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This is a draft chapter for a forthcoming research handbook on shareholder power and activism. This chapter provides an analysis of shareholder activism based on the so-called director primacy model of corporate governance, which argues for a board-centric, rather than a shareholder-centric, understanding of corporate governance.Even though the primacy of the board of director primacy is deeply embedded in state corporate law, shareholder activism nevertheless has become an increasingly important feature of corporate governance in the United States. The financial crisis of 2008 and the ascendancy of the Democratic Party in Washington created an environment in which activists were able to considerably advance their agenda via the political process. At the same time, changes in managerial compensation, shareholder concentration, and board composition, outlook, and ideology, have also empowered activist shareholders.There are strong normative arguments for disempowering shareholders and, accordingly, for rolling back the gains shareholder activists have made. Whether that will prove possible in the long run or not, however, in the near term attention must be paid to the problem of managing shareholder interventions.This problem arises because not all shareholder interventions are created equally. Some are legitimately designed to improve corporate efficiency and performance, especially by holding poorly performing boards of directors and top management teams to account. But others are motivated by an activist’s belief that he or she has better ideas about how to run the company than the incumbents, which may be true sometimes but often seems dubious. Worse yet, some interventions are intended to advance an activist’s agenda that is not shared by other investors.This chapter proposes managing shareholder interventions through changes to the federal proxy rules designed to make it more difficult for activists to effect operational changes, while encouraging shareholder efforts to hold directors and managers accountable.

Introduction A book in memory of Wassily Leontief would hardly be complete without some piece on the structure of the American economy. After all, Professor Leontief had developed his first input-output table using US data and subsequently published his first three books with the purpose of examining the structure of the American economy (Leontief, 1941, and 1951; Leontief et al., 1953). In this contribution we study the decline of labor compensation's share of US GDP in the 1980s and early 1990s. According to data on gross domestic product constructed by the Bureau of Economic Analysis (BEA) in the US Department of Commerce, this share steadily decreased from 59.1 to 56.0 percent between 1982 and 1997. This 3.1 percentage point drop may not seem notable. But it contrasts strongly against its steady rise of 6.6 percentage points from 1950 to 1970 (from 52.8 to 59.4 percent), when productivity rose rapidly. Moreover, it is clear that wage rates did not increase at the same pace as labor productivity during this period. Recent literature suggests many potential causes for this phenomenon. Some of the causes pertain to almost all industries of the American economy (shift effects), whereas others strongly relate to structural changes (share effects). We propose a multiplicative structural decomposition analysis (SDA) inspired by Dietzenbacher et al. (2000) to get insight into the relative empirical importance of these two categories of causes. [ABSTRACT FROM AUTHOR]

The preceding four chapters have explored the forces which shaped the evolution of business attitudes and the emergence of networks in the British and American cotton industries before 1860. Their findings are summarised in Table 6.1 which demonstrates that, whilst sharing the common concerns of production, profitability and market penetration, businessmen on either side of the Atlantic often displayed differences in priorities, perceptions and behaviour. These were born of the varying social, political and economic forces to which they were subject, and in turn were translated into the culture of business. For example, the production-driven strategies, detected in much of the United States cotton industry, clearly only partly resulted from resource allocation. Rather they derived from a combination of collective approaches to community development traceable even to the colonial period, from a faith in the power of technology which was rarely contradicted by the workforce and the habitual transience of the workforce plus a confidence in a protected domestic market. Yet in Britain eighteenth- and early nineteenth-century infant industry protection against cheap colonial imports allowed the successful development of cotton manufacturing. However, the constraints of a small, but strongly differentiated domestic market, combined with overseas opportunities, brought with it greater market complexity than was then the case in America and significantly enhanced the relative power of mercantile groups, as opposed to manufacturers. This factor, combined with a need for cheap imported raw materials, a reliance on overseas markets for business expansion and the social and political forces which brought free trade, led to a shift in government policy in favour of liberalism. [ABSTRACT FROM AUTHOR]

