Political preconditions to separating ownership from corporate control

Stanford Law Review

Volumn 53, Issue 3, 2000, Pages 539-602

  Roe, Mark J ^a  

^a Columbia Law School ^*  (United States)

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EID: 0347667534     PISSN: 00389765     EISSN: None     Source Type: Journal    
DOI: 10.2307/1229469     Document Type: Article

References (210)

1. Cf. Colin Mayer, Financial Systems and Corporate Governance: A Review of the International Evidence, 154 J. INST. & THEORETICAL ECON. 144, 144 (1998) ("In Continental Europe, there is concern that existing systems of [corporate] governance are stifling innovation and growth."). A Europe-wide inquiry concludes similarly.
2. Marco Becht, Strong Blockholders, Weak Owners and the Need for European Mandatory Disclosure, in 1 EUROPEAN CORPORATE GOVERNANCE NETWORK, THE SEPARATION OF OWNERSHIP AND CONTROL: A SURVEY OF SEVEN EUROPEAN COUNTRIES 1, 12 (1997) (stating that weak securities markets and few public firms impede European economic development).
3. See Adam Przeworski, Socialism and Social Democracy, in THE OXFORD COMPANION TO POLITICS OF THE WORLD 832, 835 (Joel Krieger et al. eds., 1993) (defining social democracies as nations that seek "to implement 'functional socialism,' even if ownership of productive resources remains private");
4. S.C. Stimson, Social Democracy, in 4 THE NEW PALGRAVE: A DICTIONARY OF ECONOMICS 395, 396 (John Eatwell, Murray Milgate & Peter Newman eds., 1987) (noting that European social democracy seeks not to end private ownership, but to improve material conditions for the many).
5. See note 122 infra and accompanying text.
6. Ekkehart Boehmer, Who Controls Germany? An Exploratory Analysis 13-14 (Dec. 22, 1999) (unpublished manuscript, on file with the Stanford Law Review);
7. Julian Franks & Colin Mayer, Ownership, Control and the Performance of German Corporations 9 (Jan. 25, 1999) (unpublished manuscript, on file with the Stanford Law Review).
8. Paul Windolf, The Governance Structure of Large French Corporations: A Comparative Perspective, in CORPORATE GOVERNANCE TODAY 695, 705-06 (1998) (Sloan Project on Corporate Governance at Columbia Law School).
9. Cf. Eugenio Ruggiero, Italy, in THE LEGAL BASIS OF CORPORATE GOVERNANCE IN PUBLICLY HELD CORPORATIONS: A COMPARATIVE APPROACH 79, 82 (Arthur R. Pinto & Gustavo Visentini eds., 1998) (stating that in the 1990s Italy's small stock market saw listings on its leading stock exchange decline).
10. Rafael La Porta, Florencio Lopez-de-Silanes & Andrei Shleifer, Corporate Ownership Around the World, 54 J. FIN. 471, 492 (1999).
11. See, e.g., ADOLF A. BERLE, JR. & GARDINER C. MEANS, THE MODERN CORPORATION AND PRIVATE PROPERTY 119-25 (1932);
12. Michael C. Jensen & William H. Meckling, Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure, 3 J. FIN. ECON. 305 (1976).
13. See. e.g., WILLIAM J. BAUMOL, BUSINESS BEHAVIOR, VALUE AND GROWTH 48-52 (1959);
14. ROBIN MARRIS, THE ECONOMIC THEORY OF "MANAGERIAL" CAPITALISM 46-107 (1964);
15. OLIVER E. WILLIAMSON, THE ECONOMICS OF DISCRETIONARY BEHAVIOR: MANAGERIAL OBJECTIVES IN A THEORY OF THE FIRM 34-35 (1964).
16. ALFRED P. CHANDLER, THE VISIBLE HAND: THE MANAGERIAL REVOLUTION IN AMERICAN BUSINESS 491 (1977);
17. cf. Harold Demsetz, The Structure of Ownership and the Theory of the Firm, 26 J.L. & ECON. 375, 378 (1983) (stating that sole owners maximize personal utility, not firm value).
18. Berle and Means typically get the credit for discovering that ownership in large firms had become sufficiently diffuse by 1933 that managers, not stockholders, controlled the firm. BERLE & MEANS, supra note 8.
19. CHARLES S. MAIER, RECASTING BOURGEOIS EUROPE: STABILIZATION IN FRANCE, GERMANY, AND ITALY IN THE DECADE AFTER WORLD WAR I 59-60, 138, 141-44 (1975).
20. Katharina Pistor, Codetermination: A Sociopolitical Model with Governance Externalities, in EMPLOYEES AND CORPORATE GOVERNANCE 163, 167-69 (Margaret M. Blair & Mark J. Roe eds., 1999).
21. MAIER, supra note 12, at 142. More precisely, Rathenau sought to make business property something intermediate between a private possession and a socialized asset. CHARLES S. MAIER, IN SEARCH OF STABILITY 40 (1987);
22. WALTER RATHENAU, DIE NEUE WIRTSCHAFT (1918);
23. WALTER RATHENAU, VOM AKTIENWESEN (1922). Rathenau, a leading thinker and political leader, was from the family that founded Germany's leading electrical company; he ran wartime production and later became Germany's foreign minister.
24. See also MAIER, IN SEARCH OF STABILITY, supra, at 165 (characterizing codetermination as cooptation of revolutionary ideals by industrial leaders); MAIER, supra note 12, at 12 (Reformers "envisioned a gradual dissolution of central state authority and the growth of works councils and industrial self-government. . . . [W]orkers and entrepreneurs of a given industry[] could [and should] be seated at the same table to hammer out common policy. . . .").
25. See [Interview with] Gerhard Schröder, "Je ne Pense plus Souhaitable une Société sans Inégalités," LE MONDE, Nov. 20, 1999, at 2 (quoting Chancellor Schröder's belief that, in contrast to the American economic model, Germany's "is founded on the participation of workers not just in our prosperity but also in decision-making, notably via codetermination").
26. Until recently, German public corporation boards needed to meet only twice annually. Well-publicized corporate governance failures in a few public firms induced business pressures and legal changes that pushed supervisory boards to meet three or four times a year. Compare Aktiengesellschaft § 110, in HANNES SCHNEIDER & MARTIN HEIDENHAIN, THE GERMAN STOCK CORPORATION ACT 115 (2000) (four) with Uwe Huffer, Aktiengesetz § 110, at 440 (1995) (two).
27. See Thomas J. André, Jr., Some Reflections on German Corporate Governance: A Glimpse at German Supervisory Boards, 70 TUL. L. REV. 1819, 1825 n.21 (1996).
