The Politics of Corporate Governance: Roe's Strong Managers, Weak Owners

Abstract:     
In his important book, STRONG MANAGERS, WEAK OWNERS, Professor Mark Roe questioned whether Berle and Means were correct in assuming that the separation of ownership and control is an inherent aspect of large public corporations. Roe contends that dispersed ownership was not the inevitable consequence of impersonal economic forces, but rather the result of a series of political decisions motivated by a fear of concentrated economic power. The implication of this thesis, of course, is that while economic forces shaped modern corporate governance, they did so within the parameters set by law. As such, the governance structure of U.S. public corporations may not be optimal in an absolute sense, but only relative to the set of possibilities defined by our legal system.

This essay quibbles with portions of Roe's analysis. Its primary thrust, however, is to question STRONG MANAGERS' premises regarding institutional investor activism. The essay argues that institutional investors will not - and should not be allowed to - become active agents in corporate governance.

Keywords: Institutional investors, corporate governance, board of directors

JEL Classifications: B25, G30, K22

Accepted Paper Series