Corporate Governance: Online Book Reviews

In less than 90 pages, the participants review some of the most significant arguments in the field concerning Blair's contention that employees are legitimate stakeholders in corporations and that like shareholders, they too have firm-specific investments at risk, in the form of human capital. Blair looks at the current system and asks whether the allocation of risks and rewards is inevitable or should labor also be considered a residual claimant.

The group seems to come close to consensus that firms should greatly expand their use of equity-based compensation systems in exchange for salary reductions. Blair suggests the use of restricted stock which can encourage commitment to the firm by requiring they continue their employment in order to reap the full benefits. In fact, many are already doing so, especially, as pointed out by Ronald Gilson, in high-technology industries. Some pension funds have recognized this in their proxy voting guidelines (see, for example TIAA-CREF which has different stock dilution guidelines for high-technology industries).

An encouraging note comes from Jonathan Low, Deputy Assistant Secretary for Work and Technology Policy at the U.S. Department of Labor who indicates that five different groups have approached the Department that are looking to set up screens or create funds based on workplace practices and investments in human capital (see the beginnings or our own notes in this area at Mutual Fund). Low also sites a study by Wayne Cascio, of the University of Colorado, on the effects of massive downsizing. Three years after downsizing, sample companies had subsequent earnings increases of 183%, whereas comparison firms in the same industries that did not downsize had earnings increases of 422%. Cumulative stock returns over three years were 4.7% vs 34.3%. He concludes that pension fund managers "would be justified in encouraging a second look at such tactics."

Scott R. Bowman

This is an ambitious work which investigates how ideas which justify particular interests are adopted into law and influence intellectual presumptions. Bowman wants to know how we got to the point where "increasingly, transnational corporate power, not state power, constitutes the formative agent of change in world development." (p. 34) His interdisciplinary approach leads him to examine the legal foundations of corporate power.

He begins by reviewing how the republican tradition, which emphasized the responsibilities of citizen and statesman in maintaining social balance, was gradually replaced by the rise of classic liberalism, which affirmed the rights of the individual and justified the rise of capitalism by conceiving of economics as a matter of contracts between individuals. Economic activity came to represent the realm of freedom and the pursuit of self-interest. The coercive powers of the state were limited to preserving the realm of freedom and social efficiency. The ideological precept of corporate autonomy grew out of legal doctrines which reified the corporation as a citizen, thus, serving both to legitimize and to disguise corporate power as an inviolable part of the natural order. Corporate liberalism rose as an alternative to laissez-faire liberalism and statist socialism.

Jurists moved from thinking of the corporation as an artificial construct of the sovereign to a regulated citizen. The rights of due process aided corporate power by providing constitutional rights that could be invoked against state attempts to regulate. With the rights of legal persons, came an expectation of corporate social responsibility, consistent with the ideological concept of citizenship. The western frontier and the "invisible hand" gave way to faith in technological advance and a pragmatic role for government support and regulation.

Bowman's historical journey leads through exponents of the Progressive Movement such as Herbert Croly, Walter Weyl, and Thorstan Veblin who argued that corporate hegemony constituted the central problem of modern society. In place of the automatic balance of the marketplace, a conscious social balance would have to be imposed. The rights of property would be reduced but freedom would be retained through the separation of political and economic realms. Our concept of democracy shifted from the belief that sovereignty resides in the people to a more instrumental approach, dependent on rule by experts and faith in technology.

At the beginning of the Progressive Movement most large corporations were controlled by the majority stockholder. With the publication of Berle and Means' The Modern Corporation and Private Property in 1932 that assumption changed and the economic/political dichotomy fell. Peter F. Drucker, Adolph A. Berle and John Kenneth Galbraith "viewed the corporation as an autonomous or self-sufficient entity capable of generating its own capital and therefore no longer dependent on the capital markets." (p. 190) Each, in their own way, argued that corporate autonomy was an essential condition of modern industrial society. The objective of managerial theory shifted from preserving democratic institutions by regulating enterprise, to limiting the regulatory powers of government in deference to the value of corporate autonomy. The corporation became a more important political institution than the state and the business of government becomes even more dominated by corporate business.

Each wave of populism was marked by pushing regulation of corporations to a more abstract level. Bowman speculates on the future of the adoption of an international companies act or a supranational corporate charter. Behind the political decisions of corporations, Bowman sees the work of a dominant class. His is not the simple class warfare of Marx; the owners of the means of production pitted against the masses. Instead, control lies with the corporate executives and board members of the top 200 industrial and 50 financial corporations. Power based on relationships of control over the corporate bureaucracy superseded power based on property ownership, as the corporation developed into a political institution.