28. See Pistor, supra note 13, at 191; see also JEREMY EDWARDS & KLAUS FISCHER, BANKS, FINANCE AND INVESTMENT IN GERMANY 213 (1994) ("Supervisory boards typically . . . receive relatively little detailed information about the firm's operations.");
29. Wulf von Schimmelmann, Unternehmenskontrolle in Deutschland, in FINANZMÄRKTE 7 (Bernhard Gahlen, Helmut Hesse & Hans Jürgen Ramser eds., 1997);
30. cf. Johannes Semler, The Practice of the German Aufsichtsrat, in COMPARATIVE CORPORATE GOVERNANCE - THE STATE OF THE ART AND EMERGING RESEARCH 267, 272 (Klaus J. Hopt, Hideki Kanda, Stefan Prigge, Mark J. Roe & Eddy Wymeersch eds., 1998) (stating that some boards get good supporting information, but some do not);
31. Florian Schilling, Der Aufsichtsrat ist für die Katz, FRANKFURTER ALLGEMEINE ZEITUNG, Aug. 27, 1994, at 11 (reporting German survey of business leaders who conclude that the supervisory board is weak and that, as a result of codetermination, it avoids controversial topics).
32. Felix R. FitzRoy & Kornelius Kraft, Economic Effects of Codetermination, 95 SCANDINAVIAN J. ECON. 365, 374 n.6 (1993) (stating that the 1976 change resulted in productivity loss of "13%-14% of value added");
33. Frank A. Schmid & Frank Seger, Arbeitnehmermitbestimmung, Allokation von Entscheidungsrechten und Shareholder Value, 5 ZEITSCHRIFT FÜR BETRIEBSWIRTSCHAFT 453 (1998);
34. Gary Gorton & Frank Schmid, Class Struggle Inside the Firm? A Study of German Codetermination 25 (June 16, 2000) (unpublished manuscript on file with the Stanford Law Review) (finding that codetermination reduces market-to-book ratio of equity by 27%).
35. Contra Theodor Baums & Bernd Frick, The Market Value of the Codetermined Firm, in EMPLOYEES AND CORPORATE GOVERNANCE, supra note 13, at 206, 232 (finding no financial loss to stockholders from court decisions extending codetermination rights);
36. see also Bernd Frick, Gerhard Speckbacher & Paul Wentges, Arbeitnehmermitbestimmung und moderne Theorie der Unternehmung, ZEITSCHRIFT FÜR BETRIEBSWIRTSCHAFT 745-63 (1998-V) (critiquing studies that showed codetermination as negatively affecting stock price).
37. See Franks & Mayer, supra note 4, at 22.
38. Likewise, institutional creditors, who loom larger in European firms than in their American counterparts, prefer to avoid risk and to maintain stability. And incompletely diversified family stockholders, the last key player in large continental European firms, also prefer stability more strongly than diversified American public firm stockholders. The key risk-avoiding pieces all fit together in continental Europe.
39. LLOYD G. REYNOLDS, THE STRUCTURE OF LABOR MARKETS: WAGES AND LABOR MOBILITY IN THEORY AND PRACTICE 156 (1951);
40. Richard A. Lester, A Range Theory of Wage Differentials, 5 INDUS. & LAB. REL. REV. 483, 500 (1952) (arguing that a range of wage indeterminacy is natural and that managers can select a position of long-run stability at various points within that range).
41. Marianne Bertrand & Sendhil Mullainathan, Is There Discretion in Wage Setting? A Test Using Takeover Legislation, 30 RAND J. ECON. 535, 537 (1999).
42. Cf. Michael C. Jensen, Agency Costs of Free Cash Flow, Corporate Finance and Takeovers, 76 AM. ECON. REV. 323, 324-25 (1986).
43. See Des réactions politiques et syndicales sévères, LE MONDE, Sept. 11, 1999, at 16 (quoting the leader of the governing French party as saying "[i]t's unacceptable that a large firm can decide to reduce employment . . . simply to enhance shareholder profits").
44. Gerhard Schröder, when minister of Lower Saxony - he is now the German prime minister - had a steel mill nationalized rather than see it taken over by a foreign firm, because he did not want a restructuring that would affect the German employees. Arnaud Leparmentier, L'Allemagne industrielle de nouveau conquérante, LE MONDE, Nov. 28, 1998, at 1;
45. see also Alain Faujas, Français, Allemands et Italiens n'attendent rien de bon des entreprises, LE MONDE ECONOMIE, June 1, 1999, at IV ("60% [of the French] feel that government regulation and taxes handicap French firms, but [they applaud this result] as 51% also say the State must more severely control firms to prevent them from degrading social conditions");
46. Alain Faujas, Français, Allemands et Italiens n'attendent rien de bon des entreprises, LE MONDE ECONOMIE, 1999, at IV id. (reporting that a majority in each of Germany, Italy, and France believe "the firms' interests and the people's interest are not the same," while in Britain a majority thought the contrary).
47. Consider this passage from a book well known in European business circles: "Is the firm a simple piece of merchandise . . . ? Or is it . . . a community in which the stockholders' power is balanced by managerial power, which is in turn . . . co-opted . . . by the employees . . .?" MICHEL ALBERT, CAPITALISME CONTRE CAPITALISME 19 (1991) (translated from the French) (emphasis added).
48. Frédéric Lemaître, Le succès de l'actionnariat salarié bouleverse le capitalisme français, LE MONDE, Mar. 2, 1999, at 15.
49. The United States historically lacked some, but not all, of these tools; however, its gap was smaller than elsewhere because American firms felt only weak social democratic pressures. In recent decades, intensified competition and technological change have called forth stronger tools than American shareholders previously needed. And, when American industries were less competitive, large-firm oligopolies lost something from managerial agency costs but gained oligopoly profits to spread around to shareholders, managers, and employees. Mark J. Roe, From Antitrust to Corporate Governance? The Corporation and the Law: 1959-1994, in THE AMERICAN CORPORATION TODAY 102, 105, 111-13 (Carl Kaysen ed., 1996). (Only the New Deal era had a flavor vaguely similar to that of European social democracy; however, even the New Deal, one must remember, was designed to save American capitalism. Moreover, one wonders whether the number of public firms then increased, stayed level, or declined.)
50. In one well-known merger anecdote, directors asked their attorney, a leading merger advisor, to what extent they could consider other constituencies when evaluating offers. "A buck a share," the advisor is said to have replied.
51. See, e.g., the famous essay by Milton Friedman, The Social Responsibility of Business Is to Increase its Profits, N.Y. TIMES MAG., Sept. 13, 1970, at 32. Although aggressive when it appeared, Friedman's perspective is now mainstream in American business circles and not unthinkable then, as it has been in some social democracies.