Historically family firms have been vital during industrialisation throughout the world and were synonymous with the early development of cotton textiles in both Britain and the United States. Whether as the result of institutional failure stemming from underdevelopment, or as a reflection of pre-industrial wealth patterns, or a combination of the two, family businesses lay at the heart of the First Industrial Revolution on either side of the Atlantic. In eighteenth-century Britain family firms proliferated in most branches of manufacturing, commerce and finance. With the spectre of bankruptcy ever present in the hazardous world of the eighteenth and nineteenth centuries, a combination of the common law partnership and unlimited liability meant that many businessmen preferred to be associated with their family connections than with outsiders. This was less a reflection of conservatism than a strategy to ameliorate the worst effects of uncertainty. In the United States too, the regional take-off of New England and Pennsylvania was based upon personal capitalism which proved crucial in the cotton industry. Similarly in the Southern states the, admittedly limited, development was founded on family-based, community-oriented firms. The popularity of family business in the early British and American cotton industries in both manufacturing and commercial arrangements was, therefore, a predictable response to instability. However, national differences in the sources of uncertainty, in economic circumstances, in the institutional environment and in that complex array of historical forces which shape both business and national culture mean that, whilst ownership and control were united in both countries, the form which this took and the strategies pursued were at times strikingly different (Gerschenkron 1953: 1–19; Kindleberger 1964: 113–14). [ABSTRACT FROM AUTHOR]

Promoting exports was the leading paradigm of Japanese industrial policy in the 1950s. This paradigm had a profound effect on the Japanese economic system. Unlike the 1946–9 period, in which the wartime legacies were either challenged or were simply inherited without much adaptation, Japanese developmentalism in the 1950s demonstrated a strong capacity for innovation in the new environment. It started the transformation from the military version to a trade version for peacetime. Kenneth Pyle (1992:139-40) writes that the United States twice played an important role in transforming the organizing structure of regional politics in Asia after both world wars ended. The establishment of the Pax Americana after World War II shaped Japan's postwar order. “The extraordinary rise of Japan as an economic superpower is, to a considerable extent, the result of this special relationship [with the United States]” (Pyle 1992:141). Beginning at the end of the 1940s, the Pax Americana determined the external environment of the Japanese economy in two decisive ways. First, the implementation of the Dodge Plan in 1949 directly linked the Japanese economy with the international market. As discussed in Chapter 3, Japan's wartime economic system had a strong anticapitalist orientation, marked by restraints on market competition and the rejection of the profit principle. In 1946–9, due to various structural factors, the managed economy not only continued but was even enhanced. When Japan was again forced to survive international competition after more than one decade's isolation, competitiveness and efficiency became the top issues in Japanese industrial policy. [ABSTRACT FROM AUTHOR]

Japanese industrial policy in 1946–9 was still dominated by the paradigm of the managed economy. Although many elements of the wartime economic system were greatly challenged by the democratic reforms of the occupation authority, the practice of priority production (keisha seisan hōshiki), which referred to concentrating human, financial, and material resources in the coal, iron and steel, and fertilizer industries in order to provide basic materials for postwar economic reconstruction in all industries, contributed greatly to transforming the wartime legacies into the postwar economy. Japan's defeat in World War II opened a new chapter in its history. Like Germany, Japan experienced a storm of democratic reforms by the Occupation Authority. What was the impact of these reforms on postwar Japan? For a long time, 1945 was considered by many people the “birthday for a new Japan” (Noguchi 1995), a “Year Zero, when everything could be remade and redone” (Fallows 1994:120). In academic discussions, the discontinuity argument presented by Yamada Moritarō prevailed. It held that the postwar democratic reforms changed Japanese capitalism fundamentally because the production cycle of the Japanese economy was no longer sustained by militarism and colonies, the land reform eliminated the landlord class, and the majority of economic output shifted from textile industry to heavychemical industry (Ōishi 1974). This view was influential not only in Japan, but also in Germany. As Simon Reich (1990:4) points out, the astonishing achievement of Germany in postwar economic growth has been interpreted as being “like a phoenix [rising] from the ashes,” which had nothing to do with the German experience in the dark valley. [ABSTRACT FROM AUTHOR]

The extensive white-collar crimes of the nineteenth and twentieth centuries were born of the financial revolution that radically altered English finance during the early eighteenth century. The growth of a securities market and experiments in company organization fashioned a world of new possibilities for dishonest businessmen. The Industrial Revolution greatly accelerated developments in banking, credit and company formation, culminating in a second, and more profound, financial revolution in the mid-nineteenth century. The company explosion initiated by the Railway Mania of 1845, the Limited Liability Act of 1855 and the Companies Acts of 1856 and 1862 created tremendous opportunities for fraud. Big business and business crime have never been the same since. Financial crime is as old as capitalism itself. In the fifty years following the Glorious Revolution of 1688, England experienced a profound “revolution” in public borrowing which transformed the economy and opened many doors for the resourceful swindler. The Bank of England was created in 1694 to finance the national debt, and the government securities issued by the bank, and traded on the Stock Exchange, soon became an important source of investment for the wealthier classes. These securities, or funds, were also the source of some of the earliest white-collar crime. Sir Henry Furnese, a seventeenth-century director of the Bank, participated in a number of schemes for artificially lowering the price of the funds and then purchasing as much as possible at the reduced price. Such transactions had a demoralizing effect on the entire Exchange. [ABSTRACT FROM AUTHOR]

