172 InManagersWeTrust
increase in your estimate of a company’s value, the weakness or
absence of these qualities certainly justifies the opposite. As Buffett
says: “Investors should pay more for a business that is lodged in the
hands of a manager with demonstrated pro-shareholder leanings
than for one in the hands of a self-interested manager marching to
a different drummer.”^3
To set the stage for examining managerial integrity and ability, it
is first useful to consider the standards of behavior managers are
held to both in the United States and around the industrialized
world. Much rhetoric characterizes discussion of these conventions,
but the reality is often at odds with it. Let’s take a brief tour of the
world stage of corporate governance before zeroing in on specific
indicators of pro-shareholder management.^4
THE TWO-WORLD STORY
Customarily, it is believed that corporations in the United States and
the United Kingdom (U.K.) operate primarily for the benefit of
shareholders. This contrasts with corporations in Japan, Ger-
many, and other Continental European countries, where managers
are thought to operate for the common good—for the benefit of
shareholders, workers, creditors, and communities. At an abstract
level both generalizations are correct, but on closer inspection nei-
ther is.
This comparison describes the U.S./U.K. approach as a share-
holder market model. In it, two internal groups constitute and reg-
ulate a corporation: managers and shareholders. Shareholders own
the corporation’s equity, the value of which fluctuates with the for-
tunes of the corporation. Managers consist of both the daily opera-
tors of the corporation (the officers) and those who oversee and
supervise those operations (the directors).
The key problem in U.S. and U.K. corporate governance is the
separation of ownership from control that results from the
shareholder-manager dichotomy. Two broad sets of mechanisms ad-
dress the issues raised by this problem. Monitoring mechanisms ei-
ther impose duties on managers or empower shareholders to take
action against them. Exit mechanisms include, most importantly, the
free transferability of ownership interests, which enables sharehold-
ers to sell their stoc kand thus exit the corporation at will; this often
is called the Wall Street rule.
Monitoring and exit mechanisms reinforce the financial and la-