52. Cf. Michael E. Porter, The Microeconomic Foundations of Economic Development, in WORLD ECON. FORUM, THE GLOBAL COMPETITIVENESS REPORT 1998, at 38, 42 ("In western Europe . . . the inability to place profitability as the central goal is . . . the greatest constraint to economic development.").
53. Cf. Robert Kuttner, Soaring Stocks: Are Only the Rich Getting Richer?, BUS. WK., Apr. 22, 1996, at 28 (indicating that the wealthiest 20% of American households own over 98% of American investments in stocks).
54. Timothy W. Ryback, The World of Business: The Man Who Swallowed Chrysler, NEW YORKER, Nov. 16, 1998, at 80, 83.
55. This antishareholder sentiment is hardly absent in the United States. It ebbs and flows, stronger during Ralph Nader's "Campaign GM" in the 1970s, say, and weaker during the Reagan 1980s, but surely it has been much weaker in the United States than in continental Europe.
56. This is not the only reason for opacity: players with informational advantages prefer to keep the firm opaque to others. Banks, if satisfied with the information they get, may not want to increase transparency and thereby lower the costs of the banks' financial competitors.
57. That is, if business players were leery of transparency because of social democratic pressures, one might wonder why socialist governments did not force more transparency. First, the social democratic goal for the larger firms for several decades was not to facilitate labor interests against private capital inside public firms. Rather, it was to nationalize the large firms in heavy industry, which many of the social democracies did. Second, because fewer firms were fully public in their nation, the transparency sought would be for the many privately held firms, and the focused players there would resist. Thirdly, as noted in the text, transparency is a two-edged sword for a social democratic government: it can promote a shareholder culture (a negative for them) and facilitate labor power (a positive); hence, the social democratic program might better focus on other non-ambiguously pro-employee goals.
58. Philippe Mabille, Stock-Options: Vers des Prélèvements Allégés et une Transparence Accrue, LES ECHOS, Dec. 9, 1998, at 2;
59. cf. Gail Edmondson, France: A CEO's Pay Shouldn't Be a Secret, BUS. WK., Aug. 9, 1999, at 47 (reporting that the Viénot corporate governance committee, a French blue-ribbon panel, did not recommend disclosure of CEO pay);
60. Les Stock-Options Seraient Moins Imposées et Plus "Transparentes," LE MONDE, Dec. 10, 1998, at 9 (reporting that the governing French socialist party sought rules to have total managerial compensation publicly known). I suspect the socialist government sought not to facilitate shareholder monitoring but to expose high managerial salaries.
61. Martin J. Conyon & Joachim Schwalbach, Corporate Governance, Executive Pay and Performance in Europe, in EXECUTIVE COMPENSATION AND SHAREHOLDER VALUE 13, 25 (Jennifer Carpenter & David Yermack eds., 1999).
62. Wolfgang Munchau, German Executives Discover a Nice Little Extra: Moves Towards Share Options for Top Managers Are Likely to Provoke Controversy, FIN. TIMES, Apr. 24, 1996, at 23.
63. See Virginie Malingre, Les Députés PS Acceptent le Dispositif Stock-Options Préconisé par M. Fabius, LE MONDE, Apr. 28, 2000, at 9 (reporting that socialist government planned to raise tax on options);
64. Virginie Malingre & Michel Noblecourt, Les Députés PS Veulent Taxer Davantage les Stock-options, LE MONDE, Oct. 15, 1999, at 8;
65. David I. Oyama, French Socialists Back Steeper Taxes on Options Gains, WALL ST. J., Apr. 27, 2000, at A17;
66. cf. Christopher J. Mesnooh, Stock Options in the United States and France: A Comparative Regard, MTF-L'AGEFI, Nov./Dec. 1998, at 59-60 (reporting that French stock options were taxed unfavorably).
67. Mabille, supra note 36, at 2 ("The pill [(the subsequently withdrawn proposal to facilitate stock options) was] not an easy one to swallow for the left, which [was] highly distrustful of a tool that they [saw] as a means for managers to give themselves a super-bonus").
68. Peter Goldstein, Managers & Managing: Compensation Packages for Executives Aren't All Alike, WALL ST. J. EUR., Dec. 22, 1998, at 4 (stating that base pay was converging in Europe, but that bonuses and stock options still varied).
69. See Graham Bowley, Hoechst Launches Stock Option Scheme, FIN. TIMES (London), Sept. 13, 1997, at 19 ("Only a handful of Germany's biggest companies have adopted share option schemes . . . because of strict German regulations on employee share ownership.").
70. See, e.g., Michael Woodhead, A Pyrrhic Victory for Germany, SUNDAY TIMES (London), Mar. 30, 1997, § 3, at 7 ("The foiling of Krupp's bid for Thyssen is a victory for the social consensus.");
71. Steeled for a Battle, FIN. TIMES (London), Mar. 22, 1997, at 9 (reporting that a mainstream German newspaper printed a headline asking if an executive seeking a takeover wanted to set Germany on fire). German politicians brokered a partial merger on terms favorable to incumbent employees.
72. See Richard Halstead, Steel Is Put to the Sword, INDEPENDENT (London), Mar. 23, 1997, at 3 ("The combined forces of federal economics minister Guenter Rexrodt and Johannes Rau, premier of North Rhein Westphalia, Germany's biggest state, bounced Germany's virtually sole corporate raider into 'negotiations' with Thyssen.");
73. Greg Steinmetz & Matt Marshall, Krupp Suspends Hostile Bid for Thyssen, WALL. ST. J., Mar. 20, 1997, at A13 ("[T]he steel merger is less attractive than a full merger. But the smaller merger is politically more acceptable . . . .").
74. William R. Emmons & Frank A. Schmid, Universal Banking, Control Rights, and Corporate Finance in Germany, FED. RES.[?] BANK OF [?]ST. LOUIS REV., July/Aug. 1998, at 19, 22.
75. William Boston, Hostile Deal Could Breach German Resistance, WALL ST. J., Nov. 17, 1999, at A17. Vodaphone's takeover of Mannesmann changed this.
76. Cf. Banque: Le Coup de Poker de la BNP, LE MONDE, Mar. 11, 1999, at 1 (reporting that in a huge French hostile offer to build the world's largest bank, the offerer's CEO immediately promised not to lay off anyone in France).
77. Cf. Edmund L. Andrews, A French Concoction, N.Y. TIMES, Sept. 21, 1999, at C1 (indicating that after Totalfina bought Elf Aquitaine, most experts assumed that Totalfina would have to close at least one French refinery and perhaps others in Europe, thereby igniting protest). A J.P. Morgan oil analyst said it was widely believed that "the potential savings are well above two billion euros . . . . [But the] difficulty is knowing how long it would take to deliver those savings."
