Posts filed under ‘Corporate Governance’
| Peter Klein |
Congratulations to Henry Butler for being named Dean of the George Mason University School of Law. Henry has been director of GMU’s Law and Economics Center, and previously directed the Searle Center at Northwestern. In these roles he has been a prolific economic educator, following in the footsteps of his mentor Henry Manne (aka “Big Henry,” Henry Butler being “Little Henry”).
Younger readers may not know that Henry Butler is also a significant contributor to the early theoretical and empirical literature in transaction cost economics, particularly through two papers with Barry Baysinger, “Corporate Governance and the Board of Directors: Performance Effects of Changes in Board Composition” (JLEO, 1985) and “The Role of Corporate Law in the Theory of the Firm” (JLE, 1985). These papers argued that, contrary to a naive reading of the nexus-of-contracts literature on the firm, institutional constraints such as contract law do have an effect on firm organization and governance. One strand of the research literature on the firm, taking its cue from Alchian and Demsetz (1972) and Jensen and Meckling (1976), maintained that the legal structure of the firm is relatively unimportant for organization and performance, as market participants can simply price out, and contract around, any constraints imposed by the legal system. Baysinger and Butler, following Coase and Williamson, showed that legal rules, particularly those related to incorporation, do matter in the presence of transaction costs. Their work on boards showed that board structure and composition affect firm performance, while emphasizing that boards and other governance mechanisms including corporate law are interdependent.
| Peter Klein |
Very sorry to report the passing of Henry Manne yesterday at the age of 86. Manne made seminal contributions to the literatures in corporate governance, securities regulation, higher education, and many other subjects. Here are past O&M posts on Manne and his contributions. I tried several times to get him to guest blog on O&M but couldn’t pull it off.
I got to know him fairly well in the last few years and he was a charming companion and correspondent — clever, witty, erudite, and a great social and cultural critic, especially of the strange world of academia, where he plied his trade for five decades but always as a slight outsider.
| Dick Langlois |
Attending academic presentations as a spectator – a pure consumer – can be great fun. On November 20, I drove up to Boston for one day of a wonderful conference, put together by the Business History program at Harvard Business School, on the History of Law and Business Enterprise (which probably merited its own separate blog post). This is an area that I am starting to get interested in. The conference was in many ways a showcase for the GHLR perspective on the history of corporate organization – the acronym referring to the work of Timothy Guinnane, Naomi Lamoreaux, Ron Harris, and Jean-Laurent Rosenthal, all of whom were there. The conference took place across the street from Harvard Stadium on the weekend of the Harvard-Yale game. Harvard won the football game (alas), but the conference was a Yale rout.
And last week I attended a presentation here at UConn that was even more vicarious fun. Our Humanities Institute invited Joel Kaye from Barnard to talk about his new book, A History of Balance, 1250-1375: The Emergence of a New Model of Equilibrium and Its Impact on Thought, which has just appeared from Cambridge. I was the token economist in the audience, even though two of his chapters are about economics. His argument is that medieval scholastic thought changed radically over this period, and produced by its end a different and arguably more sophisticated model of how the economic world works. This “new” model is not the standard Aristotelian version we are normally told about but was in fact something far closer to the views of the Scottish Enlightenment. (Needless to say, his telling of this was far more nuanced.) In addition to Nicole Oresme, whom I had heard of, he relies heavily on the work of Peter John Olivi, an earlier Franciscan theologian, whom I had never heard of. In Kaye’s telling, Olivi came close to something like the idea of the invisible hand. I took a quick look at standard history-of-thought texts, and nobody mentions Olivi at all – except Murray Rothbard, who credits him with discovering the subjective theory of value.
This is really a story about the Enlightenment of the High Middle Ages, which took place among academic clerics in an age of population growth, (extensive) economic growth, and urbanization. As Kaye apparently argues in an earlier book, these academics were constantly confronted with the market – especially in the thriving city of Paris – and were well versed in market practice; indeed, this knowledge of the market and money contributed to advances in physical and biological as well as social sciences. The medieval academic Enlightenment went into decline after the Black Death in the early fourteenth century. The resulting dislocations and the swing in relative prices – in favor of peasants and against landholders, including importantly the Church – reduced the centrality and authority of academic thought, even as they spurred institutional changes that would set the stage for growth in the early modern period. Population in Europe did not return to its pre-plague levels until the sixteenth or seventeenth century, and economic thought took just as long to recover. (I know this is whiggish, but I can’t help it.)
There was perhaps one connection between the two events. At HBS, Ron Harris talked about his ongoing research on the earliest history of the corporate form in the East and the West. Here the commenda contract is the centerpiece. That is presumably what schoolmen like Olivi called by the Latin term societas, which was not, however, the same institution as the societas publicanus of ancient Rome.
| Dick Langlois |
I write on the flight back from the inaugural conference of the World Interdisciplinary Network for Institutional Research (WINIR), which met on the Prime Meridian these last few days. The conference was a great success, not only for its wonderful location in the Old Royal Naval College astride the Cutty Sark but also for the overall quality of the organization and the presentations.
