The Evolution of the American Corporation and Global Organizational Biodiversity

Publication year2012
CitationVol. 35 No. 04

UNIVERSITY OF PUGET SOUND LAW REVIEWVolume 35, No. 4SUMMER 2012

The Evolution of the American Corporation and Global Organizational Biodiversity

Ugo Pagano(fn*)

I. Introduction

The Evolution of the Modern Corporate Structure has been one of the most influential chapters of The Modern Corporation and Private Property.(fn1) But a limit of Adolf A. Berle and Gardiner C. Means's influential analysis is that it is framed in the American context and cannot be easily generalized to other experiences. Their corporate model arose in a democratic country where "production engineers"(fn2) commanded more respect than financiers and capitalist dynasties. Other countries evolved along different organizational paths. Different institutional complementarities between labor and financial markets generated "concentrated equilibria" different from the American "dispersed equilibrium." This Article argues that the roots of this divide can be found in the different aristocratic and democratic origins of the two systems, and that organizational biodiversity is still an important feature of the global economy.

The work of Berle and Means included a careful study of the evolution occurring in the United States during the interwar period.(fn3) Berle and Means described how the corporation evolved as a product of decentralization of powers formerly monopolized by the states.(fn4) Similar processes were at work in other countries as well, and Berle and Means's analysis could be seen as a useful guide for the general evolution of capitalism.(fn5 )But the advent of the new organizational species, which was to become known as the "Berle and Means Public Company," required a complex political process. Thus, the asymmetric political conditions of different countries were bound to have a strong influence on its institutional structure.(fn6)

As argued by Mark J. Roe, different political conditions, such as social democracy, cause important impacts on corporate-governance systems.(fn7) Conversely, different corporate-governance systems can generate different political reactions.(fn8) On one hand, social democracy can be seen as a set of political conditions impeding the separation between ownership and control and the development of the public company.(fn9) On the other hand, social democracy can also be seen as a reaction to a concentrated family-based corporate-governance system.(fn10) M. Belloc and I have shown that causation runs both ways: from politics to corporate governance and vice versa.(fn11)

Politics and corporate governance co-evolve. Initial conditions in history can have a decisive role in shaping a process of cumulative causation-where the political conditions existing when "big business" emerged in a country play a decisive role in the structure of its future institutions of production.(fn12) Berle and Means considered the evolution of the corporation in a special framework where, at the time of the second Industrial Revolution, a robust democracy already existed.(fn13) The democratic roots of the American system of corporate governance are unique(fn14) (with the possible exception of Switzerland).(fn15) In our times, the uniqueness of the American experience is hidden by its dominant role in the world economy.(fn16) American dominance has turned an exceptional pattern into an apparent norm that other countries are supposed to follow.(fn17)

If a robust democratic system had already developed by the time of the emergence of large enterprises, then the concentration of economic power in the wealthy would likely have been challenged and limited by democratic political action.(fn18) But the power of the labor unions was often limited by political constraints put in place by those acting in the interests of employers.(fn19) In the United States, trade unions turned out to be less popular and powerful than in most other capitalist countries.(fn20) As a result of these political constraints, neither the employers nor the workers had to balance the concentration of power of the other side. This was a case of a "dispersed equilibrium"-where neither workers nor owners fully organized because a democratic state was in charge and able to limit the power of other centralized organizations. These democratic roots marked the particular setting where the Berle and Means Public Company emerged.

Most countries have had different evolutionary paths. If a robust democratic system had not emerged before the development of the large capitalist enterprises, then the unchecked, concentrated power of the capitalist dynasties would go well beyond their private wealth.(fn21) In that case, union and social-democratic power would likely arise as a counterbalance and later be an important ingredient in the democratization of society. The result of that process would be that both workers and employers could find justification for the concentration of their own interests in the high degree of concentration of the other's interests, generating a fairly stable, concentrated equilibrium.

Concentrated equilibria are likely to have aristocratic roots(fn22) in the sense that the existence of dynastic privileges and social exclusion also favor a concentration of workers' interests. Because dynastic and aristocratic privileges were still widespread outside of the United States at the time of the second Industrial Revolution,(fn23) it is not surprising that a pattern different from the one illustrated by Berle and Means was followed by other capitalist countries.

The Berle and Means Public Companies theory, which built upon Veblen's works on the corporate model, offers a popular counter-narrative to today's history-silent neoclassical approach to understanding corporate governance. Its strength lies in applying the Darwinian evolutionary construct to the development of modern institutions with a focus on the American context. But its limitations are twofold. First, it assumes that the singular American example is sufficient to determine a pattern that can then be applied as a roadmap to other regions. Second, it ignores the critical role of biodiversity to the Darwinian construct, and therefore fails to apply that part of the evolutionary equation to institutions.

This Article builds upon the Berle and Means Public Companies theory by deconstructing these two limitations. It considers the evolutionary paths of several well-documented European systems, and then compares and contrasts the effects of their aristocratic roots to the very different democratic roots present in America. Finally, it argues that "organizational biodiversity" is an important feature of the global economy, just as actual biodiversity is a critical feature of natural ecologies.

Part II of this Article examines how each type of equilibrium forms in response to different political environments and influences the actors within it. Part III discusses the two types of political roots from which modern corporate governance grows: aristocratic roots and democratic roots. Part III also examines examples of corporations modeling themselves after the operating governmental structures and demonstrates that the corporate structures are influenced significantly by their political environments.

Part IV explores how aristocratic roots grow different types of equilibria, expounding on the rich diversity that the aristocratic roots in Europe have produced compared to the unique case of democratic roots in America. Part V counters the assertion that a single Anglo-American model of corporate governance exists between the United States and the United Kingdom, and demonstrates that their similarities grow instead from different roots and that their differences are actually significant. In addition, Part V discusses how corporate and governmental structures can exert coevolutionary pressures on each other. Finally, Part VI discusses the relationship between labor and financial markets.

II. Safeguards for Specificity and Collective Action

In this Part, I discuss the pressure driving equilibrium by analyzing the risks and opportunities available to three key types of actors within the economic system: owners, managers, and workers. Furthermore, I consider how different political environments can influence how equilibrium is reached.

Nobel Prize-winning economist Oliver Williamson observed that labor and financial markets share an important characteristic distinguishing them from intermediate-product markets: in both cases, the individuals make specific investments and, at the same time, face a collective action problem.(fn24)

Information asymmetries characterize both cases. But according to Williamson, the asymmetric-information problem is more serious in the case of the relationship between shareholders and directors because the latter can easily collude with top management.(fn25) The integrity of decision-making delegation-the most remarkable advantage of the public company-would be lost if shareholders have to rebalance information asymmetries in a way similar to that characterizing the relationship between the workers and their representatives. Thus, according to Williamson, shareholder democracy can easily degenerate into oligarchy(fn26)-a point that was forcefully made in Berle and Means's path-breaking contribution.(fn27)

The difference between the collective action problems faced by workers and shareholders is related to the inseparability between human capital and its owner...

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