78. Edmund L. Andrews, A French Concoction, N.Y. Times 1999, at C1 Id.
79. Alan Katz, Shareholders Gain a Voice in France, but the Socialist Tradition Talks Back, WALL ST. J., Feb. 13, 1998, at B7E. A high price might indicate high inefficiencies, including perhaps redundancies in the work force. In contrast, consider what an American analyst considers to be the critical social issues to negotiate in a takeover: "A critical part of the negotiation of large merger transactions is the resolution of such social issues as the location of the headquarters for the combined entity and the determination of who will lead the 'new' company, [a Goldman, Sachs managing director] explained."
80. Eileen J. Williams, Focus: Mergers and Consolidations, BNA'S CORP. COUNS. WKLY., Mar. 24, 1999, at 8.
81. Martine Orange, La Fin de l'Exception Française?, LE MONDE, Mar. 30, 1999, at 19.
82. Frédéric Pons, Un Brin d'Éthique dans les Fusions, LIBERATION, Mar. 16, 2000, at 25;
83. see also Thomas Kamm, French Bill Takes Aim at Takeovers in Wake of Recent Merger Battles, WALL ST. J. EUR., Mar. 16, 2000, at 2 (indicating that the proposed law would require "a company launching a bid to meet with representatives of its target's staff to discuss its projects in detail").
84. See Samuel H. Szewczyk & George P. Tsetsekos, State Intervention in the Market for Corporate Control: The Case of Pennsylvania Senate Bill 1310, 31 J. FIN. ECON. 3, 5 (1992);
85. Management and Labor Join Forces to Stiff-Arm Raiders in Pennsylvania, CORP. CONTROL ALERT, Jan. 1990, at 1, 8;
86. Leslie Wayne, Takeovers Face New Obstacles, N.Y. TIMES, Apr. 19, 1990, at D1.
87. The political data are from Thomas R. Cusack, Partisan Politics and Public Finance: Changes in Public Spending in the Industrialized Democracies, 1955-1989, 91 PUB. CHOICE 375, 383-84 (1997),
88. which arrays a survey from Francis G. Castles & Peter Mair, Left-Right Political Scales: Some 'Expert' Judgments, 12 EUR. J. POL. RES. 73 (1984).
89. The ownership data and judgment are from La Porta et al., supra note 7, at 492, who sought to show something else: that failure to protect minority stockholders is the primary determinant of a nation's inability to get diffusely-held firms. The simplest of the concentration indices looks at the twenty largest firms in each nation and sees what percentage of them lacks an owner with more than 20% of the stock. If not one of the twenty has such an owner, the county scores a 1.00 for diffuse ownership; if none of the twenty has such an owner, the country scores a zero.
90. The four-decade political average correlates more strongly with ownership structure. It ought, though, to be weaker since it matches a forty-year political index with a single moment's concentration ratios. Perhaps a better longitudinal look would correlate concentration in each decade with the political index in each decade. On the other hand, political coalitions come and go; corporate structures are the result of long-term expectations of governmental orientation.
91. And the financial researchers building the concentration index classified government-owned blocks as if they were privately owned blocks. La Porta et al., supra note 7, at 476. But publicly owned blocks do not at first reflect the owners' decision that concentration will promote shareholder wealth better than would dispersion. Still, governments often take blocks if social pressures deter private players from investing, and the firm can continue, or arise, only if the government invests. Thus linkage is plausible. Government blocks for purposes of a competing theory - that poor legal protection of minority shareholders induces blockholding - is questionable, as governmental motives in keeping blocks are unlikely to link directly to minority shareholder protection, although it is true that the government might invest if capital markets do not fund very large firms.
92. This data can be found in La Porta et al., supra note 7, at 476, 494.
93. Castles & Mair, supra note 52, at 75.
94. Id. at 78, 83.
95. A few general notes on the data: Countries are in the sample if and only if they were in the Castles-Mair political index. The time periods for the political side and the concentration side are not identical, but because both politics and ownership structure tend to persist, this mismatch may not be important. Indeed, persisting political foundations (and expectations of future politics) should influence ownership structure.
96. See Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer & Robert W. Vishny, Law and Finance, 106 J. POL. ECON. 1113, 1145-51 (1998) (arguing that civil law countries give investors less legal protection than common law countries, inducing higher ownership concentration in civil law countries).
97. See MARK J. ROE, THE QUALITY OF CORPORATE LAW ARGUMENT AND ITS LIMITS (Working Paper, 2000).
98. See. e.g., JONATHAN P. CHARKHAM, KEEPING GOOD COMPANY: A STUDY OF CORPORATE GOVERNANCE IN FIVE COUNTRIES 125 (1994); Windolf, supra note 5, at 722;
99. James A. Fanto, The Transformation of French Corporate Governance and United States Institutional Investors, 21 BROOK. J. INT'L L. 1, 41 (1995).
100. Table II supra; Table IX infra.
101. Table VIII infra.
102. See Michel Goyer, The Transformation of Corporate Governance in France and Germany 41 (1999) (unpublished Ph.D. dissertation, M.I.T., on file with the Stanford Law Review).
103. CHARLES P. KINDLEBERGER, ECONOMIC GROWTH IN FRANCE AND BRITAIN: 1851-1950, at 115 (1964).
104. See, e.g., David Owen, Michelin Slips After Provisions, FIN. TIMES (London), Mar. 15, 2000, at 32 (reporting that the Prime Minister's "remarks were seen as a warning that there were limits to the extent to which big French companies should adopt aggressive Anglo-American profits-oriented tactics").
105. Laurent Mauduit, M. Jospin Ouvre avec Précaution le Dossier de l'Épargne Salariale, LE MONDE, Jan. 29, 2000, at 6.
106. MINISTRE DE L'ECONOMIE, DES FINANCES ET DE L'INDUSTRIE, RAPPORT AU PREMIER MINISTRE SUR L'EPARGNE SALARIALE, pt. I, at 2, pt. II, at 8-10, 15 (Jan. 2000).
107. See James A. Fanto, The Role of Corporate Law in French Corporate Governance, 31 CORNELL INT'L L.J. 31, 47 (1998) ("The concept of the intérêt social, which permeates the French corporate code, permits directors to consider the interests of all constituencies when deciding upon corporate strategy. This concept allowed the state-owner to use controlled corporations for purposes other than profit-making.") (citation omitted).
108. Cf. Michel Bauer & Bénédicte Bertin-Mourot, Administrateurs et Dirigeants du CAC 40, C.N.R.S. OBSERVATOIRE DES DIRIGEANTS ET BOYDEN 31 (Oct. 1997) (reporting that more than sixty percent of the managers and directors of the companies comprising the CAC 40 received their degrees from either the Ecole Nationale d'Administration or the Ecole Polytechnique).
