Mark J. Roe, The Political Roots of American Corporate Finance, 9 J. Applied Corp. Fin. 8 (1997).
Abstract: The distinctive ownership and governance structure of the large American corporation-with its distant shareholders, a board of directors that defers to the CEO, and a powerful, centralized management-is usually seen as a natural economic outcome of technological requirements for large-scale enterprises and substantial amounts of outside capital, most of which had to come from well-diversified shareholders. Roe argues that current U.S. corporate structures are the result not only of such economic factors, but of political forces that restricted the size and activities of U.S. commercial banks and other financial intermediaries. Populist fears of concentrated economic power, interest group maneuvering, and a federalist American political structure all had a role in pressuring Congress to fragment U.S. financial institutions and limit their ability to own stock and participate in corporate governance. Had U.S. politics been different, the present ownership structure of some American public companies might have been different. Truly national U.S. financial institutions might have been able to participate as substantial owners in the wave of end-of-the-century mergers and then use their large blocks of stock to sit on the boards of the merged enterprises (much as Warren Buffett, venture capitalists, and LBO firms like KKR do today). Such a concentrated ownership and governance structure might have helped to address monitoring, information, and coordination problems that continue to reduce the value of some U.S. companies. The recent increase in the activism of U.S. institutional investors also casts doubt on the standard explanation of American corporate ownership structure. The new activism of U.S. financial institutions-primarily pension funds and mutual funds-can be interpreted as the delayed outbreak of an impulse to participate in corporate ownership and governance that was historically suppressed by American politics.