CORPORATE GOVERNANCE IN THE UNITED STATES:
THE RISE OF FIDUCIARY CAPITALISM
A REVIEW OF THE LITERATURE

James P. Hawley
and
Andrew T. Williams

Hawley: 510-631-4204
email: jhawley@stmarys-ca.edu

Williams: 510-631-4610
email: awilliam@stmarys-ca.edu

Graduate Business Programs
Saint Mary's College of California
Moraga, California 94575 USA

January 31, 1996

This is a background paper prepared for the Organization for Economic Cooperation and Development. As a literature review it quotes widely and liberally from the corporate governance literature, much of which is in the US law and economy scholarly tradition. The paper also raises some questions and concerns which have not been a main focus of governance scholarship. We wish to thank the following individuals for conversations with us as part of preparing this paper: Edwin Epstein, Ron Gilson, Joe Grundfest, Richard Koppes, and John Shoven.

TABLE OF CONTENTS

PART I UNITED STATES PATTERNS OF OWNERSHIP AND CONTROL: THE EMERGENCE OF FIDUCIARY CAPITALISM

• A Brief History
• US Financial Institutions

• Bank Trust Departments
• Mutual Funds
• Private Pension Funds
• Public Employee Pension Funds

• Conclusions

Appendix: Statistical Tables

• Figure 1: Institutional Investor Asset Growth by Category: 1970-1994
• Figure 2: Percentage Ownership of US Equities: 1950 - 1994
• Figure 3: Pension Fund Equity Holdings: 1980, 1988, 1993 and 1994
• Figure 4: Private Trusteed Pensions-Defined Benefit vs. Defined Contributions
• Figure 5: Civilian Employment by Level of Government: 1940 - 1982
• Figure 6: Economically Targeted Investments As a Proportion of Total Assets, Largest 20 Public Funds
• Figure 7: Institutional Investor Concentration of Ownership in the Top 1000 US Corporations: 1987-1994
• Figure 8: Relative Growth in Market Value, all Domestic Corporations vs. Top 1000: 1990-1994
• Figure 9: Concentration of Institutional Investor Holding by the Largest 25 Institutions in the Largest 25 US corporations: 1985, 1990, mid-1994 and mid-1995
• Figure 10: Concentration of Institutional Investor Holdings by the Largest 25 Institutions in the Largest 25 Corporations (as of mid-1994).
• Figure 11: The 25 Pension Funds with the Largest Indexed Equities: 1994

PART II THE FINANCE APPROACH TO CORPORATE GOVERNANCE

• The Finance Model in Brief

• Lessons of the Finance Model
• Critiques of the Simple Finance Model

• Alternative Views of Corporate Governance

• The Stewardship Model
• The Stakeholder Model
• The Political Model

• Conclusions

PART III THE LINK BETWEEN CORPORATE GOVERNANCE AND CORPORATE PERFORMANCE

• Introduction
• The Hypothesized Relationship
• The Evidence

• Blair
• Gordon and Pound
• Donaldson and Davis
• Karpoff, Malatesta and Walkling
• Strickland, Wiles and Zenner
• Opler and Sokobin
• Wahal
• Grundfest

• Conclusions

PART IV MONITORING AND CORPORATE GOVERNANCE IN THE UNITED STATES

• Introduction
• The Political Model of Corporate Governance
• Monitoring by Institutional Investors

• Institutional Voice
• Multiple Monitors
• The Partial Institutionalization of Insurgency

• Generic Impediments to Monitoring

• Regulation of Voice: Four Examples
• Regulation of Exit: Four Examples

• Relationship Investing as an Alternative to Monitoring a Fragmented Portfolio
• Increasing the Focus on Boards of Directors

• Contestability in the Board Room
• Critics' Agenda

• Globalization of Monitoring and Global Financial Markets: Convergence of Governance Systems?
• Conclusion and Some New Directions

• Monitoring What and to What End?
• Universal Owners: Competition and Externalities

PART V POLICY IMPLICATIONS

• Introduction
• Regulatory and Legal Reforms
• Deregulation of Voice

• SEC Communication Rules
• Redefine Control
• Promote Relational Funds

• Further Regulation of Voice

• Incentives to Monitor
• Mandate A Duty to Monitor
• Disclosure and Democratization of Voting and Proxy Procedures

• Deregulation of Exit

• Insider Trading

• Further Regulation of Exit

• Limit Voting Rights of Short-Term Holdings
• Tax Incentive for Long-Term Holdings

• Reforms on the Corporate and Institutional Investor Level
• Corporate

• Contractual Representation
• Corporate Mission
• Management Compensation
• Board of Directors: Representatives, Responsiveness and Democratization

• Institutional

• Minimize Diversification
• Professional or Institutional Directors
• Align Managers Incentives Properly
• Encourage Blockholder and Trade Groups
• Establish Lead Monitors
• Public Disclosure
• Safe Guard Public Pension Funds

• Other Proposal Areas
• ESOPs: Employee Stock Ownership Plans
• Conclusions

PART VI SUMMARY, CONCLUSIONS AND QUESTIONS

• United States Patterns of Ownership and Control: The Emergency of Fiduciary Capitalism
• The Financial Approach to Corporate Governance
• The Link Between Corporate Governance and Corporate Performance
• Monitoring and Corporate Governance in the United States
• Corporate Governance Reforms
• Fiduciary Capitalism: Some Unanswered Questions

• Can Agents Watch Agents?
• What Are The Implications Of ‘Universal Ownership’?
• What Does It Mean To Maximize Shareholder Wealth?

BIBLIOGRAPHY

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