History of Corporate Governance Around the World: Family Business Groups to Professional Managers

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For many Americans, capitalism is a dynamic engine of prosperity that rewards the bold, the daring, and the hardworking. But to many outside the United States, capitalism seems like an initiative that serves only to concentrate power and wealth in the hands of a few hereditary oligarchies. As A History of Corporate Governance around the World shows, neither conception is wrong.

In this volume, some of the brightest minds in the field of economics present new empirical research that suggests that each side of the debate has something to offer the other. Free enterprise and well-developed financial systems are proven to produce growth in those countries that have them. But research also suggests that in some other capitalist countries, arrangements truly do concentrate corporate ownership in the hands of a few wealthy families.

A History of Corporate Governance around the World provides historical studies of the patterns of corporate governance in several countries-including the large industrial economies of Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States; larger developing economies like China and India; and alternative models like those of the Netherlands and Sweden.

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Editorial Reviews

Economic History Review
This book is a treasure and a key addition for the bookshelves of all economic historians and their university libraries.  The scope, the approach, the breadth, and the depth of the research contained in this volume are of the highest order. . . . The individual chapters in the volume represent scholarship at its best.  Together they make a highly significant publication.. . This reviewer recommends all chapters as major contributions to the disciplines and as examples of critical work in these areas.”

— Sue Bowden

Economic History Review - Sue Bowden

“This book is a treasure and a key addition for the bookshelves of all economic historians and their university libraries.  The scope, the approach, the breadth, and the depth of the research contained in this volume are of the highest order. . . . The individual chapters in the volume represent scholarship at its best.  Together they make a highly significant publication.. . This reviewer recommends all chapters as major contributions to the disciplines and as examples of critical work in these areas.”

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Product Details

Meet the Author

Randall K. Morck is the Stephen A. Jarislowsky Distinguished Chair in Finance at the University of Alberta and a research associate of the National Bureau of Economic Research. He is the editor of Concentrated Corporate Ownership, also published by the University of Chicago Press.

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A History of Corporate Governance around the World
Family Business Groups to Professional Managers

By Randall K. Morck The University of Chicago Press
Copyright © 2007
The University of Chicago
All right reserved.

ISBN: 978-0-226-53680-4

Chapter One The Rise and Fall of the Widely Held Firm

A History of Corporate Ownership in Canada

Randall K. Morck, Michael Percy, Gloria Y. Tian, and Bernard Yeung

1.1 Introduction

At the beginning of the twentieth century, large pyramidal corporate groups, controlled by wealthy families or individuals, dominated Canada's large corporate sector, as in modern continental European countries. Over several decades, a large stock market, high taxes on inherited income, a sound institutional environment, and capital account openness accompanied the rise of widely held firms. At mid-century, the Canadian large corporate sector was primarily freestanding widely held firms, as in the modern large corporate sectors of the United States and United Kingdom. Then, in the last third of the century, a series of institutional changes took place. These included a more bank-based financial system, a sharp abatement in taxes on large estates, a likely rise in the value of superior rent-seeking skills, and foreign investment restrictions. These were accompanied by a decline in the importance of freestanding widely held firms and a commensurate rise in the prevalence of family pyramidal groups.

The reasons for the relative decline in importance of Canada's stock market as compared to its banking system in the last decades of the century are unclear. The introduction of a capital gains tax at the onset of a period of high inflation may have been a factor, but the stock market did not recover its prior level of importance after inflation abated.

The advent of the capital gains tax accompanied the end of succession taxes. After 1972, inherited income became tax exempt. Capital gains taxes were theoretically due on the decedent's assets at death. But the realization of capital gains could be postponed for two generations through family trusts, structures viable only for very large estates. Several large family corporate groups were clearly broken into freestanding widely held firms to pay succession taxes, so the succession tax clearly accounts, in part at least, for the rise of the widely held firm.