109. Cf. Michel Noblecourt, Pour une Extension des Stock-Options à l'Ensemble du Personnel, LE MONDE, Oct. 7, 1999, at 6 (reporting that the leader of France's governing socialist party asserted that "although our goal is not to socialize the means of production, one can neither leave the private sector without rules . . . nor allow stockholders alone to decide, without any input from employees, what to do solely due to shareholders' purely financial interests").
110. Mark J. Roe, German Codetermination and German Securities Markets, 1998 COLUM. BUS. L. REV. 167, 178.
111. See Lorenzo Stanghellini, Corporate Governance in Italy: Strong Owners, Faithful Managers: An Assessment and a Proposal for Reform, 6 IND. INT'L & COMP. L. REV. 91, 180 (1995) ("[T]he Italian legal framework discourages investors unable to enter in[to] the control group from entering the company at all.")
112. Minority stockholders in Mediaset, Silvio Berlusconi's principal corporate vehicle - Berlusconi has a wheeler-dealer reputation - insisted on a corporate charter term requiring super-majority board approval for any related party transaction. They expected board representation and, hence, veto power. Board approval for such transactions is not required under Italian corporate law, but contract law could fill the gap. See Giovanni Battista Bisogni, Autonomia ed eteronomia nella disciplina del rapporti associativi della publicly held corporation, 42 RIVISTA DELLE SOCIETA 649, 702-03 n.116 (1997).
113. LINDA WEISS, CREATING CAPITALISM: THE STATE AND SMALL BUSINESS SINCE 1945, at 104-05, 127-38 (1988) (arguing that the Christian Democrats strengthened small Italian firm to provide political stability in the face of popular strong support for leftist politics, of a mobilized labor movement, and of intense capital-labor conflict).
114. Masahiko Aoki, Hugh Patrick & Paul Sheard, The Japanese Main Bank System: An Introductory Overview, in THE JAPANESE MAIN BANK SYSTEM: ITS RELEVANCE FOR DEVELOPING AND TRANSFORMING ECONOMIES 3, 3-48 (Masahiko Aoki & Hugh Patrick eds., 1994).
115. See generally Ronald J. Gilson & Mark J. Roe, Lifetime Employment: Labor Peace and the Evolution of Japanese Corporate Governance, 99 COLUM. L. REV. 508 (1999).
116. La Porta et al., supra note 7, at 476-77, 482, 484. In addition, institutions that are themselves diffusely owned were made transparent in the ownership index, so even if a firm had a twenty-percent shareholder that was a diffusely-owned bank, the firm was classified as diffusely owned. Id. at 477.
117. Masahiko Aoki, Toward an Economic Model of the Japanese Firm, 28 J. ECON. LITERATURE 1, 14 (1990).
118. The goals of a shareholder-creditor - the typical large Japanese shareholder - are not the shareholder-wealth maximization goals of a pure, diversified shareholder, but rather correspond more closely to the goals of a lifetime employee; ownership fits with employment. Banker-shareholders, like long-term employees, are more risk-averse than pure stockholders.
119. Przeworski, supra note 2, at 835.
120. See ROE, THE QUALITY OF CORPORATE LAW ARGUMENT AND ITS LIMITS, supra note 61.
121. JONAS AGNBLAD, ERIK BERGLÖF, PETER HÖGFELDT & HELENA SVANCAR, OWNERSHIP AND CONTROL IN SWEDEN: STRONG OWNERS, WEAK MINORITIES, AND SOCIAL CONTROL (Working Paper, 2000) (on file with the Stanford Law Review).
122. Luigi Zingales, The Value of the Voting Right: A Study of the Milan Stock Exchange Experience, 7 REV. FIN. STUD. 125, 146-47 (1994);
123. cf. Clas Bergström & Kristian Rydqvist, Ownership of Equity in Dual-Class Firms, 14 J. BANKING & FIN. 255, 267 (1990) ("[D]ata do not support the argument that dual classes are used [in Sweden] for wealth expropriation by holding control with little equity."). But note what law cannot explain: the continuing dominance of blockholders in those public firms.
124. Clas Bergström & Kristian Rydqvist, The Determinants of Corporate Ownership: An Empirical Study on Swedish Data, 14 J. BANKING & FIN. 237, 252 (1990) (emphasis added).
125. MARTIN HOLMÉN & PETER HÖGFELDT, CORPORATE CONTROL AND SECURITY DESIGN IN INITIAL PUBLIC OFFERINGS 38 (Stockholm Sch. of Econ. Working Paper, 1999) (emphasis added) (on file with the Stanford Law Review).
126. Franks & Mayer, supra note 4, at 25-26.
127. See generally Lucian Arye Bebchuk, Reinier Kraakman & George G. Triantis, Stock Pyramids, Cross-Ownership, and Dual Class Equity: The Mechanisms and Agency Costs of Separating Control from Cash-Flow Rights, in CONCENTRATED CORPORATE OWNERSHIP 295 (Randall K. Morck ed., 2000);
128. LUCIAN ARYE BEBCHUK, A RENT-PROTECTION THEORY OF CORPORATE OWNERSHIP AND CONTROL (Nat'l Bureau of Econ. Research Working Paper No. 7203, 1999) (on file with the Stanford Law Review);
129. LUCIAN ARYE BEBCHUK, A THEORY OF THE CHOICE BETWEEN CONCENTRATED AND DISPERSED OWNERSHIP OF CORPORATE SHARES AND VOTES (Harv. Law & Econ. Working Paper, 1998); cf. La Porta et al., supra note 7.
130. See, e.g., Almar Latour & Greg Steinmetz, Swedish Giant: Barnevik Sets About Task of Preserving Wallenberg Empire, WALL ST. J., May 18, 1998, at A1 (reporting that Peter Wallenberg, owner of a Swedish business empire, might view short-term goals as not necessarily serving society's best interests).
131. Cf. Lucian A. Bebchuk & Mark J. Roe, A Theory of Path Dependence in Corporate Ownership and Governance, 52 STAN. L. REV. 127 (1999) (interest groups slow corporate evolution).
