June 22, 2003

Note: What Does "Control" Mean?

A note on Caroline Fohlin, "Ownership and Control in the German Corporation":

I want to load yet another task onto our conference organizer and editor Randall Morck's broad, tall, northern, Albertan back. Yet another thing that our editor needs to do is to give us a definition of "control" that we can all use in our papers.

In the U.S. context, which is the only one I really know--when Morgan right-hand George F. Baker tells AT&T during the Panic of 1907 that he will rollover their loans only if they will replace their current president with Theodore N. Vail and if they will change their entire strategy from the "Macintosh" one of selling high-priced telephones to rich people to the "Microsoft" strategy of universal nationwide low-price service, is that control? When NY, NH, & Hartford RR president Charles Mellen tells journalist C.W. Barron that he is proud to wear the Morgan [thrall] collar, is that control? When other board members of the Union Pacific tell Frank Vanderlip to be quiet and stop complaining about the fees the U.P. is paying its underwriters because Vanderlip's bank is getting its fair cut, is that control? In all three cases, I would say, "Yes." But the way Caroline classifies the data, I believe that in each case she would say, "No." And that's fine, that's useful--hers is a justifiable classification, a natural reaction to a thread of the literature coming out of "Economic Backwardness in Historical Perspective" that overstates the differences between Anglo-Saxons and Saxon-Saxons.

But at the moment the word "control" means something very different in the paper that Marco Becht and I are writing than in the paper that Caroline Fohlin is. And that will cause trouble for readers of the book that comes out of this conference...

Posted by DeLong at June 22, 2003 10:35 AM | TrackBack

Comments

In stories about Japanese corporate governance I have seen correlations between losses and forced removal of executives by the main bank (center of keiretsu group)...or the percentage of the controlling main bank's personnel actually sitting on the corporation's board, which would increase during profit-challenged periods.
But neither of these are great measures. Much control is informal in Japan, and business cycles where all businesses loose or gain profits together muddy attempts to isolate results of decision making.

But it was interesting that when financial markets deregulated, in the 80's in Japan, and the importance of the stock markets increased and bank loans decreased as a source of corporate finance, the governance mechanism (to the extent that it existed as measured above) broke down.

With no one watching the store, easy money from the Ministry of Finance, equity markets flush with yen, corporations eager to find new places to park their cash, they began "financial engineering" - chasing investment income in speculation, lots in real estate.
Banks did this too. Their profits were squeezed - corp's didn't need their loans as much anymore, and finanical liberalization increased competition from other instruments, and eliminated their government subsidized source of cheap funds for loans (interest rate allowed to float more freely). They chased speculative returns in risky ventures and real estate.

And we all know what happened next. So, corporate governance is closely tied to the boom and bust, and the neverending bad loan crises in Japan.

Posted by: andrew on June 22, 2003 01:49 PM

There are times when it seems as though the Japanese economy has been steadily weakening for a decade, and times when it seems Japan is gradually re-structuring and growing stronger. The competitive role of Japan in industrial markets should not simply be dismissed.

Posted by: jd on June 22, 2003 02:28 PM

If that sounded like Japan-bashing, then I didn't express myself clearly. Which isn't really surprising, since I'm an amateur at this.

What I was trying to say was that it seems like the problems in Japan were exacerbated by a collision of corporate "cultures" (although that word is overused)....when a relatively successful model of corporate governance (relational banking and keiretu linkages) was opened up, in the liberalization of the financial markets before the bubble.
Their old system of oversight was undermined, but not replaced by a new system of shareholder power, transparent and contract-based. Making the bubble worse, and the bad debt problem bigger.
But I might be overstating the case, because how powerful are shareholders in the western model?

Posted by: andrew on June 22, 2003 06:52 PM

Control dovetails neatly into a discussion of power. And it's an area that Sociology has done a lot more work on than economics has, as far as I can tell. Might want to pick up your Weber and Collins.

Posted by: Ian Welsh on June 22, 2003 07:58 PM

Andrew -

You were quite clear and considered. I have been puzzling over Japan for quite a while, not sure how to argue. Note Bob Briant above: "The Japanese Model"

Posted by: jd on June 23, 2003 09:50 AM
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