Faculty Bibliography
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I refine here the classical evolutionary model from law and economics by modifying it to accommodate three related concepts, one from chaos theory, another of path dependence, and a final one of politically-induced punctuated equilibrium from modern evolutionary theory itself. Although economic evolution selects out for extinction very inefficient results, and efficient results tend to survive, the evolutionary metaphor is by itself not rich enough to explain enough of what we see surviving, nor is it rich enough to explain fully how what survives survived. Within the looseness of acceptable efficiency, what survives depends not just on efficiency but on the initial, often accidental conditions (chaos theory) that establish an institutional structure inside which the economic players evolve. What survives also depends on the history of what problems had to be solved in the past -- problems that may be irrelevant today (path dependence); solutions to what later become irrelevant problems can be embedded in slowly-changing institutional structures. Although institutions cannot be too inefficient if they have survived, evolution toward efficiency constrains but does not fully determine the institutions we observe.
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In this essay, I analyzed changes in the law's impact on the corporation during the past thirty-five years, what the underlying bases for these changes might have been, and how these changes affected corporate law. When the first Corporation and Modern Society symposium was held in 1959, today's issues, such as competitiveness, were hardly apparent, and the issue of colossal corporate power was paramount. Antitrust law in particular was seen to be a means to restrain the large corporation. Underlying the 1959 urge to tame the large corporation was the widespread existence (or at least perception) of industrial oligopoly. It was oligopoly (or perhaps really the superior efficiency of a few American manufacturing leaders) that gave the large firm slack and induced the widespread perception of its power. What erased that image of power in the ensuing decades is clear: the reconstruction of Europe and Japan forced the American manufacturing oligopolists to compete in the international arena; an accelerating pace of technological change made old structures obsolete and brought forth new domestic competitors. While many of the old industrial firms were, or became, fit to compete in the new international arena and to ride the waves of new technological change, some weren't. Even the fit ones have to sweat to survive and cannot relax as they did four decades ago, making competitiveness considerations overshadow those of corporate power. Globalization changed the 1959 attitudes and shifted the legal focus on the corporation. Antitrust attacks to break up the giants seemed politically sensible when the three oligopolists split the U.S., and sometimes the world, market. They made no sense when the three came to be embedded in a world-wide market of ten firms. Antitrust rules relaxed. The notion of using law to control corporate power faded, and the legal questions began to focus on whether law plays some role in hindering, or enhancing corporate competitiveness.
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"The distinctive character of corporate business enterprise in the United States - large firms guided by powerful, centralized managers, historically deferential directors, and distant shareholders - is usually thought to be the inevitable result of economic and technological forces. In this major reinterpretation of the origins and evolution of corporate structure, Mark Roe shows that the nature of the American corporation derives not only from these forces but also from political decisions that made alternative forms of organization costly or illegal. Review: Drawing upon work in economics, history, law, and political science, Roe argues that the role of politicians in mediating the interaction between firms and financiers is a critical, but neglected, part of the explanation why certain forms rather than others prevailed." "In their classic 1932 study, The Modern Corporation and Private Property, Adolf Berle and Gardiner Means argued that the separation of ownership and control was the consequence of industrial technologies requiring large-scale production, which in turn led to highly dispersed stockholding. Roe demonstrates, however, that the ownership structure of the American corporation represents just one of several possible outcomes, and that other organizational forms arose abroad (in Germany and Japan, for example) under the influence of different political conditions. Review: At a number of critical junctures, political choices were made about how savings were to be channeled to industry that sharply restricted the power of financial institutions to shape the growth of large firms. These decisions, which pre-dated the New Deal, going as far back in some cases as the nineteenth century, reflected the American public's enduring dislike of concentrated financial power. Once these rules for the governance of financial institutions were in place - but not before - the Berle-Means corporation became inevitable." "In recent years, new technological and competitive challenges have forced many of America's largest firms to restructure, often painfully. Some are now more efficient and productive, others are not. Relationships among shareholders, directors, and senior managers remain in flux, and tensions over whether shareholders are to have a greater or smaller voice in corporate management in the future may become acute. Review: If history is any guide, Roe suggests, the issue will eventually be settled not only in boardrooms and on stock exchanges but also in statehouses and in Congress." --BOOK JACKET.
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Dieses Buch enthält Untersuchungen zur ökonomischen Analyse der Unternehmung und ihrer rechtswissenschaftlichen Umsetzung im Unternehmensrecht.
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Mark J. Roe, The Modern Corporation and Private Pensions, 41 UCLA L. Rev. 75 (1993).
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Mark J. Roe, Foundations of Corporate Law: The 1906 Pacification of the Insurance Industry, 93 Colum. L. Rev. 639 (1993).