The last third of the century actually saw much more profound transformations of public finances. Corporate taxes rose and became intricately complicated, filled with implicit subsidies and intricate incentives and penalties. A proliferation of agencies administered a vast array of subsidies directly and through regional or industrial development funds. In a comprehensive study of Canadian public finances, Savoie (1990) concludes that "especially since the early 1960s ... in certain areas of the country at least, there is a government subsidy available for virtually every type of commercial activity." He goes on to quote Canadian Business thus: "Some firms are in the happy position of being able to employ staff or consultants whose sole function is to sniff out all the juicy morsels the politicians and policy makers throw in the public trough."

Corporate groups are a response to a weak institutional environment. One version of this hypothesis, developed by Khanna and Palepu (2000a,b, 2001), proposes that corporate groups are a second-best solution in economies whose product, labor, and capital markets are underdeveloped and inefficient. Substantial evidence supports this explanation in emerging economies. A second version of this hypothesis, proposed by Morck and Yeung (2004), holds that family-controlled corporate groups have superior political rent-seeking skills. Political rent seeking, corporate investment in political influence, is commonplace in most countries and is usually legal. Family groups' most important advantages include the following: Groups can act more discretely than freestanding firms, for one group firm can invest in influencing a politician while another, perhaps privately held, collects the reward. Family firms have long time horizons, so they can better invest in influence now to reap subsidies in the distant future. Widely held firms, in contrast, change chief executive officers (CEOs) every few years and so require a faster payback. Thus, as political influence became an increasingly important determinant of financial success in the last decades of the century, family-controlled group firms eclipsed freestanding widely held firms.

Finally, this rise of interventionism also entailed restrictions on foreign investment. Nationalist politicians, seeking to safeguard Canadian control of major corporations, perhaps encouraged family groups to serve as white knights. In some sectors, notably energy and cultural industries, this was overt-locking in future subsidies and tax advantages. In others, the rewards may have been more indirect.

This heightened importance of political influence, and the nationalist overtones surrounding it, have resounding echoes through Canada's economic history. Jean-Baptiste Colbert, the intellectual father of French mercantilism, owned Canada and used the colony as a laboratory for mercantilist experiments. Colonial Canada featured state-subsidized ironworks, shipbuilding, canals, brick making, shoe making, beer making, wool production, mining, lumbering, eel packing, sea oil, and cod salting, among many other industries. In general, these were owned by the colonial political elite (and Colbert), and subsidized by the French government. The British conquerors, appreciating the benefits of this system to the colonial elite (now themselves), preserved it. British North America repeatedly bankrupted itself subsidizing all manner of canal and railway projects owned, directly or indirectly, by colonial politicians. Canadian corporate investment continued in this vein long after independence, almost to the twentieth century. Around the turn of the twentieth century, the Liberal prime minister Wilfrid Laurier greatly reduced corruption and adopted laissez-faire policy (until near the end of his last term). The country enjoyed an unprecedented surge of development. After World War II, C. D. Howe, a powerful cabinet minister in a series of Liberal governments, professionalized the civil service and moved the country back toward laissezfaire. He also virtually monopolized the awarding of remaining subsidies and tax favors. In the 1960s, shareholder rights were formalized, and Canada's mercantilist past seemed buried. This corresponded to the greatest extent of large widely held freestanding firms-about 80 percent of the corporate sector by assets.

Two factors changed this in the late 1960s.

One was the Révolution Tranquille in Quebec, which reignited Canada's dormant linguistic quarrels and created a national identity crisis. Separatist politicians sought to build a Quebecois nation with sweeping industrial policies. To counter this, federal politicians nurtured Canadian identity with nationalist rhetoric. This led to concern about foreign control of Canadian companies and probably to Canadian family groups' serving as white knights to safeguard widely held firms from foreign acquirers.

The second factor was a renewed political respectability for state intervention. Each previous political philosophy-the Tory rejection of the American Revolution, nineteenth-century liberalism, the progressive movement, and agrarian socialism in turn-quickly took on mercantilist garb upon touching Canadian soil. The Keynesian and Social Democratic philosophies of the 1970s were especially open to this. Canada's mercantilist undercurrent transformed idealistic plans to improve society into a morass of political rent seeking. In this environment, family-controlled corporate groups had an edge.

