At the heart of any free economy is its capital markets. Investors put their money in these capital

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• At the heart of any free economy is its capital
  markets. Investors put their money in these
  capital markets with the expectation of a return
  on their investment. What assurance do these
  investors have that they will receive a fair
  return on their investment?
• Corporate governance is the set of processes and
  procedures that ensures investors a fair return
  on their investment. In practical terms,
  corporate governance includes
• the articles of incorporation of the company,
• the mechanics of the election of the board of
  directors,
• the responsibility of the board to act as
  fiduciaries of the shareholders,
• the responsibility of the board to hire,
  compensate, and fire senior management, and the
  public auditors of the company.

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Roe (1997) The Political Roots of American
Corporate Finance

• Roe (1990) Legal Restraints on Corporate
  Control, Journal of Financial Economics, v. 27.
  Table 1 (Show me the money!)
• Who has the money in U.S.? (in order of
  importance)
• Banks
• Pension funds
• Insurance companies
• Mutual funds
• Bank trust funds and holding companies

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Roe (1997) The Political Roots of American
Corporate Finance

• Roe (1990) Table 1
• Institutions that have the money are restricted
  from owning significant fraction of the voting
  stock of any company.
• How did we get to this situation?

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American Populism

• The widespread attitude in the U.S. that large
  institutions and concentrations of political or
  economic power are inherently undesirable, and
  should be reduced, whether or not the
  concentration serves a useful productive function.

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American Populism

• Today populist sentiments are directed at the
  government, mostly the federal government.
• In the 19th century, the populist movement,
  representing farmers in particular, gave impetus
  to the passage of the Sherman Antitrust Act.
• Frederick Jackson Turner in his Frontier Thesis
  Democracy, in our traditions, has rich
  connections to the yeoman farmer, involving
  freedom from the urban banker.
• William Jennings Bryan in his Cross of Gold
  speech, On the one side stand the moneyed
  interests, aggregated wealth and capital,
  imperios, arrogant, compassionless On the other
  side stand an unnumbered throng.

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Roe (1997)

• Page 16 In the early 1990s, the SEC relaxed its
  view that made informal communications among
  investors in the same company come under rules
  requiring proxy filings.
• Page 17 When monitoring of managers is likely to
  be important?
• Concentrated market, large fixed costs, and few
  growth opportunities.
• When monitoring of managers is NOT likely to be
  important?
• Highly competitive market, with little fixed
  long-term capital, and lots of growth
  opportunities.

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Roe (1997) Page 19 The Case for Competing
Corporate Governance Systems

• The current U.S. corporate governance system and
  the corporate control market has much to
  recommend for itself on both the economic and
  political dimensions.
• However, it would not be unwise to look at other
  corporate governance systems.
• Japan The keiretsu system Cross-holdings of
  stock. Banks lend to companies and own their
  stock.
• Germany Banks and insurance companies own many
  large blocks of stock.
• Perhaps we might allow features of other
  corporate governance systems to compete with our
  existing governance system.