Political Structure and Corporate Governance: Some Points of Contrast Between the U.S. and the U.K.
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Description
When viewed against the backdrop of corporate governance systems worldwide, the similarities between England and the United States are more pronounced than the differences. Unlike in Germany, with its emphasis on the two-tier board system and worker participation in management, English and American corporations operate under a unitary board system and do not favor employee codetermination. And unlike in Japan, with its keiretsu system of informal corporate groups cemented by cross holdings of stock, English and American corporations operate under a regime of explicit contracts and free-standing firms. Unlike most other countries in the world, including Germany and Japan, English and American corporations are not usually locked into financing relationships with lead banks. English and American corporations are unique in the world, or nearly so, in the degree to which they turn to impersonal securities markets for financing rather than to banks. While it is relatively easy to identify salient differences between the English and U.S. systems and the rest of the developed world, it is more difficult to identify major contrasts within the Anglo-American world itself. Yet such differences do exist, although they are often matters of degree rather than kind. In this paper, I consider two areas of difference: rules on derivative litigation and those on corporate takeovers. It turns out that England has a more robust and less regulated takeover market than the United States, while the U.S. is more permissive towards derivative litigation. These differences can be viewed as reflecting alternative approaches to controlling agency costs in the Berle-Means corporation. In England, agency costs are controlled by the threat or reality of a hostile takeover bid in which incumbent managers are replaced if they fail to maximize the value of a firm's assets. In the United States, where hostile takeovers have been severely restricted, the derivative action has attained greater prominence as a management control device. Although there is some plausibility to the theory that the systems reflect alternative approaches to the same public policy problem, this view is not entirely satisfactory. As it has evolved in the United States, the derivative action is not an effective means for ensuring managerial competence. Derivative lawsuits based on alleged mismanagement are extraordinarily difficult to win. The derivative lawsuit is most effective in dealing with cases of self-dealing or illegality, but these are not, or at least are not usually, the sorts of managerial behavior against which the hostile takeover is directed. Thus, the derivative lawsuit and the hostile takeover are not substitutes for one another in a public policy sense. An alternative theory might be that the distinctions between England and the United States stem from political differences. Yet, at least at first glance, this seems somewhat puzzling. We might assume, based on a review of U.S. takeover law, that incumbent corporate managers are calling the shots. Such a view, however, cannot easily explain the relative vibrancy of derivative litigation in the United States, as compared with England. Incumbent managers do not like derivative litigation because they are often the defendants, and even if they are not defendants, the derivative lawsuit threatens their authority to manage the corporation. A political explanation of the evidence must, therefore, be based on a more complex theory than one based solely on the power of incumbent management. The thesis of this paper is that a more satisfying account can be provided when differences in political structure are taken into account. In the United States, where corporate law is dominated by state governments, the political forces aligned against hostile takeovers are quite potent, generating legislation and judicial decisions that have suppressed takeover activity. In England, with its more unitary system, the political forces play out differently, and the system accordingly generates rules more accommodating to unfriendly takeovers. With respect to derivative litigation, the differences stem largely from the political influence of the organized bar. Because the English system does not recognize contingency fees, there is little constituency in the organized bar pushing for liberalization in the rules governing derivative litigation. Thus, incumbent managers, who are generally hostile to derivative litigation, exercise a great deal of control over the scope of the remedy in that country. In the United States, in contrast, the recognition of contingency fees and the "common fund" doctrine permitting attorney compensation out of the amounts generated for the benefit of the corporation have created a strong interest group within the organized bar that favors a relatively liberal scope for the remedy. Because the organized bar is usually quite influential in the design of corporate rules, it has been able to ensure a relatively wide ranging derivative remedy despite the remedy's unpopularity among corporate managers. Differing political dynamics again help to explain differences in legal institutions. This paper is organized as follows. Part I contains a brief summary of U.S. and English takeover law. Part II describes some of the differences in the law related to derivative litigation. Part III argues that the differences between England and the United States stem, at least in part, from the different political structures in which they arise. I end with a brief conclusion.
Source Publication
Corporate Governance Today: Venture Capital, Hierarchies & Boundaries, the Board, Employees, the Contractarian Paradigm, Europe and Japan, the Social Setting
Publication Date
1998
Recommended Citation
Miller, Geoffrey P., "Political Structure and Corporate Governance: Some Points of Contrast Between the U.S. and the U.K." (1998). Faculty Chapters. 2035.
https://gretchen.law.nyu.edu/fac-chapt/2035
