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Tuesday, May 13, 2014

Corporate Governance and Shareholder Dispersion

I like Christopher Bruner’s book a lot. It provides a major service to corporate law scholarship in focusing on the differences between corporate governance in the U.S. and the U.K., and calling on scholars to try to explain those differences. I find Bruner’s suggested explanation quite plausible, and very much appreciate his mix of theoretical and historical analysis. But simply nodding yes makes for boring blogging. So, I will use my first post in this book club to suggest an alternative explanation.

Bruner argues that the US prioritizes shareholder interests less than the UK, and does so because the US welfare system provides fewer protections for workers elsewhere. But perhaps the U.S. and the U.K. both prioritize shareholders similarly, but do so using different legal tools. Consider three stylized facts about shareholding in the two countries, all of which Bruner seems to accept. (1) Shareholding is somewhat less dispersed in the UK, so that in the typical public company it takes a smaller number of shareholders to create an effective voting bloc. (2) There are fewer key institutional investors active as shareholders in the UK, who can work together as shareholders in many companies. (3) Those British institutional investors are more geographically concentrated. These facts suggest that shareholder collective action via voting is more likely to be effective in the UK, and it is precisely that sort of collective action which British law protects more strongly than US law. Since such collective action was traditionally unlikely to be effective in the US, shareholders had to find different ways to protect themselves. Such protection includes shareholder suits and executive compensation tied to share prices.

Bruner anticipates some of this alternative explanation, but his response falls short in a few ways. He does consider that shareholder suits in the US may substitute for weaker voting rights, but argues that the protective effect of suits is unlikely to be strong enough to fully compensate. However, his argument on the weakness of suits is not very fully developed, and he admits that empirical evidence in either direction is weak. Moreover, he does not consider that the value of voting rights may differ in different countries based on ownership patterns, so that the relative value of competing methods of shareholder protection may differ. Finally, the only alternative form of shareholder protection in the US that Bruner considers is shareholder suits. There may be others, including stock-based compensation. Of course, such compensation is extremely controversial, with many (perhaps myself) seeing it as more a sign of broken corporate governance than as a cure. Still, Bruner’s argument would be more complete and convincing if he considered, and persuasively ruled out, this and other potential substitutes for voting within the American corporate governance system.

My suggested alternative analysis so far just mentions the US and the UK. How about Canada and Australia, the other two countries on which Bruner focuses? For them, I must admit that focusing in on the question of degree of shareholder dispersion leaves me rather confused as to Bruner’s message. For most of the book, I thought his point was that among these four countries with dispersed shareholding, the relationship between the social welfare state and shareholder orientation is reversed from what Mark Roe argues in comparing common law and continental systems. However, in his final chapter, Bruner considers evidence that in Australia and particularly Canada, there really are not many companies that lack a controlling shareholder or group. He then tries to fit Australia and Canada back into his story, but I must admit, I thought that was a pretty darn big deviation from the core story as I understood it, and one that deserved rather more than a few pages near the end of the book. But maybe I have misunderstood the logic of dispersed shareholding in his basic story, in which case, I apologize.

Posted by Brett McDonnell on May 13, 2014 at 09:44 AM | Permalink


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