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.When they do and expectations are justifi ed byperformance, American corporate capitalism is at its best.1But expectations built upon expectations can take on their own life,as Keynes observed, and this has often characterized the American market.During the last twenty-fi ve years, expectations have become exaggerated.The multiples of earnings at which stock is trading are a good metric for mar-ket expectations.In his book Irrational Exuberance, Robert Shiller showed an almost unbroken spike in average price-to-earnings ratios beginning in theearly 1980s at around ten times earnings to reach forty-fi ve in 2000, earningsmultiples that far exceeded historical averages.The more unrealistic expec-tations become, the more the market puts pressure on corporate managers tofulfi ll its sense of reality.If they fail, the market punishes them by deserting the stock, dropping its price and jeopardizing management’s income and jobsecurity.The natural response is for management to do what it has to do inorder to meet the market’s expectations, no matter how unrealistic those ex-pectations may be.When this occurs, the long-term health of the Americancorporate economy suffers.2t h e m a n a g e r i a l e r aThe effects of the speculation economy that developed during the early de-cades of the twentieth century receded from view during the middle of thecentury.The period from the late 1920s through the early 1970s is known asthe managerial era, a time when directors and managers did their best to keepcorporate control out of the hands of public stockholders.Its developmentcan be detected as early as the fi rst decade of the twentieth century.Corpo-rate boards protected their abilities to run their businesses by creating struc-tures that relieved them of excessive pressure from the speculation economythey created.Leading bankers sat on boards to control the combinations theyhelped to put together.The interlocking directorates that resulted allowedthem to maintain some assurance that the businesses they fi nanced wererun profi tably and responsibly, providing returns to public stockholders butpreventing the market from exerting pressure on management.Interlocking directorates were only one device.Morgan, among others,• 271 •Epilogueused voting trusts as one way of vesting control in boards rather than markets.In their classic 1932 study, The Modern Corporation and Private Property, Adolph Berle and Gardiner Means found that 21 percent of the two hundredcorporations they studied were controlled by means of voting trusts, nonvot-ing stock, super-voting stock and pyramiding, all of which placed control inthe hands of managers, directors or controlling shareholders, and held offthe pressures of the market.In fact, they claimed that 44 percent of thesecorporations were under some form of management control.Managementalso quickly learned to command the proxy machinery of their companies,leading to the well-known phenomenon that stockholder voting during thewhole of the twentieth century was almost entirely ineffectual.3Corporate control seems to have been lodged in those with major fi -nancial interests in the corporation, whether as controlling families, banks,or executives with major assets invested in their own corporation’s stockand cross-owning signifi cant amounts of stock in other major corporations.The Temporary National Economic Committee found that 140 of the 200largest nonfi nancial corporations in 1937 had a controlling block of stock.A 1959 Conference Board study found that 27 percent of the directors of638 industrials either were nonemployee large stockholders or representedfi nancial institutions that had an interest in the corporation, again suggest-ing signifi cant controlling shareholder infl uence.Robert Larner concludedthat between 42.7 percent and 58.7 percent of the 300 largest public cor-porations among the Fortune 500 were family controlled in the mid-1960s.Robert Burch found that, as late as 1965, corporate control of almost half ofAmerican corporations lay in the stock ownership of founding families andtheir descendants.Other data, less carefully collected and more anecdotal,support the conclusion that a signifi cant degree of corporate control was inthe hands of small groups of large shareholders.More recent studies suggestthat large stockholdings continue to characterize the ownership structures ofmany of the biggest American corporations
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