132. ALFRED D. CHANDLER, JR., SCALE AND SCOPE: THE DYNAMICS OF INDUSTRIAL CAPITALISM 240 (1990).
133. See also Alfred D. Chandler, Jr. & Herman Daems, Introduction, in MANAGERIAL HIERARCHIES: COMPARATIVE PERSPECTIVES ON THE RISE OF THE MODERN INDUSTRIAL ENTERPRISE 1, 6 (Alfred D. Chandler, Jr. & Herman Daems eds., 1980) ("Until World War II, the British economy was for the most part an example of family capitalism.");
134. Leslie Hannah, Visible and Invisible Hands in Great Britain, in MANAGERIAL HIERARCHIES: COMPARATIVE PERSPECTIVES ON THE RISE OF THE MODERN INDUSTRIAL ENTERPRISE 41, 53 (Alfred D. Chandler, Jr. & Herman Daems eds., 1980) ("The separation of ownership and control . . . had not progressed far enough to displace founding or family directors from company boards . . . and 119 [out of the 200 largest firms in Britain], or 59.5 percent, [had founding or family directors] in 1948.");
135. cf. Leslie Hannah, Mergers, Cartels and Concentration: Legal Factors in the U.S. and European Experience, in LAW AND THE FORMATION OF THE BIG ENTERPRISES IN THE 19TH AND EARLY 20TH CENTURIES 306, 306 (Norbert Horn & Jürgen Kocka eds., 1979) ("In the period before 1914 . . . it seems that the United States and Germany led the industrial world in introducing large-scale corporate organisation, whereas Britain retained a stronger inherited structure of family enterprise.").
136. See also THE DECLINE OF THE BRITISH ECONOMY 5 (Bernard Elbaum & William Lazonick eds., 1987) ("British industrialists clung to family control of their firms").
137. Arthur Francis, Families, Firms and Finance Capital: The Development of UK Industrial Firms with Particular Reference to Their Ownership and Control, 14 SOCIOLOGY: J. BRIT. SOC. ASS'N 1, 1 (1980);
138. cf. Steve Nyman & Aubrey Silberston, The Ownership and Control of Industry, 30 OXFORD ECON. PAPERS 74, 74, 85-86 (1978) (concluding that "evidence on the extent of ownership control in British industry . . . shows that the extent of managerial control is more limited than has been thought and may not have an inexorable tendency to increase [in light of evidence that in 1975 at least forty percent of the 250 largest firms had a dominant blockholder]").
139. John Scott, Corporate Control and Corporate Rule: Britain in an International Perspective, 41 BRIT. J. SOC. 351, 366-67 (1990) (reporting on the "decline of family control" from 1976 to 1988).
140. CHANDLER, supra note 92, at 240.
141. See Ralf Dahrendorf, The Third Way and Liberty: An Authoritarian Streak in Europe's New Center, FOREIGN AFF., Sept.-Oct. 1999, at 13;
142. Andrew Sullivan, The End of Britain, N.Y. TIMES MAG., Feb. 21, 1999, at 39, 54 ("[Blair] had long since lost faith in the sclerotic European social-democratic model . . . . [H]e made some . . . Clintonite changes . . . . All were worthy ameliorations of Thatcherism - but no reversal.").
143. ORGANIZATION FOR ECONOMIC COOPERATION & DEVELOPMENT, Financial Market Trends, Shareholder Value and the Market in Corporate Control in OECD Countries, Feb. 1998, at 15, 18 tbl.2. In 1985, British domestic stock market as a percentage of gross domestic product more than doubled from that of 1975. In contrast, the American percentage rose only modestly. Id. at 18 tbl.2. Privatization complicates but does not contradict the social democracy thesis, accounting for some but not all of the 1985 increase; the largest 250 British firms included thirteen government corporations in 1976 and still had eleven in 1988. Scott, supra note 95, at 366. Note that firms had been nationalized either because markets demanded a downsizing that political actors would not permit or because of ideologies of state ownership. When these social democratic, or socialist, sentiments declined, the government began to privatize these firms.
144. NEVILLE KIRK, CHANGE, CONTINUITY AND CLASS: LABOUR IN BRITISH SOCIETY 159, 169 (1998).
145. A social democratic Britain might have directly attacked Britain's financial markets. But sequencing was important. British securities market institutions arose early, while it was a non-social democratic nation. Their rise yielded an interest group - the City in London that could delay its own demise until electoral results changed. (Labour governments were not continuously in power in the half-century after World War II, losing to Conservatives as often as beating them.) Second, London was already an international financial center whose damage would diminish earnings from abroad. Many City institutions were not directly corporate-governance related - and hence would not directly raise the social democratic ire: they involved trading in government bonds, both British and foreign, corporate bond trading, and insurance. Social democratic governments would not have sympathized with their construction, but because they were already in place, they might have survived for a few years, while the government pursued policies it valued more highly, such as nationalizing the nation's largest firms.
146. E.g.. FREDERICK JACKSON TURNER, THE FRONTIER IN AMERICAN HISTORY (1920).
147. See, e.g., John R. Commons, Is Class Conflict in America Growing and Is it Inevitable?, 13 AM. J. SOC. 756 (1908),
148. reprinted in III CLASSICS IN INSTITUTIONAL ECONOMICS 112, 120 (Malcolm Rutherford & Warren J. Samuels eds., 1997).
149. MARK J. ROE, STRONG MANAGERS, WEAK OWNERS: THE POLITICAL ROOTS OF AMERICAN CORPORATE FINANCE vii-xvi (1994).
150. Id. at 26-36, 48-49 (discussing populist anti-finance politics).
151. See, e.g., John R. Commons, History of Labor in the United States: 1896-1932 (1935),
152. reprinted in CLASSICS IN INSTITUTIONAL ECONOMICS, supra note 102, at 438, 454-55; Commons, supra note 102, at 118-19.
153. Cf. E. E. SCHATTSCHNEIDER, THE SEMISOVEREIGN PEOPLE: A REALIST'S VIEW OF DEMOCRACY IN AMERICA (1960) (arguing that politicians seek to divide the electorate on issues in which the divider will be allied with a majority of the division). I hardly mean that only the United States has had ethnic conflict, but rather that America's long-simmering race and ethnic divisions stymied economic-based coalitions that arose in many other nations.
154. In a major undertaking, the European Corporate Governance Network has pulled together Europe-wide ownership data for the mid-1990s. Becht & Röell, supra note 96, at 1053. The data is hard to assemble because many nations lack transparent ownership data (i.e., no immediately ready historical databases from SEC filings). Coming up with nation-by-nation data that stretch back for decades (and onto which one could regress political change) is a task for the future, perhaps an impossible one.
155. Seymour Martin Lipset & Gary Marks, IT DIDN'T HAPPEN HERE - WHY SOCIALISM FAILED IN THE UNITED STATES 275 (2000).
156. ROE, supra note 103, at 51-101.
157. Id. at 7-8.
158. See generally Mark J. Roe, Backlash, 98 COLUM. L. REV. 217 (1998).
159. I expand on this in Mark J. Roe, Rents and their Corporate Law Consequences, 53 STAN. L. REV. _ (forthcoming 2001),
160. Mark J. Roe, The Shareholder Wealth Maximization Norm and Industrial Organization, 149 U. PA. L. REV. _ (forthcoming 2001).
