Corporate Darwinism

Abstract

Because representative shareholder litigation has been constrained by numerous legal developments, the corporate governance system has developed new mechanisms as alternative means to address managerial agency costs. We posit that recent significant governance developments in the corporate world are the natural consequence of the ineffectiveness and inefficiency of shareholder suits to address certain genre of managerial agency costs. We thus argue that corporate governance responses evolve to fill voids caused by the inability of shareholder suits to monitor and discipline corporate managers.

We further claim that these new governance responses are themselves becoming stronger due in part to the rising concentration of share ownership of public companies. Share ownership has steadily evolved so that there are now a significant number of large blockholders at most public companies. This growing concentration of ownership in public companies has the twin effects of reducing the costs of collective action and increasing the likelihood that an owner exists who will have a sufficient economic interest to embrace improved governance as a wealth-increasing strategy.

Finally, the increasing concentration of ownership of public companies has the effect of making governance responses efficient and effective, a response that would not have been observed were ownership not concentrated. Thus, we not only argue that concentration increases activism among this growing group of blockholders but also that concentrated ownership ushers in new methods to address agency costs and makes those methods effective.