So where does Bowman look for salvation from a world dominated by a few hundred corporate executives? Clearly, he believes that large corporations must be held accountable for policies that affect society as a whole and that increasingly, corporate accountability will have to be defined in global terms. He rejects any movement to destroy the corporate form or rewrite their charters after the fashion of the 19th century. Instead, he seems to turn to public interest groups organized around environmental, health and consumer issues. According to Bowman, America's tradition of civic activism has "found its most potent voice when it has arrayed itself against corporate power or class privilege." (p. 275) Yet, even here Bowman appears pessimistic since he believes corporate social responsibility is unlikely to become a salient political issue except in cases of gross negligence or blatant disregard for the public welfare. In addition, through the media and political influence, corporations have taken the lead in redefining the parameters of corporate social responsibility.

However, even if public interest groups could unite popular opinion, the reforms they seek would extend government authority over those who control corporate power. If, as Bowman argues, corporations are so dominant they control government, it seems that little would change. Perhaps Bowman is too quick to dismiss those who seek to reform the corporations themselves. He sees the dominant struggles for control in merger battles not in a resurgence of stockholder democracy. "Tender offers, an essential strategy of the merger movement, have supplanted proxy fights as the favored means of seizing control of large corporations, though hostile takeovers often lead to proxy fights." (p. 351)

While tender offers and diversified mergers have played a significant role in increasing the asset concentration of the Fortune 500 there has also been a significant resurgence of shareholder democracy. Recent studies have shown that active management of funds is not cost effective. After factoring in fees and turnover expenses, "indexing" or owning a representative share of a particular market, has proved to be the best strategy for most pension funds, as well as for most individuals. As more money moves to the indexes and to institutional investors with large holdings, shareholder democracy becomes increasingly important; shareholders who cannot sell must become active in corporate governance if they wish to increase the value of their holdings. In 1992 the Securities and Exchange Commission changed the rules regarding shareholder communication. After this limited deregulation, the United Shareholders Association estimated the cost of a target mailing to a corporation's 1,000 largest shareholders was reduced from $1M to between $5,000 and $10,000.

Bowman does an excellent job of drawing from concepts in law, political thought and the social sciences in making a case for a revised form of class analysis to explain the character and evolution of corporate power. He is clearly right that civic activism reaches its peak when it focuses on "corporate power or class privilege." Each wave of reform in the past has been immediately preceded by public outrage. Upton Sinclair's portrait of the meatpacking industry, Ida Tarbell's condemnation of Standard Oil, Rachel Carson's cry for the environment and Ralph Nader's research into unsafe cars each stirred the middle class to action. Each crisis is answered with a new set of regulations for business.

Perhaps if shareholder democracy can take root, corporations will build democratic mechanisms into their own structures. Power would then shift from the dominant class of Bowman's concern to a more broadly based group of shareholders and employees. Arguably, such a shift would be consistent with both republican and liberal democratic traditions. Social balance would be restored, while preserving the realm of freedom and social efficiency, by relying less on the coercive powers of the state.

Carolyn Kay Brancato

This is the best book I've seen for CEOs, board members, investor relations staff, and others concerned with ensuring the market fully reflects a corporation's value. Institutional and individual investors, who take an ownership perspective, will also find insights here on the difficulties of measuring good corporate performance and governance. In six short chapters, chock-full of informative figures and tables, Brancato clearly describes why a corporation's shareholder mix is important, what institutional investors view as good corporate governance, and "how companies can attract the investors they want."

Brancato graphically illustrates a continuum of shareholders. On one side are "relationship" investors such as Warren Buffet, LENS and the State of Wisconsin Investment Board. These investors pay close attention to the fundamental value of their investments. In addition, where that value is eroding or opportunities to create value are being ignored, these investors will not hesitate to actively use their votes to seek changes. On the other side of the spectrum are program traders, technical analysts, who chart price movements in order to time the market or individual stock, regardless of intrinsic value. They vote with their feet, not their proxies. Although corporations may want to attract traders at some point in their development, there are clear benefits to targeting shareholders who are "willing to tolerate a drop in this quarter's earnings." She points to an analysis by Georgeson which shows that a number of major companies' stock prices have improved when the composition of their shareholder bases shifts from value to growth investors.