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Takeovers cannot be fully understood without understanding the role of American politics in finance. Politics prohibits some ownership structures and regulates or taxes others, often powerfully influencing corporate governance. Politics' influence on takeovers falls into two categories. First, politics fragmented American finance, facilitating the scattering of shareholders of large public companies. This scattering of shareholders set the stage for takeovers. Second, takeovers created winners and losers. Those at risk of loss in takeovers had the political muscle to get state legislatures to pass anti takeover laws. Financial fragmentation came first. Before the recent takeover wave, American politics fragmented financial institutions and their portfolios and weakened coordination among those financial institutions. American laws generally raised the institutions' cost of entering the corporate boardroom. Three determinants produced this result: American federalism, popular fear of concentrated economic power, and the power of interest groups.
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We aim here for a better understanding of the Japanese keiretsu. Our essential claim is that to understand the Japanese system-banks with extensive investment in industry and industry with extensive cross-ownership-we must understand the problems of industrial organization, not just the problems of corporate governance. The Japanese system, we assert, functions not only to harmonize the relationships among the corporation, its shareholders, and its senior managers, but also to facilitate productive efficiency.
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Mark J. Roe, A Political Theory of American Corporate Finance, 91 Colum. L. Rev. 10 (1991).
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Why is the public corporation-with its fragmented shareholders buying and selling on the stock exchange-the dominant form of enterprise in the United States? Since Berle and Means, the conventional corporate law story begins with technology dictating large enterprises with capital needs so great that even a few wealthy individuals cannot provide enough. These enterprises consequently must draw capital from many dispersed shareholders. Shareholders diversify their own holdings, further fragmenting ownership. This combination of a huge enterprise, concentrated management, and dispersed, diversified stockholders shifts corporate control from shareholders to managers. Managers can pursue their own agenda, at times to the detriment of the enterprise. In the classic story, the large public firm survived because it best balanced the problems of managerial control, risk sharing, and capital needs. In a Darwinian evolution, the large public firm mitigated the managerial agency problems with a board of directors of outsiders, with a managerial headquarters of strategic planners overseeing the operating divisions, and with managerial incentive compensation. Hostile takeovers, proxy contests, and the threat of each further disciplined managers. Fragmented ownership survived because public firms adapted. They solved enough of the governance problems created by the large unwieldy structures needed to meet the huge capital needs of modern technology. In the conventional story, the large public firm evolved as the efficient response to the economics of organization.
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Law and politics affect the financial structure of the public corporation, perhaps as much as economics. Law restricts financial institutions from holding large equity blocks and from networking the small blocks they do own. Impetus for these restrictions came from several sources: a public-spirited belief that financial stability would be fostered by financial fragmentation, American federalism (each state created its own insular set of financial institutions), rivalries between groups of financial institutions, and popular mistrust of powerful private financial institutions. The stability of many of these rules also derives from the political resistance that one would expect corporate managers and benefited financial institutions to offer to any change.
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The Trust Indenture Act prohibits a binding vote of bondholders to change any core term-principal amount, interest rate, or maturity date-of a bond issue. In this Article, I show how the prohibition on a collective action clause inhibits a troubled company's ability to reorganize outside of bankruptcy. Moreover, the prohibition — a carryover of 1930s thinking — fails to implement satisfactorily the underlying original goals of individualized bondholder choice and bondholder protection. The bar on bond issue majority vote, collective action clauses should be repealed.
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An enterprise markets a product that afflicts industrial workers with disease. A pharmaceutical manufacturer sells a drug that causes serious disorders in users and deformities in their children. Liability in tort is clear, we suppose. Yet the effect of the industrial product or drug may be so pernicious, as it has been for those exposed to asbestos or DES, that the tort system produces - or may in the near future produce - an aggregate liability that may well exceed the value of the responsible firm. The tort system normally creates simple financial liability to an individual or class after a single trial or settlement. But under circumstances of massive enterprise liability after multiple trials and settlements, that financial clarity and simplicity is quickly obliterated. Questions arise that the tort system does not explicitly answer. For example, should a large, immediate cash payout be allowed if it would destroy the responsible firm and leave later plaintiffs uncompensated?
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Two of the core determinations made in a reorganization proceeding under chapter 11 of the Bankruptcy Code' are simply stated: Who gets how much? What will the new capital structure be? To resolve these simply stated questions of valuation and recapitalization, bankruptcy courts loosely oversee a lengthy bargaining process that is widely thought to be cumbersome, costly, and complex. The strain of extended financial stress results in lost sales when customers seek a more secure supply source, in consumption of valuable management time spent resolving financial difficulties, and in forgone opportunities to obtain new projects. Additional costs are borne by the employees, customers, and suppliers of the bankrupt company, as well as the comnunities in which it operates. Furthermore, while contraction of the bankrupt firm is usually in order, parts of the firm may sometimes be liquidated even though liquidation value is less than operational value. Finally, the firm often emerges from reorganization with an unnecessarily complex capital structure. Such a complex capital structure can cause the reorganized firm to adopt poor operational strategies, prevent it from raising new capital, and pose a barrier to a healthy merger.
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Mark J. Roe, Finance, Rules and the Indexation of Brazilian Government Bonds, 12 Vand. J. Transnat'l L. 1 (1979).
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