GoingGlobal 173bor markets, and vice versa. Shareholders can oust inferior manage-
ments because a market for managing and controlling corporations
exists. The free transferability of ownership interests—an exit mech-
anism—has contributed to the development of deep, liquid, and ac-
tive (if not efficient) capital markets. Disclosure laws in the United
States, which promote the transparency of corporations’ perfor-
mance, have substantially aided these market forces.
Corporate transparency, coupled with the U.S./U.K. tradition of
at-will employment, also facilitates reasonably well-functioning labor
markets. For example, if managers perform poorly, corporate trans-
parency makes it more likely that shareholders will vote to oust them
and other corporations will not hire them readily.
At the same time, however, managers can contract and expand
the employee base to enhance performance. Of course, labor unions
often gain substantial power through collective bargaining agree-
ments which contract and federal labor laws protect. That power
does not derive, however, from externally imposed regulation but
instead is the product of voluntary arrangements.
Consumer product markets also contribute to the discipline of
corporate managerial performance by registering preferences which
eventually lead to corporate profits. Nonetheless, in the end, labor
markets are far from perfect, and it is not uncommon to see senior
executives earn staggering compensation despite mediocre or subpar
performance.
The great American pastime of litigation reinforces these moni-
toring mechanisms. Shareholders are equipped with a vast arsenal
of legal claims, procedural devices, and legal and equitable remedies
to protect their interests. They benefit from a specialized group of
lawyers who not only bring direct, derivative, and class action suits
under both state and federal law but also identify and communicate
the bases for such actions and even finance them.
The rights of other constituencies in a U.S. corporation differ
from those of shareholders. Contracts set employee, supplier, cred-
itor, and customer rights. The primary rationale for this treatment
is that in bankruptcy, shareholders are last in line after the claims
of all the other groups are paid off. This means that when managers
act for the shareholders they indirectly protect the interests of all
those claimants.
The central finance characteristic of this market model is frag-
mented ownership of equity securities in corporations. An underly-
ing cultural aspect of the fragmented ownership structure generates
an entrepreneurial spirit which encourages widespread participation