Using research from various sources, Brancato, points to the importance of knowing who is managing the assets of a fund, the votes and what the turnover rate is. For example with regard to turnover, the rate in 1995 for public pension funds was 21% vs 59% for money managers. This reinforces the doubts I expressed in my review of Michael Useem's Investor Capitalism regarding CEOs who listen to money managers but avoid pension fund managers. Brancato examines various ways to measure corporate performance and the potential to create investor value. Measures include customer satisfaction/loyalty, employee satisfaction/empowerment, cash flow, quality measures, strategic alliances, and intellectual capital. She notes "there is a pressing need to explore ways corporations can communicate with their current and potential investors (as opposed to the traders in the markets) concerning their key performance measures, strategic intentions, and plans to add value to their enterprises in the future." (76)

According to Brancato, investor activism has gone through four stages. First the focus was on social issues, then opposing antitakeover devices, next urging structural and procedural changes, and finally analyzing the performance of corporations in order to target underperforming companies. Most recently, the focus is beginning to be on the positive potential for future performance...what practices add value? "Oddly enough, many of these nonfinancial issues are reminiscent of some social concerns, such as workplace practices and environmental compliance, formerly associated with the social- and religious-based institutional investors." "They are increasingly perceived to add to the financial viability of the corporation." (87)

Good corporate governance is good business. Guidelines put out by the National Association of Corporate Directors, the Cadbury Report, the Toronto Stock Exchange Report, the Vienot Report, CalPERS, and others have generally had positive results. A 1995 Korn/Ferry survey found only 21% of boards had been contacted by institutional investors. While 6% said such contacts "made board deliberations less congenial," 19% said it "increased the level of contributions by directors;" 33% agreed directors became "more sensitive in evaluating CEO performance;" and 36% indicated directors were "more sensitive in evaluating board performance." (169)

Brancato's substantial contribution with this volume is in linking the movement to better define strategic performance measures with the recent focus by investors on finding measures which indicate the potential for sustained performance. Agreement "could not only better link the interests of investors with corporations, it could reduce the tension that arises as managers and directors attempt to reconcile conflicts in deciding to whom the corporation owes its allegiance: the shareholders or its other constituents such as customers, employees, and the community." (234)

John A. Byrne

Byrne, John A., Chainsaw: The Notorious Career of Al Dunlap in the Era of Profit-At-Any-Price, HarperBusiness, 1999. Click on the link to buy the book.

Byrne tells the story of how Wall Street created a Frankenstein monster, committed to maximizing short-term performance at any cost while spouting the mantra of "shareholder value creation." Al Dunlap exploited America's fascination with strong leadership by romancing investors with sweeping decisions and monumental cutbacks. But, as Byrne notes, "Dunlap did not know how to cut fat without destroying muscle."

He fooled many investors into thinking he was aligning his own interest with theirs through the heavy use of stock options. However, his enormous compensation package had practically no downside and only contributed to further incentivising strategies which inevitably led to his own downfall.

Byrne reports that Dunlap's 2nd contract with Sunbeam awarded him $46.5 million even if the stock only rose about as much as a Treasury bond (5.5% a year). He documents numerous practices that focused attention on the short-term, such as halting new product development and using "bill and hold" strategies, which allowed Sunbeam to immediately book sales and profits. Restructuring charges from mergers allowed Dunlap to create one false year of increasing profitability at the same time he was selling off plants with the highest profit margins.

"He did things that authentic leaders, guided by a set of values and morals, would refuse to do. They didn’t cut corners, debase employees before their peers, enrich themselves at the expense of others, or forfeit the long term for a few months of outsize results." Dunalp "appealed to Wall Street’s desire for slaughter, for fast money, for the illusion of speedy turnaround that pumped up the price of a stock." He was embraced by "cutthroat investors and deal makers, people like Michael Price, Michael Steinhardt, and Ronald Perelman, not to mention those highly regarded advocates of shareholder value George Soros, Robert A. G. Monks, and Nell Minow."

True leaders, according to Byrne, are ambitious for their companies, don’t impose unrealistic demands, demonstrate compassion and respect, believe in shared sacrifice, invest for the long term, understand that public corporations have social responsibilities, and a responsibility to build long-lasting useful products. Dunlap "became more concerned with his image and his speeches than the company."

Allowing Dunlap to personally select at least 3 new board members was one mistake of many but even then "he eluded the safeguards of a well-meaning board, independent outside auditors, and army of talented executive." "Every system depends on people who will say no even when faced with the threat of losing a job or a business. Dunlap worked at creating fear, dependence, and guilt so that no one dared defy him - until it was too late. It was a lesson no one should ever forget."

Of course such problems didn't begin or end with Al Dunlap. A recent study by Garry Sanders, Bringham Young University, found that compensation was highest and performance worst among companies that grant lots of options and don't tie cash compensation closely to past performance. Sanders also found that CEOs who hold many options, especially out of the money, are more likely to make acquisitions. If the stock soars the CEO wins. If it tanks, the CEO has lost nothing. Ira Kay, of Watson Wyatt, found that executive pay at the poorest performing acquirers were 5 times more reliant on stock options v stock ownership. (BusinessWeek, 12/13/99, p. 204)

Will the lessons of "Chainsaw Al" be remembered? Making the book into a movie would help popularize the facts and images. Certainly there's lots of violence (largely verbal), suspense and insight. But the sex is minimal and there aren't really any heroes to be found playing a major role. Without institutional changes, the "lessons" are more likely to be learned by those who want to continue to focus on short-term gains at the cost of diminishing long-term wealth creation, rather than by the "authentic leaders" described by Byrne who already have a higher moral code.