Victorian England witnessed the birth of a new, industrial economy and a financial structure characterized by individual shareholdings in joint-stock corporations. By the end of the nineteenth century, the British had invested several billion pounds in company shares, or roughly two-fifths of total national wealth. This level of shareholding had no parallel in the world, amounting to more than twice the sum of French and German company investment combined. Corporate organization facilitated British domination of the world economy and enriched many members of the investing public; yet this novel and peculiar form of economic arrangement also proved vulnerable to abuse. White-collar crime was the soft underbelly of the modern British economy, robbing the public of millions of pounds, undermining trust in commercial integrity and depressing the level of investment in new industries. A number of structural and ideological factors combined to create a climate favorable to corporate fraud in nineteenth-century England. The divorce of ownership from control in large companies increased the distance between shareholders and directors and heightened the impersonality of the relationship. Directors held vast sums of money in trust for investors, and the temptation to misappropriate or misapply that money was at times irresistible. The primitive nature of accountancy and auditing made fraud difficult to discover and the complexity of modern finance blurred the boundaries between crime and misadventure. The entrepreneurial culture of Victorian England bred aggressive businessmen who were impatient with ethical codes and whose preoccupation with material success led them to fear failure more than fraud. A laissez-faire mentality and an emphasis on individual responsibility discouraged state intervention to protect shareholders. [ABSTRACT FROM AUTHOR]

The story of English company law during the nineteenth and twentieth centuries is the story of the rise and fall of laissez-faire. As we have seen, the various agents of English finance and trade operated under the most permissive commercial legislation in all of Europe, if not the world. From the mid-nineteenth century through the early decades of the twentieth, the law put few obstacles in the paths of white-collar criminals, trusting instead that the free market would regulate itself and that good business would drive out bad. The liberal outlook was taken up by the law courts which neglected business frauds and treated white-collar criminals with comparative leniency. Throughout much of this period, cultural perceptions of “criminality” remained focused on the “dangerous classes” while elite misconduct was seen as a relatively minor social ill. Experience, however, proved increasingly irreconcilable with classical economic theory and class prejudice. The speculative disaster of 1866, the fraudulent loan issues of the 1870s and the crash of the City of Glasgow Bank in 1878 brought to light a system of finance riddled with fraud. Thus, from the 1880s there was an ideological shift in favor of greater state regulation of the economy to protect investors. Thereafter, the movement for the reform of company law gained momentum with each new revelation of fraud. Balfour, Hooley, Wright, Bottomley, Bevan and Hatry all contributed to the weakening of free trade doctrines among legislators, the business community and the general public. In 1844 the British Parliament attempted to regulate joint-stock company affairs for the first time. [ABSTRACT FROM AUTHOR]

Once a company had passed through the uncertain process of promotion, it was still vulnerable to fraud on the part of those persons who managed the business for shareholders. The vast assets of large corporations proved too great a temptation for many of those whose job it was to manage shareholders' money. The divorce of ownership and control in public companies also placed directors in positions of almost unlimited power vis-á-vis shareholders. The license of directors was further bolstered by investors' ignorance regarding business matters, the inadequacy of auditing and the permissive nature of company law. Directorial abuse of power was greatest when authority was concentrated in too few hands. Ideally, managerial authority was to have been divided among several directors who were to act as checks on each other. In practice, however, there was nothing to prevent directors from conspiring with each other to defraud shareholders. In other cases a single, strong personality might emerge as leader, riding roughshod over other directors who were too timid, ignorant or lazy to protest. Too many directors, especially those of the guinea-pig variety, viewed their positions as sinecures. It was thus fatally easy for an aggressive businessman like George Hudson to gain complete control over his fellow directors, who were quite content to draw their salaries and leave the work to someone else. That such dereliction of duty on the part of directors eliminated an important safeguard against fraud was dramatized in a number of notorious cases. At the trial of the City Bank of Glasgow directors in 1878, it was revealed that only one director was well informed about the bank's affairs. [ABSTRACT FROM AUTHOR]