Thus, our findings support Burkart, Panunzi, and Shleifer (2002) and La Porta, López-de-Silanes, and Shleifer (1999), who relate widely held ownership of corporations to sound institutions. They also support the general approach of Acemoglu and Johnson (2000) and Acemoglu, Johnson, and Robinson (2001, 2002, 2003), who stress the importance of colonial institutions in determining modern institutions. Our findings also give credence to the arguments of Morck and Yeung (2004) that family-controlled corporate groups have an advantage in weak institutional environments because of superior rent-seeking skills. However, they in no way undermine the thesis of Khanna and Palepu (2000a,b, 2001) that other institutional deficiencies can also confer advantages on groups.

The remainder of the paper is as follows. Section 1.2 describes our ownership data. Section 1.3 describes Canada's colonial institutions. Section 1.4 describes institutions and large corporate ownership structures at the beginning of the twentieth century. Section 1.5 describes the evolution of large corporations' ownership structures and proffers explanations. Section 1.6 concludes.

1.2 Description of Data

To explore the evolution of corporate ownership, we require a picture of its initial conditions on the eve of industrialization. Continuous quantitative data are unavailable until the twentieth century; however, qualitative descriptions of business ownership are possible. Such descriptions are useful in assessing the influence of Canada's colonial heritages on her industrialera institutions and in interpreting quantitative data in later years when they become available.

These qualitative descriptions summarize relevant parts of the writings of several business historians. Bliss (1986) presents a thorough review of Canadian business history that is broadly sympathetic to the country's business elite, emphasizing their entrepreneurial ventures and risk taking as well as their occasional skulduggery. Francis (1986) describes the increasing importance of business groups as of the early 1980s and provides some historical information about the thirty largest groups. Hedley (1894) provides brief biographies of Canadian business leaders. Unfortunately, many are at too low a level to be of interest to us. Myers (1914) is something of a muckraker, focusing on the rent seeking, unsavory undertakings, and politically incorrect philosophies of the business elite. Naylor (1975) is quite critical of the business elite and often appears sympathetic to leftist views. Taylor and Baskerville (1994) provide a highly useful history of Canadian businesses, though their coverage after 1930 is rushed. Tulchinsky (1977) provides information about colonial Montreal businesses. Parkman (1867) contains much information about Canada's colonial economy. All provide valuable information about ownership and control as asides to their main arguments.

Much of the qualitative description below relies on these sources-especially Bliss and Naylor for broad historical overviews and basic factual information. To avoid repetitive citations, specific references are mainly to other sources. However, a general reference pervades to these authors, and a degree of plagiarism is gratefully acknowledged.

Certain data on the health of the preindustrial and early industrial economy aid us in interpreting changes in corporate control. The Bay's dividend, available from 1670 on, reflects the health of the fur trade and hence the colony's prosperity. Per capita gross domestic product (GDP) growth is available from 1870 on-from Urquhart (1993) prior to 1926, and from Statistics Canada thereafter.

Annual data on merger and acquisition activity from 1885 can be concatenated from several sources. Marchildon (1990) provides a series from 1885 to 1918. Maule (1966) reports data from 1900 to 1963. The Royal Commission of Corporate Concentration provides data for 1970 through 1986. For 1985 through 2000, data are from Merger and Acquisition in Canada.

Corporate financial records begin in 1902. Since these are not available from a uniform source over the full history of the country, we combine all available sources for each time period to produce the most accurate representation possible. Data for later years are probably better. For 1965 through 1998 we take the largest 100 companies, as listed in the Financial Post, ranked by assets until 1967 and by revenue thereafter. For earlier years, Financial Post rankings are unavailable, so we build our own rankings using annual report data, summarized in the Canadian Annual Financial Review for 1902 through 1940 and in Financial Post Corporate Securities for 1950 through 1960. We do not consider financial companies because these are not included in the top-100 rankings of the Financial Post and because bank ownership structures are explicitly determined by federal legislation. Both state-owned enterprises and multinational corporations constitute significant fractions of the corporate sector through much of the twentieth century. We therefore consider alternative average ownership structures-including and then excluding state-owned enterprises, multinationals, and both.

A second problem is that the Financial Post ranks the top hundred firms from 1901 to 1965 by assets and, for later years, by revenues. This appears to be because only consolidated assets are available for many companies in the earlier years. For later years, when both rankings are available, the use of sales and assets generates similar pictures. Consequently, this shortcoming is unlikely to affect our findings.