161. Monopoly rents create indeterminacy in corporate ownership and governance. Rents allow different players to get value out of the firm, and happenstance may lead one player to win in one political environment and another to win elsewhere. Rents might induce concentrated ownership to tighten up the firm when weak competition cuts managers slack. But if large size is the predicate to their getting rents, then shareholders may put up with that slack as the price to pay for whatever rent is left. Monopoly induces a trade-off for shareholders: more slack if the necessary size precludes ownership concentration, but more monopoly profit to pay for it. When competition in the American economy was weaker, and oligopoly stronger, mild pressures to soften the workplace and to make managers socially responsible to employee constituencies were more effective than they are today. See generally Roe, supra note 28.
162. THE FEDERALIST No. 10 (James Madison): "[A more populous nation] . . . renders factious combinations less to be dreaded . . . . The smaller the society, . . . the fewer the distinct parties and interests, the more frequently will a majority be found of the same party [and] . . . the more easily will they concert and execute their plans of oppression."
163. Whether path dependence diminishes the demand for corporate change is analyzed in Bebchuk & Roe, supra note 91.
164. See generally KARL POLANYI, THE GREAT TRANSFORMATION (1944) (arguing that markets destabilize society, inducing a reactive craving for stability).
165. See RAGHURAM G. RAJAN & LUIGI ZINGALES, THE POLITICS OF FINANCIAL DEVELOPMENT 76 (Univ. of Chicago & NBER Working Paper, 1999) (on file with the Stanford Law Review) (arraying data showing that in 1913, total securities issuances as a percentage of GNP were higher in France than in the United States and only slightly lower in Germany than in the United States). From 1900 to 1913, French and Japanese firms sold more stock in their nations than American firms did in the United States.
166. WENDY CARLIN & COLIN MAYER, FINANCE, INVESTMENT AND GROWTH 17, 37 (Oxford Univ. Working Paper, 1998).
167. See, e.g., Ruggiero, supra note 6, at 86 ; Peter Gumbel, The Hard Sell: Getting Germans to Invest in Stocks, WALL ST. J., Aug. 4, 1995, at A4 ("No amount of encouragement or cajoling can persuade the German public to invest in stocks.").
168. A stronger cultural possibility is that continental Europe tolerates hierarchy more than does the United States, and this tolerance both facilitates family-owned firms and social democratic politics. Culture could contribute, and to some extent does, to build both.
169. Ailsa Röell, The Decision to Go Public: An Overview, 40 EUR. ECON. REV. 1071, 1072, 1078-79 (1996) (finding a "negative relationship between the size of the stock market and the proportion of GDP devoted to public pensions . . .").
170. A major Europe-wide research network, leading financial economists, including one Nobel Prize winner, and leading legal commentators have taken up the law-driven theme. See, e.g., Becht & Roëll, supra note 96; John C. Coffee, Jr., The Future as History: The Prospects for Global Convergence in Corporate Governance and Its Implications, 93 NW. U. L. REV. 641 (1999); La Porta et al., supra note 7, at 511 ("[O]wnership concentration is a consequence of poor legal protection of minority shareholders.");
171. Franco Modigliani & Enrico Perotti, Protection of Minority Interest and the Development of Security Markets, 18 MANAGERIAL & DECISION ECON. 519 (1997);
172. Bebchuk, A THEORY OF THE CHOICE BETWEEN CONCENTRATED AND DISPERSED OWNERSHIP OF CORPORATE SHARES AND VOTES, supra note 89, at 1 ("[W]hen the corporate law system in an economy is lax, the resulting large size of private benefits will tilt their choices in favor of corporate structures with a controlling shareholder."). The legal theory can be stated abstractly and, for many nations, convincingly: if corporate law is very lax, then all else equal ownership will be concentrated and separation weak. But the legal theory should not be extended beyond what it can explain. One should not jump to the converse - that if a nation has concentrated ownership that concentration must be due to lax corporate law: there are other predicates whose absence impedes separation. Political predicates are a) probably more important for the richer developed nations than constructing technical corporate law and b) less malleable. If the political foundation is absent, public and business players may not have bothered with building good corporate law that would support separation.
173. I evaluate the limits to the corporate law argument in ROE, THE QUALITY OF CORPORATE LAW ARGUMENT AND ITS LIMITS, supra note 61.
174. Whether the common law did in fact protect minority stockholders well is open to question. See Louis Loss & JOEL SELIGMAN, FUNDAMENTALS OF SECURITIES REGULATION 26-27 (3d ed. 1994) (claiming that civil liability under the 1933 Act was an "advance over the hypertechnical common law");
175. William O. Douglas, Protecting the Investor, 23 YALE L. REV. 521, 524 (1934) ("[The 1933 Act] provides a better opportunity for reparation and compensation than the common law ever afforded. The common law with its insistence upon the presence of an intent on the part of the seller to defraud, of a causal relation between the misstatement and the damage, and of a reliance by the buyer on the misstatement, presented almost insuperable procedural barriers to recovery.") (emphasis added). For examples of the procedural difficulties raised under common law prior to the 1933 Act, see Old Dominion Copper Mining & Smelting Co. v. Lewisohn, 210 U.S. 206 (1908); Mandelbaum v. Goodyear Tire & Rubber Co., 6 F.2d 818 (8th Cir. 1925); Brennan v. Nat'l Equitable Inv. Co., 160 N.B. 924 (N.Y. 1928); and Dinsmore v. Nat'l Hardwood Co., 208 N.W. 701 (Mich. 1926).
176. Andrei Shleifer & Robert W. Vishny, Large Shareholders and Corporate Control, 94 J. POL. ECON. 461, 465 (1986) ("Our analysis indicates that [by monitoring managers,] large shareholders raise expected profits and the more so the greater their percentage of ownership.").
177. ROE, supra note 103, at 260-61 (showing how large owners can mitigate); Jeremy C. Stein, Efficient Capital Markets, Inefficient Firms: A Model of Myopic Corporate Behavior, 104 Q. J. ECON. 655 (1989).
178. Cf. Andrei Shleifer & Lawrence H. Summers, Breach of Trust in Hostile Takeovers, in CORPORATE TAKEOVERS: CAUSES AND CONSEQUENCES 33-56 (Alan J. Auerbached., 1988).