The greatest opportunities for white-collar crime probably occurred during the promotion of new companies. British company law was the most permissive in all of Europe and gave promoters great latitude in their operations. The ease with which a limited, joint-stock company could be created was remarkable. Seven persons had only to take up one share each in a concern to achieve incorporation. They might have no real stake in the company, but they could sell its shares to the public, have themselves or their friends appointed directors, and trade on the firm's capital in the most reckless manner with no personal liability beyond their own small shareholding. In 1867, only ten years after the liberalization of company law, Parliamentary hearings were held to inquire into the alarming incidence of company fraud. Many witnesses complained that promoters were taking advantage of the law's leniency. The company promoter David Chadwick admitted “there are radical defects in the Act [Companies Act, 1862], and that too great facility is afforded to the promoters of companies who wish to palm off something unsound on the public.” The Master of the Rolls, Lord Romilly, was more blunt: In a great many cases which have come before me, I am satisfied that the company was formed for the purpose of being wound up, and that the original promoters had no other object than just to put a company on foot which they were satisfied could never be carried into any profitable execution, for the mere purpose of afterwards winding it up in the Court of Chancery.[...] [ABSTRACT FROM AUTHOR]

The proliferation of shares, bonds and securities of all kinds during the nineteenth century radically changed the nature of investment. Property as an essentially physical possession – land, plate, jewelry – gave way to the more intangible resources of income and interest from capital investment. The proprietors of joint-stock companies or holders of government bonds, for example, were entitled to a “flow of income” from their capital. Investments of this sort were responsible for the phenomenal growth of the English economy, but were especially vulnerable to manipulation by unscrupulous persons. The theft of shares or misuse of an investor's capital was not readily detectable so long as the accustomed flow of income was maintained. Worthless paper securities could also be passed off as representing valuable goods or profitable trade. Furthermore, the principal securities market – the London Stock Exchange – was a poor intermediary between investors and new share issues, failing to shield the public from fraudulent company promoters. The growth of stockholding and a securities market was originally tied to the National Debt, which increased from a mere £5 million in 1698 to £71 million in 1749 to £497 million in 1800. For over a century most stock transactions involved government securities, and company shares were not even listed on the Exchange until 1811. The Railway Mania of the 1840s magnified the importance of company shares and railway share dealings increased Exchange membership from a few hundreds before the Mania to 864 in 1851. [ABSTRACT FROM AUTHOR]

For most of the Victorian period, the English banking system was riddled with fraud and mismanagement. Each wave of bank failures brought forth new revelations of criminal conduct. The financial crises of 1857 and 1866 and the collapse of the City of Glasgow Bank in 1878 were but the high-water marks in an age of widespread commercial dishonesty. By the late nineteenth and early twentieth centuries, improvements in bank management and accountancy had reduced the level of fraud, though by no means had eliminated it. Banking lies at the heart of the modern commercial nexus. As Thomas Joplin, founder of the National Provincial Bank, wrote in 1827: “Banks are by far the most important of all our commercial establishments. They are the fountains of our currency, the depositories of our capital, and at once the wheels and pillars of our trade. Business to any great extent could not be carried on without them.” For the greater part of the nineteenth century, banks were the most important type of joint-stock company after railways. Between 1844 and 1868, 291 banks were formed. Banking promotions peaked in the early sixties, 36.4% of the capital offered to the public and 27% of subscribed capital was from banks and finance companies in the years between 1863 and 1866. In 1844 total bank capital and deposits for the nation amounted to some £139 million or 34% of national income. The bulk of these deposits was in the form of small sums from a very large number of customers. [ABSTRACT FROM AUTHOR]

Before the Railway Mania of 1845–46, large-scale financial fraud had been episodic, appearing dramatically in speculative disasters such as the South Sea Bubble of 1720 or the 1825 Commercial Crisis. With the coming of the railways, however, big business and business fraud were here to stay. Railways pioneered the joint-stock company form a half-century before it became general in most other fields. In the words of Harold Perkin, “big business on the scale we know it today began with the railways in the nineteenth century.” So too did white-collar crime. Railways transformed English finance as surely as they changed the face of the English landscape. The London Gazette, which published all Parliamentary schemes for companies, had been, previous to 1845, a slender volume. Due to the enormous proliferation of railway companies in 1845, the Gazette swelled to over 4,000 pages. It would never be light weight again. In 1845 Parliament sanctioned 2,816 miles of new railway line, an amount equal to all the miles sanctioned between 1821 and 1843. An additional 4,540 miles were sanctioned in 1846. At its peak in 1846–47, railway expenditure absorbed almost 7% of national income. Railways broadened the base of investment. For the first time the Stock Exchange dealt significantly with company shares instead of government bonds. The Mania of the mid-forties drew in the whole nation of investors. The aristocracy and gentry became heavily involved in railway shareholding since they were often given large blocks of shares to secure their goodwill for lines crossing their estates. At mid-century, Thomas Tooke observed: “In every street of every town persons were to be found who were holders of Railway shares.” [ABSTRACT FROM AUTHOR]

