'American Asset Manager Capitalism' by Benjamin Braun (Institute for Advanced Study and
Max Planck Institute for the Study of Societies)
asks
Who holds power in corporate America? Scholars have invariably answered this question in the language of ownership and control. This paper argues that tackling this question today requires a new language. Whereas the comparative political economy literature has long treated dispersed ownership and weak shareholders as core features of the U.S. political economy, a century-long process of re-concentration has consolidated shareholdings in the hands of a few very large asset management companies. In an historically unprecedented configuration, this emerging asset manager capitalism is dominated by shareholders that are fully diversified ‘universal owners’, while lacking direct economic interest in the performance of portfolio companies. The paper reconstructs the history of this institutional configuration and examines the fault lines of the new political economy of corporate governance.
Braun argues
Who holds power in corporate America? The question is central for students of American political economy. Students of corporate governance have invariably phrased their answers in the language of ownership and control. This language stems from Berle and Means (1932), who observed that trust-busting policies and the diversification of robber baron fortunes had dispersed stock ownership in the United States, while concentrating corporate control in the hands of a small class of managers. Jensen and Meckling’s (1976) agency theory, while reiterating the notions of shareholder dispersion and weakness, conceptualized shareholders as principals – the only actors with a strong material interest in the economic performance of the corporation. Offering a simple solution to what Berle and Means had considered a complex political problem, agency theory reduced corporate governance to the problem of protecting outside minority shareholders against “expropriation” by insiders, namely corporate managers and workers (La Porta et al. 2000: 4). Notwithstanding the political chasm between these two pairs of authors – New Deal liberals versus pro-market libertarians – the field of corporate governance melded these ideas into a single Berle-Means-Jensen-Meckling (BM-JM) ontology – the United States as a society in which shareholders, while dispersed and weak, are the owners and principals of the corporation. This ontology underpins ‘shareholder primacy’ (or ‘shareholder value’), which in the late 20th century emerged as the dominant corporate governance regime. This regime is geared towards three goals – ensuring a market for corporate control, allowing shareholders to monitor managerial performance, and aligning the material interests of managers with those of shareholders (Fourcade and Khurana 2017: 355). So complete was its victory that two prominent legal scholars announced the “[t]he triumph of the shareholder-oriented model of the corporation” and the “end of history for corporate law” (Hansmann and Kraakman 2001: 468).
Political economists, while critical of the regressive distributive consequences of shareholder primacy (Lazonick and O'Sullivan 2000), have largely taken the BM-JM ontology at face value. The ideas that shareholders in the United States are dispersed and weak but are nonetheless the owners and principals of the corporation have been absorbed by the comparative political economy (CPE) literature on corporate governance (Aguilera and Jackson 2003; Gourevitch and Shinn 2005; Hall and Soskice 2001; Roe 1994). While this has always been problematic, the rise of asset managers has dramatically transformed the investment chain – see Figure 1 – pulling the empirical rug from under the BM-JM ontology. The present paper maps this transformation and contributes to the task of putting the political economy of corporate governance on a new conceptual foundation. It argues that a ‘Great Re-Concentration’ of U.S. stock ownership that began in the mid-20th century and accelerated dramatically at the beginning of the 21st century has brought about a new corporate governance regime, asset manager capitalism (2016).
This paper seeks to come to grips with the empirical observation that today the “Big Three” asset managers – Vanguard, BlackRock, and State Street Global Advisors – together hold more than 20 per cent of the shares of the average S and P 500 company (Backus, Conlon, and Sinkinson 2019: 19). Four hallmarks characterize this new regime. First, U.S. stock ownership is concentrated in the hands of giant asset managers. Second, due to the size of their stakes, asset managers are, in principle, strong shareholders with considerable control over corporate management. While this divergence from ‘dispersed and weak’ alone would require CPE to rekindle its conceptual toolkit, two additional features distinguish asset manager capitalism from previous stock ownership regimes. The third hallmark is that large asset managers are “universal owners” that hold fully diversified portfolios (Hawley and Williams 2000). Finally, as for-profit intermediaries with a fee-based business model, asset managers hold no direct economic interest in their portfolio companies. Clearly, the BM-JM ontology does not map onto this new institutional landscape. Whereas the shareholder primacy regime was geared towards maximizing the value of the shares of individual firms, asset manager capitalism is geared towards maximizing the aggregate value of assets under management.
The paper is organized as follows. The next section gives a big-picture overview of the evolution of U.S. stock ownership and corporate governance regimes. Section 3 traces the policies and economic developments behind the growth of the asset management sector since the Revenue Act of 1936. Section 4 takes a closer look at the questions of universal ownership and of assets managers’ economic interests. Section 5 explores the political economy of asset manager capitalism at the firm, sectoral, and macroeconomic levels, as well as in the realm of politics. The conclusion highlights broader implications for the field of (American) political economy.