179. Actually, if the price gap is low, then private benefits would seem low and minority stockholders protected. But when a gap is present, the gap could be
180. Michael J. Barclay & Clifford G. Holderness, Private Benefits from Control of Public Corporations, 25 J. FIN. ECON. 371 (1989) (finding an average twenty percent voting premium on blocks in the United States); Zingales, supra note 85, at 125 (6.5% voting stock premium in Sweden, 5.4% in the United States, 82% in Italy);
181. JULIAN FRANKS & COLIN MAYER, OWNERSHIP AND CONTROL OF GERMAN CORPORATIONS (Working Paper, 1999)
182. (finding a 10-15% premium to blockholder over minority stockholders in block trades in German firms) (on file with the Stanford Law Review).
183. RAJAN & ZINGALES, supra note 117, at 59.
184. See Bernard Black & Reinier Kraakman, A Self-Enforcing Model of Corporate Law, 109 HARV. L. REV. 1911 (1996) (Russia);
185. Jeffrey D. Sachs & Katharina Pistor, Introduction: Progress, Pitfalls, Scenarios, and Lost Opportunities, in THE RULE OF LAW AND ECONOMIC REFORM IN RUSSIA 1, 3 (Jeffrey D. Sachs & Katharina Pistor eds., 1997); Röell, supra note 121, at 1079 (Italy);
186. Lorenzo Stanghellini, Corporate Governance in Italy: Strong Owners, Faithful Managers, 6 IND. INT'L & COMP. L. REV. 92, 180 (1995) ("[T]He Italian legal framework discourages investors unable to enter into the control[ling] group from entering the company at all."); Zingales, supra note 85, at 146-47 (discussing the difficulties of challenging intragroup reallocations of corporate ownership in Italian courts).
187. KIM R. HOLMES, BRYAN T. JOHNSON & MELANIE KIRKPATRICK, 1997 INDEX OF ECONOMIC FREEDOM 160, 185, 199, 346, 422, 457 (1997) (asserting that Denmark, Finland, Germany, Norway, Sweden, and the United States have high levels of protection of private property and largely efficient legal systems);
188. cf. Ross Levine, Law, Finance, and Economic Growth, 8 J. FIN. INTERMEDIATION 8, 14-15, 20 (1999) (indexing the risk that government will not respect a contract it has signed: low for the United States, but lower for France, Germany, and Scandinavia).
189. Jeffrey D. Sachs & Andrew M. Warner, Executive Summary, in WORLD ECONOMIC FORUM, THE GLOBAL COMPETITIVENESS REPORT 1998, at 24.
190. Stuart Banner, The Origin of the New York Stock Exchange, 1791-1860, 27 J. LEGAL STUD. 113, 114 (1998);
191. George J. Benston, Required Disclosure and the Stock Market: An Evaluation of the Securities Exchange Act of 1934, 63 AM. ECON. REV. 132 (1973). The following summary should give one pause before concluding that hard corporate law is the sine qua non (as opposed to a transaction-cost-reducing luxury) to taming dominant stockholders in family-run public firms: When the NYSE first instituted [its disclosure] requirements in the late-nineteenth century, many listed companies were effectively family businesses with a minority public stake [similar to European continental firms today]. The original proprietors were reluctant to abandon their instinct for secrecy . . . . Nevertheless, the NYSE prevailed. Beginning . . . in 1910, the Exchange's Committee on Stock List carried out a vigorous and successful campaign to improve the quality and quantity of disclosure . . . . [T]He turning point for disclosure practices [was] 1900, rather than 1933.
192. Paul G. Mahoney, The Exchange as Regulator, 83 VA. L. REV. 1453, 1469-70 (1997) (emphasis added).
193. Banner, supra note 135, at 126, 132 (explaining that the NYSE created its own "miniature legal system," with expulsion as the principal sanction).
194. Jensen & Meckling, supra note 8, at 304-07.
195. Cf. Marc Goergen, Corporate Governance and Economics Performance in the United Kingdom, in CORPORATE GOVERNANCE AND ECONOMIC PERFORMANCE 168 (Klaus Gugler ed., preliminary typescript version, 2000) ("[P]re-IPO shareholders of British firms on average tend to lose majority control two to three years after the flotation.").
196. Yoshiro Miwa & J. Mark Ramseyer, Corporate Governance in Transitional Economies: Lessons from the Prewar Japanese Cotton Textile Industry, 29 J. LEGAL STUD. 171, 199 (2000).
197. Emmons & Schmid, supra note 44, at 28 (1998).
198. RAJAN & ZINGALES, supra note 117, at 39-51.
199. Curtis J. Milhaupt, Property Rights in Firms, 84 VA. L. REV. 1145, 1173 (1998). As noted before, we discuss the world's modern, rich democratic nations, not history's totalitarian or extremely statist regimes. Among the rich and democratic, governments vary in their influence over firms' investments and operations.
200. PAUL J. ZAK & STEPHEN KNACK, TRUST AND GROWTH 1-3, 18 (Claremont Working Paper, 1998)
201. (building on DOUGLASS C. NORTH, INSTITUTIONS, INSTITUTIONAL CHANGE AND ECONOMIC PERFORMANCE (1990)).
202. See also FRANCIS FUKUYAMA, TRUST: THE SOCIAL VIRTUES AND THE CREATION OF PROSPERITY 8-12 (1995) (arguing that trust is necessary for economic growth);
203. RUSSELL HARDIN, TRUST AND SOCIETY (N.Y.U. Working Paper, 1998) (arguing that trust is insufficient, and that law and enforcement are necessary, for economic growth);
204. ROBERT D. PUTNAM, MAKING DEMOCRACY WORK: CIVIC TRADITIONS IN MODERN ITALY (1993);
205. Mark Granovetter, Economic Action and Social Structure: The Problem of Embeddedness, 91 AM. J. SOC. 481 (1985) (arguing that societal relations are embedded within economic behavior at a level higher than that proposed by economists).
206. Even if we adjust for their smaller economies by looking only at mid-sized firms, the result does not change, as the Appendix shows. The Scandinavian nations move toward the middle of the diffuse ownership list; and if we drop the concentration cutoff from 20% to 10%, the Scandinavian nations have very few diffusely-owned firms. The high-trust nations are also high diffuse-ownership nations. Social democracy, not trust, best explains the data.
207. Cf. Stewart Fleming, The Neuer Markt's Wild Ride, INST. INV., Apr. 1999, at 76, 77, 80 (claiming that new listings in Germany's Neuer Markt are expanding disproportionately from high tech - and presumably high human capital - firms that are adding jobs).
208. ALBERT, supra note 26, at 169-92.
209. ROE, supra note 103, at xiii-xvi, 283-87.
210. See JOHN HENRY MERRYMAN, THE CIVIL LAW TRADITION: AN INTRODUCTION TO THE LEGAL SYSTEMS OF WESTERN EUROPE AND LATIN AMERICA 27-34 (1969) (discussing the importance of "complete, coherent, and clear" legislation in code-based systems such as those of France and Germany).