As I have mentioned before, WINIR was created to encourage institutional research from a wide range of perspectives and disciplines. The annual conference institutionalizes this (you might say) by having keynote speakers from five different disciplines. The political scientist was Kathleen Thelen from MIT, one of my fellow editors on the Journal of Institutional Economics; the legal scholar was Katharina Pistor from Columbia; and the sociologist was Geoffrey Ingham from Cambridge, who made some interesting observations about Chinese institutions in the context of the “great divergence” debate in economic history. Serious and well-known scholars all. The economist was Timur Kuran, who updated us on his fascinating work on the economics of the pre-nineteenth-century Islamic waqf. But the most interesting – or at any rate most surprising – keynote was the philosopher Barry Smith from Buffalo, whom some of you may have heard of for his early work on the philosophy of Austrian economics. Smith’s talk was about “ontology,” which in my ignorance I had expected to be an hour of head-breaking essentialism. It turns out that “ontology” now means the practice of classification – giving things the right names and putting them in the right boxes. As much computer science as philosophy, it seemed to me. The main applications are in databases and sciences more generally, including things like Department of Defense databases and Human Genome data. Smith is a world-leading practitioner of this kind of ontology, having founded something called the National Center for Ontological Research. (I must confess that the first thing that popped into my mind when I heard this title was the High-Energy Magic Building at Terry Pratchett’s Unseen University.) Basically, ontology appears to be about modularization and standardization, something quite fitting to talk about in the shadow of the Royal Greenwich Observatory. I discovered that Smith was unaware of the modularity literature, so I plan to send him some references.
Many of the parallel sessions were also of high quality. I could attend only a fraction of them (what with sneaking out to visit the longitude exhibit at the National Maritime Museum). But let me plug a couple of papers by my friends. Giampaolo Garzarelli and Lyndal Keeton modeled “internal exit” in pre-colonial Southern Africa, the fissioning off of subtribal groups to found new polities. (I was impressed with the quality of that entire session.) As I was chairing a competing session later, I missed Roger Koppl and Caryn Devin talking about their paper “Against Design,” written with Stuart Kauffman and Teppo Felin. A version of that collaboration will appear in JOIE as a target article with solicited comments. (more…)
| Peter Klein |
I have a chapter in a new book edited by David Howden and Joseph Salerno, The Fed at One Hundred: A Critical View on the Federal Reserve System (New York: Springer, 2014). My chapter is called “Information, Incentives, and Organization: The Microeconomics of Central Banking,” and builds upon themes discussed many times on this blog, such as Fed independence. Here is a SSRN version of the chapter. The book comes out next month but you can pre-order at the Amazon link above.
| Peter Klein |
A new NBER paper on 19th-century manufacturing firms in Massachusetts finds that incorporation rates, ownership concentration, and and managerial ownership varied systematically with technology (factory versus artisanal production, use of unskilled labor, etc.). In other words, governance forms were not determined primarily by the legal or regulatory environment, social and cultural issues, the desire for legitimacy, or other noneconomic factors, but by standard agency considerations.
Corporate Governance and the Development of Manufacturing Enterprises in Nineteenth-Century Massachusetts
NBER Working Paper No. 20096, May 2014
This paper analyzes the use of the corporate form among nineteenth-century manufacturing firms in Massachusetts, from newly collected data from 1875. An analysis of incorporation rates across industries reveals that corporations were formed at higher rates among industries in which firm size was larger. But conditional on firm size, the industries in which production was conducted in factories, rather than artisanal shops, saw more frequent use of the corporate form. On average, the ownership of the corporations was quite concentrated, with the directors holding 45 percent of the shares. However, the corporations whose shares were quoted on the Boston Stock Exchange were ‘widely held’ at rates comparable to modern American public companies. The production methods utilized in in different industries also influenced firms’ ownership structures. In many early factories, steam power was combined with unskilled labor, and managers likely performed a complex supervisory role that was critical to the success of the firm. Consistent with the notion that monitoring management was especially important among such firms, corporations in industries that made greater use of steam power and unskilled labor had more concentrated ownership, higher levels of managerial ownership, and smaller boards of directors.
| Peter Klein |
Do firm boundaries — defined as ownership of the relevant capital goods — affect firm behavior and performance? Or is the firm best understood as a nexus of contracts, in which ownership boundaries represent arbitrary legal distinctions? Coase, Williamson, Hart, and Foss and Klein take the former position, while Alchian (sometimes), Demsetz, Jensen, and Meckling lean toward the latter.
A very interesting paper from Amit Seru, “Firm Boundaries Matter: Evidence from Conglomerates and R&D Activity,” offers some empirical evidence on the effects of boundary choices on innovation, finding significant and important effects.
This paper examines the impact of the conglomerate form on the scale and novelty of corporate R&D activity. I exploit a quasi-experiment involving failed mergers to generate exogenous variation in acquisition outcomes of target firms. A difference-in-difference estimation reveals that, relative to failed targets, firms acquired in a diversifying mergers produce both a smaller number of innovations and also less novel innovations, where innovations are measured using patent-based metrics. The treatment effect is amplified if the acquiring conglomerate operates a more active internal capital market and is largely driven by inventors becoming less productive after the merger rather than inventor exits. Concurrently, acquirers move R&D activity outside the boundary of the firm via the use of strategic alliances and joint-ventures. There is complementary evidence that conglomerates with more novel R&D tend to operate with decentralized R&D budgets. These findings suggests that conglomerate organizational form affects the allocation and productivity of resources.
Here is a longer, less technical write-up on the Corporate Governance and Financial Regulation blog.