Does Law Matter?: The Separation of Ownership and Control in the United Kingdom

Abstract

The corporate world today subdivides into rival systems of dispersed and concentrated ownership, with different corporate governance structures characterising each. The United States and the United Kingdom fall into the former category and other major industrial countries tend to fall into the latter. There is anecdotal evidence that suggests market forces are serving to destabilise traditional structures and cause some form of convergence along American corporate governance lines. According to some corporate governance experts, a variable that will affect how far will progress is the law. They argue that because the matters, a transition to the US pattern of corporate governance will occur only gradually and tentatively unless there is a legal environment which is hospitable to dispersed share ownership. This paper provides evidence on the extent to which legal regulation does matter in the corporate governance context. The approach is historical in orientation and the focus is on the emergence of a separation of ownership and control, characterised by widely dispersed share ownership and strong managers, in the United Kingdom. The experience in Britain is instructive because, with respect to corporate governance, no other major industrial nation has more in common with the United States. Developments in the UK suggest that a highly specific set of laws governing companies and financial markets does not have to be in place to ensure that a separation of ownership and control becomes a central feature of a country's corporate governance system. Instead, alternative institutional structures can perform the function law matters advocates say the legal system needs to play. It is an open question, however, whether such alternatives are likely to emerge in countries where a transition to the American pattern of corporate governance could be in progress.