Our early ownership data are from several sources. Annual reports summarized in the Canadian Annual Financial Review and Financial Post Corporate Securities list the identity of any controlling shareholder, though not their equity stake. However, we find instances where these data contradict descriptions of corporate ownership in books on Canadian business history-especially Taylor and Baskerville (1994), Bliss (1986), Myers (1914), and Naylor (1975). In such cases, we assume beneficial ownership was not always clear at the time due to obfuscatory holding company structures. We rely on the business historians to have sorted this out. One shortcoming inherent in using these descriptive sources, however, is that we cannot provide a clear-cut definition of precisely what "controlled" or "member" (of a corporate group) means. A company is controlled by a family or belongs to a group if one of our historical sources says so or if its annual report indicates so.

From 1965 on, securities laws require more detailed disclosure. Statistics Canada summarizes this in the Directory of Inter-Corporate Ownership (ICO), our primary source for these years. The Financial Post also provides the name and stake of the largest shareholder for top Canadian firms from the 1970s on. We define a company as controlled if there is a combined direct and indirect voting stake of 10 percent or more, or if the ICO lists it as controlled. The ICO infers control in the absence of a 10 percent stake if board control derives from director selection rules, golden shares, and the like.

Using all these data, we classify each company into one of the following categories: freestanding widely held firms, freestanding family-controlled firms, family-controlled pyramidal group firms, firms in pyramidal groups controlled by widely held companies, firms controlled by a government or government agency, firms with a controlling foreign shareholder, and firms we cannot classify.

1.3 Colonial Origins

Much work on economic and institutional evolution stresses the importance of early colonial institutions to economic and financial development. This literature stresses path dependence-the idea that where an economy was long ago defines the possible places it can be now. Recent work highlights several variants of path dependence.

Sokoloff and Engerman (2000, p. 221) argue that colonies with plantation economies, like the Caribbean Islands and Latin America, started off with tiny colonial elites directing large populations of conquered natives or imported slaves. These elites had no incentive to establish institutions, like land reform, education, banking systems, or stock markets, that would help create small businesses and a middle class. In contrast, the United States, especially north of the Chesapeake, was settled by yeoman farmers who demanded precisely those institutions.

Acemoglu, Johnson, and Robinson (2001) explain the difference between such regions with settler mortality rates. They argue that yeoman farmers settled the United States because the climate of that region allowed them to survive. In contrast, European settlers in the Caribbean and much of Latin American died in droves. Consequently, the colonial powers minimized European settlement and built institutions that facilitated natural resource exploitation-mines and plantations. These sorts of institutions, once established, endured because their owners had sufficient wealth to control the political system. Acemoglu, Johnson, and Robinson (2002, 2003) propose a slightly different view-Europeans preserved extractive precolonial institutions where indigenous civilizations were more developed, like parts of Latin America and Asia.


Excerpted from A History of Corporate Governance around the World by Randall K. Morck Copyright © 2007 by The University of Chicago. Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.
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Table of Contents

Contents Preface....................xi
The Global History of Corporate Governance: An Introduction....................1
1. The Rise and Fall of the Widely Held Firm: A History of Corporate Ownership in Canada....................65
2. The History of Corporate Ownership in China: State Patronage, Company Legislation, and the Issue of Control....................149
3. Corporate Ownership in France: The Importance of History....................185
4. The History of Corporate Ownership and Control in Germany....................223
5. The Evolution of Concentrated Ownership in India: Broad Patterns and a History of the Indian Software Industry....................283
6. The History of Corporate Ownership in Italy....................325
7. A Frog in a Well Knows Nothing of the Ocean: A History of Corporate Ownership in Japan....................367
8. Financing and Control in The Netherlands: A Historical Perspective....................467
9. The History and Politics of Corporate Ownership in Sweden....................517
10. Spending Less Time with the Family: The Decline of Family Ownership in the United Kingdom....................581
11. Why Has There Been So Little Block Holding in America?....................613
Author Index....................671
Subject Index....................679
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