The Dark Side of Shareholder Influence: Toward a Holdup Theory of Stakeholders in Comparative Corporate Governance

Abstract

Most comparative corporate governance scholarship is preoccupied with the protection of shareholders against illicit self-dealing by managers and controlling shareholders, and the problem of agency cost. Differences in the role of stakeholders such as employees are acknowledged in the literature, but usually not explained in functional terms. At the same time, US legal scholars are increasingly debating the strong insulation of the board of directors from shareholders in the United States, and are seeking to find an explanation for it. Proponents of a stakeholder view of corporate law have argued that the insulation of the board of directors in the United States from shareholders mitigates the risk of holdup of members of nonshareholder constituencies by shareholders, thus encouraging specific investment by these groups. The most hotly debated type of specific investment is the human capital of employees. However, US corporate law is unusual in the large degree of autonomy enjoyed by managers vis-a-vis shareholders. Since holdup of stakeholders typically takes place within what is considered legitimate managerial business judgment, but shareholders are the primary financial beneficiary of this type of ex-post opportunism, comparative corporate governance needs to take into account the degree to which managers are shielded against shareholder influence, an issue that is quite unrelated to shareholder protection. I argue that concentrated ownership, as it is typical for Continental Europe, is conducive to holdup problems because it implies strong shareholder influence on management decision-making. Given their costs, laws aiming at the protection of stakeholders (such as codetermination or restrictive employment law) are therefore normatively more desirable in the presence of stronger shareholder influence, particularly under concentrated ownership. Without postulating that each corporate governance system of the Wealthy West has an optimal level of such laws, the theory is corroborated by the observation that they tend to be more strongly developed in corporate governance systems with stronger shareholder influence. Thus, I provide a new explanation for institutional complementarities in different corporate governance systems. The United Kingdom, which (in spite of dispersed ownership) has both stronger shareholder influence than the US and stronger employment law, is classified as an intermediate case.

Keywords: comparative corporate governance, stakeholders, holdup, managerial autonomy, codetermination, employment law

JEL Classification: G32, G34, J50, K22