by Mark Roe for Project Syndicate, June 20th, 2011.
If capitalism’s border is with socialism, we know why the world properly sees the United States as strongly capitalist. State ownership is low, and is viewed as aberrational when it occurs (such as the government takeovers of General Motors and Chrysler in recent years, from which officials are rushing to exit). The government intervenes in the economy less than in most advanced nations, and major social programs like universal health care are not as deeply embedded in the US as elsewhere.
But these are not the only dimensions to consider in judging how capitalist the US really is. Consider the extent to which capital – that is, shareholders – rules in large businesses: if a conflict arises between capital’s goals and those of managers, who wins?
Looked at in this way, America’s capitalism becomes more ambiguous. American law gives more authority to managers and corporate directors than to shareholders. If shareholders want to tell directors what to do – say, borrow more money and expand the business, or close off the money-losing factory – well, they just can’t. The law is clear: the corporation’s board of directors, not its shareholders, runs the business.
Someone naïve in the ways of US corporations might say that these rules are paper-thin, because shareholders can just elect new directors if the incumbents are recalcitrant. As long as they can elect the directors, one might think, shareholders rule the firm. That would be plausible if American corporate ownership were concentrated and powerful, with major shareholders owning, say, 25% of a company’s stock – a structure common in most other advanced countries, where families, foundations, or financial institutions more often have that kind of authority inside large firms.
But that is neither how US firms are owned, nor how US corporate elections work. Ownership in large American firms is diffuse, with block-holding shareholders scarce, even today. Hedge funds with big blocks of stock are news, not the norm. (continue reading… )