Lecture 6 Corporate Governance

Question 1

Earlier lecture.

Answer 1

Corporate governance issues derive from the historical separation of member from company.
Doctrine of separate corporate personality expresses the emergence of member’s distinct property interest as share became a piece of property.
Doctrine rarely challenged as it expresses the ‘real state of things’.

Question 2

Governance Problems.

Answer 2

Director Accountability.
Controlling shareholder accountability.
Disempowerment of small dispersed shareholders.

In contrast- Partnership made of and indistinguishable from members.
Ownership and control therefore contained in act of membership.

Question 3

United States.

Answer 3

New Jersey law.

Massive corporations, interconnected over many sectors.

Question 4

Progressives.

Answer 4

BERLE & MEANS.
The Modern Corporation and Private Property (1932).

First extensive empirical study of 200 largest U.S. corporations.
Informative to Roosevelt’s New Deal.

Question 5

Key Issues.

Answer 5

Dispersal of stockholding among many.
Small holdings of managers.
Divergent interests between stockholders and management.

Question 6

The Evolution of Control.

Answer 6

Control through complete ownership.
Majority control.
Control Through Legal Device.
Minority Control.
Managerial Control.

Question 7

Complete Ownership.

Answer 7

Single individual or small group own all or almost all stock.
Have legal powers of ownership and can use it to elect and dominate management.
Ownership and control combined in one hand.

Question 8

Majority Control.

Answer 8

Retains much of powers of sole owner .
Minority may block special resolutions such as charter amendments.
N/A if other stockholders scattered.
Minority have lost control over their ownership.
But corporation still run by owners.

Question 9

Control by Legal Device.

Answer 9

Scattered interests give working control.
Majority voting when proxies gained.
Rockefeller, 14.9% of Standard Oil- sought resignation of chairman Col.Stewart, who refused Rockefeller the proxy machinery.
R’ personnally circulated s/h’s and gained 59% of vote against entire board.

Question 10

Minority Control.

Answer 10

Scattered interests give working control.
Majority voting when proxies gained.
Rockefeller, 14.9% of Standard Oil- sought resignation of chairman Col.Stewart, who refused Rockefeller the proxy machinery.
R’ personnally circulated s/h’s and gained 59% of vote against entire board.

Question 11

Managerial Control.

Answer 11

Wide distribution of stockholdings.
Proxy committee nominated by management.
No control over management.
Little stock held by management.
Control disconnected from ownership.

Question 12

Pennsylvania Railroad Co. 1929.

Answer 12

Penn.Rd.Employees Provident &Loan Association-39,350 shares - 0.34%.
William Potts-23,738 shares- 0.2%.
Top 20 stockholders-310,518shares- 2.7%.
19 directors- 0.7%.

Question 13

Nature of Ownership.

Answer 13

Passive.
Devoid of ‘spiritual values’.
Value dependent on outside forces-dividend declared by directors.
Individual wealth liquid.
Wealth cannot be directly employed by owner-scp .
Lacked the responsibility of ownership- limited liability.

Question 14

Resulting claims of ownership.

Answer 14

Party to information on true value of share.
Assured liquidity and transferability.
Other ownership rights not applicable.
historical relationship with property right only.
Forfeited rights and obligations of property ownership.

Question 15

What to do? Early Berle.

Answer 15

Protection for shareholders and prevention of managerial abuse through ‘hard law’.
Strict fiduciary duties over powers to..
Issue stock.
Declare or withhold dividends.
Acquire stock in other corporations.
Power to merge.
Power to amend corporate charter (1930-2)44 HLR 1049.

Question 16

M. Dodd(1931-2) HLR 45 1162.

Answer 16

The degraded property rights of shareholders should defer to society.
Doctrine of separate corporate personality made clear that fiduciary duty owed to corp. not shareholders.
Corporation is the amalgamation of many individuals efforts not just a vehicle to expand private wealth.

Question 17

Berle (1931-32) HLR 1367.

Answer 17

Countered that Dodd’s approach failed to counter managerial abuse.
Gave managers unjustifiable discretion.
Small investors would be failed in the absence of strong fiduciary duties, strong government or (even perhaps) socialism.

Question 18

Modern Corporation.

Answer 18

Characterised by public interest concerns.
Collective not entrepreneurial capitalism.
‘”the rigid enforcement of property rights” of passive shareholders would give way in the face of a “convincing system of community obligations”’ (121) .
Management “purely neutral technocracy” .
fair wages, security to employees, reasonable service to their public, and stabilisation of business’.

Question 19

New Deal America.

Answer 19

Little competition in oligopoly.
Corporations asset rich, shareholder dividend lower priority.
Products high price but jobs and benefits secure.
Allegiance between industry, unions and government.
Secured greater social stability and equality.

Question 20

Talbot ‘Progressive Corporate Governance for the 21sr Century’ .

Answer 20

Management-positive managerialists.
Management-negative managerialists.
Non managerialists .

Question 21

(end of page 3)

Answer 21

bb