those most responsi- tainly too large to be readily overcome, even if ble for delivering them. such a transition were desirable: many Research investigators have risen to the national distinctions will inevitably persist. occasion. A solid flow of studies has sought to discern and dissect the dynamic relations that now characterize the world of investors, direc- tors, and managers. The market is no longer THE ROAD AHEAD viewed as so impersonal, the company no longer so isolated. Economic and financial Top company managers have always drawn decisions are embedded in a complex network academic and applied interest, if for no other of working relations among money managers, reason than they can seem larger than life at stock analysts, company directors, senior those pivotal moments when a company’s executives, and state regulators. Given the ownership and its executive hang in right combination of features, that lattice can balance. The loss of control of RJR Nabisco yield high investment returns and robust by chief executive F. Ross Johnson to lever- national growth. Given the wrong amalgam, it age-buyout king Henry Kravis in 1987 pro- can lead instead to self-dealing, frozen form, vided ample material for a best-selling book and economic stagnation. and subsequent film (Burroughs and Helyar, The road ahead will thus depend on how 1991). The two CEOs – Gerald M. Levin and well researchers understand what governance Stephen M. Case – who merged America arrangements and leadership styles work well Online and Time Warner in 2000 drew enor- both within national settings and across cul- mous media interest. Corporate directors have tural divides, and on the extent that top man- attracted less attention, partly because they agers, company directors, and active investors avoid the limelight but also because few out- learn and apply what is best. Five key areas siders believed directors brought much to the deserve concerted research attention if we are table, vanquished as they were by Berle and to know what works and what does not, and Means’ managerial revolution. For under- which theories are useful and which are not: standing company strategy, production tech- Boards and directors: What does the deci- nologies, and market dynamics, neither senior sion process inside the boardroom look like? executives nor company directors could be What are the sources of power and influence viewed as fertile ground for theory building. of inside and outside directors? How are the With the rise of professional investors and decision process and director influence contin- their subjugation of national boundaries, how- gent on the ‘institutional matrix’ in which a ever, those who occupy the executive suite and board is embedded? (Example: Pettigrew and those who put them there are drawing far more McNulty, 1998a, b.) research and policy attention, and justifiably Comparative governance: What really so. In a bygone era when markets were more accounts for the astonishing and remarkably steady and predictable, when airline and persistent diversity in the national systems of telephone executives confidently knew what corporate governance? How do national insti- to expect next year, the identity of top tutions, cultures, and social structures shape Spetch11.qxd 5/18/2001 4:14 PM Page 255

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and constrain the evolution of corporate move in and out of markets with the click of governance systems? (Examples: Kogut and mouse. Walker, 1999; Bebchuk and Roe, 1999.) Financial globalization: If the surge of cross- border investing is a major driver of corporate REFERENCES change, what can we expect of financial flows and their in the years ahead? How is the evolving organization of investors and Allen, W. T. (1992) ‘Our schizophrenic conception of the business corporation’, Cardozo Law Review, 14: companies likely to affect the internationaliza- 261–81. tion of capital flows? What aspects of corpo- Anderson, R. C., Bates, T. W., Bizjak, J. M. and rate governance will affect the attractiveness Lemmon, M. L. (1998) ‘Corporate Governance and Firm of a national economy for international Diversification’, Unpublished, Washington and Lee investors? How are actions by the Inter- University. national Monetary Fund and World Bank Ayotte, C. L. (1999) ‘Comment: reevaluating the share- likely to affect national systems of corporate holder proposal rule in the wake of cracker barrel and governance? (Example: Evans, 1995; the era of institutional investors’. Catholic University Mizruchi, 2000.) Law Review, 48: 511–56. Inequality in a ‘globalized’ world: How do Baliga, B. R., Moyer, R. C. and Rao, R. S. (1996) ‘CEO duality and firm performance: what’s the fuss?’, systems of corporate governance affect distri- Journal, 17: 41. butions of wealth within and among nations? Baltzell. E. D. (1987) The Protestant Establishment: What is the likelihood that social movements Aristocracy and Caste in America. New Haven: Yale for change may mobilize in the face of – or to University Press. resist – globalization? Does the globalization Beatty, R. P. and Zajac, E. J. (1994) ‘Managerial incen- of finance lead to a leveling up or a leveling tives, monitoring, and risk bearing: a study of executive down of national standards for labor relations, compensation, ownership, and board structure in initial environmental protection, and income inequal- public offerings’, Administrative Science Quarterly, 39: ity? (Example: Firebaugh, 1999.) 313–35. Business and Political Leadership: To what Bebchuk, L. A. and Roe, M. J. (1999) ‘A theory of path dependence in corporate ownership and governance’, extent is a shared leadership style emerging Stanford Law Review 52: 127–70. among top company managers and govern- Belliveau, M. A., O’Reilly III, C. A. and Wade, J. B. ment officials around the world? Are such (1996) ‘Social capital at the top: effects of social simi- institutions as the World Economic Forum larity and status on CEO compensation’, Academy of creating a global network among those who Management Journal 39: 1568–93. govern the major commercial and political Berle, A. Jr. and Means, G. C. (1932) The Modern institutions in the leading economies? As Corporation and Private Property. New York: worldwide relations among business and polit- MacMillan. ical elites do emerge, are they undermining Bhagat, S. and Black, B. (1999) ‘The uncertain relation- traditional relations among elites within ship between board composition and firm perfor- mance’, Business Lawyer, 54: 921–63. economies? (Examples: Davis and Mizruchi, Bhagat, S., Shleifer, A. and Vishny, R. W. (1990) ‘Hostile 1999; Khanna and Palepu, 2000.) takeovers in the 1980s: the return to corporate speciali- The research is unlikely to reveal worldwide zation’, in M. N. Baily and C. Winston (eds), Brookings best practices in corporate governance, but it Papers on Economic Activity: 1990. is likely yield a host of better measures that, Washington, DC: Brookings Institution. when deftly combined, adapted to legal con- Black, B. S. and Gilson, R. J. (1997) ‘ and text, and sensitive to cultural nuance, should the structure of capital markets: banks versus stock produce what executives, directors, and stock- markets’, Stanford Law School. holders all want. The academic and policy Blair, M. M. (1995) Ownership and Control: Re-Thinking debate will wisely focus not on whether the Corporate Governance for the Twenty-First Century. Washington: Brookings Institution. opening of capital markets and ascendance of Blair, M. M. (ed.) (1993) The Deal Decade: What global companies will flatten alternative Takeovers and Leveraged Buyouts mean for Corporate forms, but rather on what forms of organiza- Governance. Washington: Brookings Institution. tion and leadership are best suited for success Blair, M. M. and Stout, L. A. (1999) ‘A team production in local or regional operations in an era when theory of ’, Virginia Law Review, 85: equity investing and company competitors can 247–328. Spetch11.qxd 5/18/2001 4:14 PM Page 256

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