Why Do Boards Exist? Governance Design in the Absence of Corporate Law, 1896-1920

The data are hand-collected from Carl Kierulf’s annual Handbook of Norwegian Bonds and Stocks (Haandbog over Norske Obligationer og Aktier), the historical Norwegian trade register (Brønnøy-sundregistrene), and individual company records kept in regional archives. The Kierulf Handbook, first published in 1900, reports rudimentary information for publicly traded companies, including year-end dividend payments dating back 3 to 5 years. The first volume also contains company statutes. Additional company statutes and financial statements are collected from archives and the trade register. Firms were not required to disclose their financial statements, so accounting variables are not available in all years for many firms and are completely missing for several firms.

In the research programme outlined in this grant proposal, we shall study corporate governance in economies with intermediated equity ownership. When public corporations are characterised by dispersed equity ownership, blockholders - holders of non-trivial percentages of a company's shares - are key to good governance. In contrast to small shareholders, who have neither the incentive nor the capacity to effectively monitor management, blockholders are able to govern firms to the benefit of all. The governance role of blockholders must be viewed in the backdrop of the large-scale intermediation of equity ownership in recent decades. Fifty years ago households directly owned around 70% (55%) of US (UK) equity. Today direct ownership accounts for only around 20% (10%) of US (UK) equity. The rest is indirectly owned via institutional investors such as pension funds, mutual funds, and hedge funds. Thus, a majority of blockholders in public corporations in the US and the UK today are money managers. In other words, modern-day corporate governance is intermediated: Funds that manage other people's money must monitor company executives who make business choices funded by external investors, a case of agents watching agents. Several questions arise immediately. What are the consequences of myopia induced by asset management contracts on the nature of governance? Intermediation of equity ownership increases the distance between ultimate owners and ultimate decision makers while ownership chains also fragment equity holdings: how does this affect coordinated shareholder engagement and corporate decision making? Are there systemic stability concerns that arise from the predominance of asset managers as monitors of firms? In the aftermath of the financial crisis, prominent policy reviews have highlighted several such questions. Yet, the academic literature is yet to engage comprehensively with these issues. We propose to fill this gap. By a combination of theoretical and empirical methods, we shall develop a comprehensive analysis of several key facets of intermediated corporate governance that are of interest to policy makers. The work will be carried out via seven, interrelated, projects. The emphasis throughout will be on the incentives of asset managers and how these impact the nature of corporate governance in firms in which they hold blocks. We shall document the landscape and legal environment of intermediated ownership around the world, delineating how incentives vary along the ownership chain (Project 1). We shall examine theoretically and empirically how such incentives affect the nature of coordinated engagement in settings with multiple small blockholders (Projects 2 and 3), engender long ownership chains (Project 4), and provide commitment mechanisms for monitoring (Project 5). We shall also examine whether the ways in which such incentives induce asset managers to govern firms foster new channels for systemic risk (Projects 6 and 7). Our research approach will be positive: in other words, the projects will develop conceptual frameworks backed up by empirical analysis to provide a basis for understanding intermediated governance as it exists today. It is only by gaining such understanding that we can carefully evaluate the normative proposals in the policy reviews for what intermediated governance should be. We shall facilitate knowledge exchange between the academic and policy communities. By engaging carefully with issues highlighted by policy reviews, we shall enhance awareness of policy-relevant questions amongst academic researchers. By providing thorough theoretical and empirical analyses of issues of direct interest to policy makers, we shall facilitate the development of informed and effective policy to regulate the role of institutional investors in corporate governance.