Steven A. Bank

Is Berle and Means Really a Myth

Adolf Berle and Gardiner Means famously declared in 1932 that a separation of ownership and control was a hallmark of large U.S. corporations, and their characterization of matters quickly became received wisdom. A series of recent papers has called the Berle-Means orthodoxy into question. This survey of the relevant historical literature acknowledges that the pattern of ownership and control in U.S. public companies is not monolithic. Nevertheless, a separation between ownership and control remains an appropriate reference point for analysis of U.S. corporate governance.

The Corporate Pyramid Fable

Although corporate pyramids are currently commonplace world-wide and although there have been “noteworthy pyramiders” in American business history, this controversial form of corporate organization is now a rarity in the United States. The conventional wisdom is that corporate pyramids disappeared in the U.S. when New Deal policymakers began taxing dividends paid to corporate shareholders. This version of events is more fable than truth. The introduction of the intercorporate dividend tax did not foster a rapid dismantling of corporate pyramids. Instead, pyramidal arrangements were already rare in the U.S., other than in the utilities sector, and the demise of utility pyramids was prompted by the Public Util- ities Holding Company Act of 1935 rather than by tax reform.

Tax and the Separation of Ownership and Control

While generally the impact tax has on patterns of corporate ownership and control has received little attention, this paper argues that tax is potentially an important determinant of ownership patterns in large companies. The paper focuses mainly on historical developments in Britain, where an “outsider/arm’s-length” system of corporate governance began to take shape in the years leading up to World War I and became fully entrenched by the end of the 1970s. Taxes imposed on corporate profits, taxation of managerial and investment income and inheritance taxes do much to explain why during this period blockholders sought to exit and why there was sufficient demand for shares among investors to permit ownership to separate from control. The paper also discusses developments in the United States and argues that tax helped to foster the separation of ownership and control that reportedly occurred in larger American companies after World War I.

Executive Pay: What Worked?

CEO pay is a controversial issue in America but there was a time, often overlooked today, when chief executives were not paid nearly as much as they are now. From 1940 to the mid-1970s executive pay was modest by today’s standards even though U.S. business was generally thriving. What worked to keep executive pay in check? Economist Thomas Piketty and others credit high marginal income tax rates, leading to calls for a return to a similar tax regime. This paper casts doubt on the impact tax had and also shows that neither the configuration of boards nor shareholder activism played a significant role in constraining executive pay. It emphasizes instead the roles played by strong unions, a different and more circumscribed market for managerial talent, and social norms, explanations that do not easily lend themselves to generating modern policy prescriptions.

The Progressive Consumption Tax Revisited

In his recent book, Professor Edward McCaffery proposes to replace the income tax with a progressive consumption tax. By exempting savings and investment from the income tax base, while subjecting spending to a progressive rate tax, McCafferys proposal appears to be the perfect compromise. This Review examines three previous attempts to introduce a progressive consumption tax - in 1921, 1942, and 1995 - and discusses why they failed to satisfy both sales tax and progressive income tax proponents. The problem was that each previous attempt was considered an illusory compromise. Consumption tax supporters were offended by the progressive rate structure while income tax supporters did not want to adopt what they perceived to be a move from an ability to pay base to a necessity to consume base. The Review concludes by analyzing the extent to which McCafferys proposal suffers from the same problems as its predecessors.

Dividends and Tax Policy in the Long Run

There is a long-standing debate as to whether changes in shareholder-level taxes have an effect on firm dividend policy. The traditional view is that tax changes influence dividends, while the new view is that there generally is no such effect. In support of the traditional view, recent observers point to the rise in dividends following the reduction in the tax rate on dividends in 2003. In fact, the resurgence in dividends has been so strong that President Bush has made it one of his top legislative priorities to permanently extend the tax cut, which is currently set to expire at the end of 2010. The popular assumption is that the rise in dividends - and any associated economic and corporate governance benefits - will only continue if the lower rate is made permanent. This Article challenges that assumption. Using finance theory and empirical evidence from the U.S. and other countries, this Article shows that the relationship between dividends and taxes over the long run is more complex than dividend tax cut proponents suggest. Because the 2003 tax cut was only a temporary cut, making it permanent may actually have an effect that is opposite of what is intended. The implication is not that a temporary tax cut is preferable to a permanent one, but rather that the attempt to influence corporate behavior through the tax laws should be resisted as either futile or potentially counterproductive.

Will U.S. Soccer be Forced to Adopt Promotion and Relegation

On August 3, 2017, Miami FC of the second division North American Soccer League and Kingston Stockade FC, an amateur side in the National Premier Soccer League, filed a claim with the Court of Arbitration for Sport (“CAS”) in Lausanne, Switzerland in an attempt to force U.S. Soccer to use promotion and relegation. This would require leagues to be organized in a strict pyramid in which the top teams each year are promoted to the next highest division and the bottom teams are relegated to the next lowest division. Their claim is that promotion and relegation, a longstanding feature of the “open” leagues dominant in Europe, but foreign in the “closed” leagues used in the United States, is mandatory under FIFA rules and Swiss law. This Essay evaluates the Request for Arbitration and concludes that there are procedural, substantive, and technical obstacles that make success at CAS unlikely.