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CLASSES OF STOCK

Most companies issue just one class of common stock. Sometimes, however, a firm may have two or more classes outstanding, which differ in their right to vote or receive dividends. Suppose that a firm needs fresh capital but its present stockholders do not want to give up control of the firm. The existing shares could be labeled class A, and then class B shares could be issued to outside investors. The class B shares could have limited voting rights, although they would probably sell for less as a result.

CORPORATE GOVERNANCE IN THE UNITED STATES AND ELSEWHERE

Heinz`s shareholders own the company but they don`t manage it. Management is delegated to a team of professional managers. Each shareholder owns only a small fraction of Heinz`s shares and can exert little influence on the way the company is run. If shareholders do not like the policies the management team pursues, they can try to vote in another board of directors who will bring about a change in policy. But such attempts are rarely successful, and the shareholders` simplest solution is to sell the shares.

The separation between ownership and management in major United States corporations creates a potential conflict between shareholders (the principals who own the company) and managers (their agents who make the decisions). We noted earlier several mechanisms that have evolved to mitigate this conflict:

Shareholders elect a board of directors, which then appoints the managers, oversees them, and on occasion fires them.

Managers` remuneration is tied to their performance.

Poorly performing companies are taken over and the management is replaced by a new team.

These principles of corporate governance do not apply worldwide. The United States, Canada, Britain, Australia, and other English-speaking countries all have broadly similar systems, but other countries do not. In Japan industrial and financial companies are often linked together in a group, called a keiretsu. For example, the Mitsubishi keiretsu contains 29 core companies, including two banks, two insurance companies, an automobile manufacturer, a steel producer, and a cement company. Members of the keiretsu are tied together in several ways. First, managers may sit on the boards of directors of other group companies, and a БІАААмpresident`s councilБІАААн of chief executives meets regularly. Second, each company in the group holds shares in many of the other companies. And third, companies generally borrow from the keiretsu`s bank or from elsewhere within the group. These links may have several advantages. Companies can obtain funds from other members of the group without the need to reveal confidential information to the public, and if a member of the group runs into financial heavy weather, its problems can be worked out with other members of the group rather than in the bankruptcy court.

The more stable and concentrated shareholder base of large Japanese corporations may make it easier for them to resist pressures for short-term performance and allow them to focus on securing long-term advantage. But the Japanese system of corporate governance also has its disadvantages, for the lack of market discipline may promote a too-cozy life and allow lagging or inefficient Japanese corporations to put off painful surgery.

Keiretsus are found only in Japan. But large companies in continental Europe are linked in some similar ways. For example, banks and other companies often own or control large blocks of shares and can push hard for changes in the management or strategy of poorly performing firms. (Banks in the United States are prohibited from large or permanent holdings of the stock of nonfinancial corporations.) Thus oversight and control are entrusted largely to banks and other corporations. Hostile takeovers of poorly performing companies are rare in Germany and virtually impossible in Japan.

For large corporations, separation of ownership and control is seen the world over. In the United States, control of large public companies is exercised through the board of directors and pressure from the stock market. In other countries the stock market is less important, and control shifts to major stockholders, typically banks and other companies.