An occupational and spatial analysis of members and shareholders in Scottish soccer clubs before 1915 [ABSTRACT FROM AUTHOR]

In the period 1875-1914 several major British sports became highly commercialised. This was acknowledged by contemporary observers. As early as 1885 horse-racing was seen as ‘becoming, everyday, more of a business than a sport’ and, less than a decade later, ‘Scottish football [could not] be described as anything else than a big business’. Its counterpart south of the Border was thought by one critic to be ‘as sordid a concern of commerce as Pears’ soap, or the electric light', and William McGregor, the founder of the Football League, acknowledged that early twentieth-century soccer was ‘a big business. The turnover of some of our clubs is considerably larger than the turnover of many an important trading concern. ’ Even cricket, considered by the run-making intellectual, C. B. Fry, to be ‘a cult and a philosophy inexplicable to … the merchant minded’, had ‘become more or less a gatemoney business’. The question, however, is what sort of businesses had the firms in the sports industry become, or, more precisely, what were their ultimate objectives. There is a major debate among economists of modern sport on this issue. Almost without exception studies of North American sports clubs have argued that they were either profit- or wealth-maximisers, but in Britain many clubs, particularly in football and cricket, have exhibited long-term operating losses, which suggests that either they were highly inefficient profit-maximisers or that some other goal had priority over profits. [ABSTRACT FROM AUTHOR]

One line of inquiry into the causes of different economic attitudes within the sports industry is to examine who owned and controlled the constituent firms. Much of the background of those involved remains to be traced at the local level, but, as the sports industry was not immune from the general incorporation movement in British industry, some aggregated information can be provided here on shareholders and directors in sports enterprises, particularly English and Scottish soccer clubs. The data presented concentrates on occupations, though, of course, these can be utilised as a guide to social class. For the purposes of analysis eleven broad categories of occupation were distinguished: aristocracy and gentry; upper professional; lower professional; proprietors and employers associated with the drink trade; other proprietors and employers; managerial and higher administration; clerical; supervisors, foremen and inspectors; skilled manual workers; semi-skilled manual workers; and unskilled manual workers. The allocation of shareholders and directors to these categories met with some problems, though none severe enough to vitiate the analysis. No occupations were given for the very few female shareholders, so where possible - with apologies to feminist readers - they were allotted to the category of the male resident at the same address. The most serious problem was the blurring of the demarcation lines between groups. The professional groups were reasonably unambiguous, but lower management and higher supervisory occasionally overlapped and there was some difficulty in distinguishing skilled manual workers from the semi-skilled, particularly where localised specialist trades were concerned. [ABSTRACT FROM AUTHOR]

Generally economists have argued that attendances at sports events will be higher the greater is the degree of uncertainty about the result. This is not necessarily true for any given home game in team sports, but has more relevance as regards the home and away gates aggregated together and, although untested, it has a priori relevance to horse-racing because of the associated betting market. Equality thus has economic value. Contemporary statements suggest that this uncertainty hypothesis had its supporters in the period under study. The Football League itself noted that ‘the meeting of a strong and weak club … does not form an effective draw’ and one well-versed cricket writer pointed out that: beyond doubt the apathy shown by spectators everywhere may in great measure be set down to the conviction that Yorkshire always had matters their own way … whether this prolonged and immense superiority benefits the game is a debateable matter. A keen competition between several counties struggling for first place until the very last fixture arouses more enthusiasm. The evidence presented in Table II.I does not lend strong support to the uncertainty hypothesis, but, it must be stressed, the results are from an unsophisticated statistical approach which merely produces rank order correlations between attendances and closeness of competition (as defined by relative end-of-season championship positions). Nevertheless, it is not calculated truths which determine a club's policy; what they believe to be true is far more significant. [ABSTRACT FROM AUTHOR]

Institutional investors have come to play a central role in financial markets since the early 1970s. They controlled about three out of ten shares of Fortune 500 companies in 1970. Today they control seven out of ten. The aging of the baby boom generation, coupled with new fiduciary requirements for defined benefit pension plans, contributed to this change. Agency theory offered a litany of innovations designed to ensure that executives pursued the interests of shareholders, rather than feathering their own nests. Institutional investors promoted the theory with a vengeance, encouraging firms through shareholder proposals and private bidding to put its prescriptions into place. This article examines the role of institutional investors in promoting changes in corporate management under the banner of shareholder value. It reviews evidence that these changes did little to promote share value and that they resulted in several disadvantages for the American worker-owner., Sociology