Keywords

financial crisis, financial services- holding companies

Document Type

Article

Abstract

This Article's goal is to revisit early and thoughtful commentary on the fundamental problem of the large corporate enterprise--managerial accountability to shareholders-- to show that this fundamental problem is dramatically pronounced--magnified, if you will--in the types of enterprises that were at the center of the financial crisis, whether too big to fail or not. In particular, The Modern Corporation articulated that the evolution of economic organization has separated the beneficial ownership of property from those who control it and that this disjunction has created an irresolvable tension between shareholders and management. Nowhere is that tension more pronounced than in the context of FSHCs, raising questions regarding whether the standard tools of corporate governance are equipped to address it.

This Article first recalls the primary contours of Adolf Berle and Gardiner Means's acclaimed observations regarding the separation of ownership and control in the “modern corporation,” as well as their conclusions about the implications of those observations for the doctrine of shareholder primacy. Second, the Article describes how the activities of FSHCs generally differ from what we think corporations do and, certainly, from what Berle and Means conceived of as the purpose of corporations or, indeed, any business enterprise. In particular, rather than deploying physical property for the purpose of producing goods or providing services and, beyond that, creating economic value for the property's ultimate owners, FSHCs deploy their and their customers' and clients' financial assets for the purpose of generating profits through trading and investment activities.

Third, this Article articulates how those business activities render more acute the problem of the separation of ownership and control that Berle and Means observed. In particular, FSHC shareholders face additional peril as a result of managerial incentives that cultivate excessive risk-taking, which is often difficult to temper, and heavy regulation, which raises the prospect of both regulatory enforcement actions and regulatory capture--all fueled by rules under the Bankruptcy Code that, in the event of insolvency, limit a firm's rights to recoup assets transferred in its final days. Additional risk derives from FSHCs' relationships to their subsidiaries, which typically do carry on activities that fall within the more traditional role of corporate activity, such as performing broker-dealer or banking services. This discussion highlights that, because FSHCs are an evolved specimen of the modern corporation, there should be heightened concern regarding the possibility that FSHC managers may not be looking after shareholders' best interests.

Finally, this Article concludes that the special concerns that FSHCs produce both portend and necessitate rethinking the problem of managerial accountability in large, publicly traded corporations. The Article suggests, consistent with Berle and Means's conclusions, that the notion of shareholder primacy should be supplanted--but does so without necessarily embracing the notion that corporations should be managed in the interests of innumerable constituencies. Rather, the Article raises the possibility that many of the concerns associated with FSHCs' activities could be addressed through a greater governance focus on one constituency, in particular: those who seek out, and benefit from, FSHCs' traditional and foundational business operations--namely, clients and customers.

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