Liquidity versus Control: The Institutional Investor as Corporate Monitor

Within academia, paradigm shifts occur regularly, some more important than others. As the takeover wave of the 1980s ebbs, a significant shift now appears to be in progress in the way the public corporation is understood. Above all, the new thinking emphasizes that political forces shaped the modern corporation. While the old paradigm saw the structure of the corporation as the product of a Darwinian competition in which the most efficient design emerged victorious, this new perspective sees political forces as constraining that evolutionary process and possibly foreclosing the adoption of a superior organizational form. Thus, my colleague Professor Mark Roe has argued that the Berle/Means corporation, in which ownership and control are separated, was not "an inevitably natural consequence" of the economic and technological forces that shaped modem capitalism, but rather was an adaptation to political forces that limited the scale, scope, and power of financial institutions. Absent these politically imposed constraints, he suggests, the evolution of the modem corporation might have resulted in the emergence of a very different dominant organizational form, one more nearly resembling the Japanese or German industrial system in which financial institutions are the major shareholders of, and closely monitor, industrial corporations. it should not be surprising that this new focus on political constraints has surfaced just as the combination of state antitakeover statutes and adverse judicial decisions has largely succeeded in eclipsing the hostile takeover as a mechanism of corporate accountability. During the late 1980s, political constraints seemed puny in comparison to the power of the market to drive corporate control transactions, but today the political vulnerability of the takeover movement is obvious. Still, there is an irony to the assertion that political forces crippled the potential monitoring capacity of financial institutions. Academics are raising the claim at the same time that (1) Congress is proposing to repeal or substantially relax the Glass-Steagall Act, which separates commercial from investment banking, and to amend related legislation that restricts interstate branching, and (2) the SEC is proposing to relax its proxy rules to facilitate shareholder collective action, particularly by institutional shareholders. If the public at large has a concern about financial institutions today, it is not their strength, but their weakness, that worries them. To the extent that the public perceives banks as reckless, unstable, or infirm, it may still favor their paternalistic regulation, but the populist image of a domineering J. P. Morgan seems to have been forever erased from the public's mind by the recent wave of insolvencies.