The Rise and Fall of Bank Control in the United States : 1890-1920

This paper sketches the evolution in the governance structures of railroad and industrial firms in the United States between 1850 and 1914. I describe how the largest of these corporations became controlled by salaried executives, with no board member willing to oversee manager actions. Initially, railroads and industrial firms were tightly controlled by a small number of shareholders. The link of ownership and control was changed by the massive corporate restructuring in the 1890s and 1900s. The newly reorganized firms were controlled by banks such as J.P. Morgan, which took board positions to ensure adequate financial returns for themselves and for their clients. The final stage of corporate governance began in the 1910s as a public policy reaction to bank control. This reaction resulted in an almost complete disappearance of activist institutional investors from boards of directors. Using stock market data from 1914, I find that this political reaction destroyed about 6 percent of the equity value of bank controlled firms. By the late 1920s all the elements that define contemporary governance structures in the United States were in place and running their logical course