Political preconditions to separating ownership from corporate control

The large publicly held firm dominates business in the United States despit e irs critical infirmities, namely the frequent fragile relations between s tockholders and managers. Managers' agendas can differ from shareholders'; tying,managers tightly to shareholders has been central to American corpora te governance. But in other economically advanced nations, ownership is not diffuse but concentrated It is concentrated in no small measure because th e delicate threads that tie managers to shareholders in the public firm fra y easily in common political environments, such as those in the continental European social democracies. Social democracies pre ss managers to stabili ze employment to forego some profit-maximizing risks with the firm, and to use up capital in place rather than to downsize when markers no longer are aligned with tile firm's production capabilities. Since managers must have discretion in the public firm how they use that discretion is crucial to st ockholders and social democratic pressures induce managers to stray farther than otherwise from their shareholders' profit-maximizing goals. Moreover, the means that align managers with, diffuse stockholders in the United Sta tes-incentive compensation, transparent accounting, hostile takeovers, and strong shareholder-wealth, maximization norms-are weaker and sometimes deni grated in continental social democracies Hence, public firms there, all els e equal, have higher managerial agency costs, and large-block shareholding has persisted as shareholders' best remaining way to control those costs. I ndeed, when we line up the world's richest nations on a left-right politica l continuum and then line them up on a close-to-diffuse ownership continuum , the two correlate powerfully. True, the effects on total social welfare a re ambiguous; social democracies may enhance total social welfare, but if t hey do, they do so with fewer public firms than less socially responsive na tions. We thus uncover not only a political explanation for ownership conce ntration in Europe, but also a crucial political prerequisite to the rise o f the public firm in tile United Stairs, namely the weakness of social demo cratic pressures on tile American business firm.