Stock turnover rates continue to accelerate; most shareholders would still rather take a "free" ride than perform due diligence in the area of corporate governance. Michael Price is portrayed in Byrne's book as learning a lesson that his mutual funds were good stock pickers but not good "control players" who worked closely with management to build the company. That's a great insight, but have Price and other fund managers really begun to create a better network of monitors to build the companies they own?

As I write these notes, the largest shareholder settlement in history was announced at Cedant, $2.83 billion, arising from fake reporting of $500 million in 1998. The same day in the Wall Street Journal the SEC once again is indicating "displeasure at the cavalier attitude of some executives toward bookkeeping and weak-kneed auditors." Sunbeam involved some fairly conscientious people and one loud mouth CEO who did everything he could to draw everyone's attention. How many more companies are being quietly milked to death as shareholders fixate on the price of their bet rather than on how they, as owners, can add value?

Also by Byrne, Informed Consent and The Whiz Kids: The Founding Fathers of American Business-And the Legacy They Left Us

Jonathan Charkham

Charkham, Jonathan and Anne Simpson Fair Shares: The Future of Shareholder Power and Responsibility Oxford University Press, 1999. Buy it through our affiliation with Amazon.com.

Much has been written about the role of directors and boards but far too little on the how shareholders can add value. Carolyn Kay Brancato did so in her excellent book, "Institutional Investors and Corporate Governance." However, Brancato was primarily writing from the perspective of managers. Although there was general recognition that shareholders can add value, the thrust of the book was on what managers need to know about shareholders and how to attract shareholders who will support them. Charkham and Simpson take a larger societal viewpoint. At bottom, they are concerned not with what is best for managers but what system will best provide the goods and services that society needs.

The authors provide a short history of the corporation, from the Bubble Act of 1720, which circumscribed the use of charters, through general enabling laws and subsequent limited liability acts. They discuss the legal framework of directors, the voluntary Cadbury Code, the growth of activist investors such as LENS, UK Active Value Fund and end with a discussion of needed reforms.

A four year study of British proxy voting shows a marginal decline in votes cast in favor of management, from 99.3% to 98.6%. This is not exactly strong evidence of a shareholder revolution. The potential is there but the current system is riddled with "practical inefficiencies," "outmoded rules," and "conflicts of interest which prevent effective oversight by institutional shareholders, who are in turn not required to be accountable to those on whose behalf they invest."

While Charkham and Simpson acknowledge that no country can afford to impose burdens on shareholders if it hopes to attract international capital, at bottom they appear to want to stand Milton Friedman on his head. Instead of "the only social responsibility of business is to make a profit," they appear to be working toward a world where the only businesses to make a profit will be those that are socially responsible. But their expressed concerns in this area aren't for specific measures, such as being kind to animals, but to the larger framework which defines the rights and behavior of owners. For example, one of the major changes they seek is for institutions to be less diversified. Holdings should not be too fragmented to warrant investment of time and resources in monitoring. This would shift institutions away from speculation to investment.

In Britain, institutions hold about 80% of the market. Cadbury indicated voting rights are an asset and should be exercised on behalf of those for whom the institution invests. Trustees must be able to demonstrate their voting activity is prudent, carried out with care and in the sole interests of beneficiaries. Charkham and Simpson are ready to move shareholder responsibility to the next level by asserting that trustees not only have a fiduciary duty to monitor companies and vote on behalf of shareholders but also to take positive action if problems are looming. "The duty of care extends to maintaining the health of the company." (p. 145)

Some of their proposed reforms are specific to the British situation, but many are not. One of their more innovative is that dividends should include a bonus for those that voted in the last election. They would like to see a growth of shareholder associations and "deeper" share ownership. Included are ideas for making the annual meeting more than a ritual. One is to give shareholders the right to do more that vote down pay. Let them amend pay. The authors oppose the use of options as in incentive for CEOs and directors. They note the quality of reporting on non-financials (environment, social) needs dramatic improvement and that training for trustees should be mandatory.

In the end, the authors argue that ownership of a significant proportion of a company's shares imposes obligations. Just as the tax system obligates those who earn more to pay more, owners with larger holdings should be held to an enhanced duty of care. Larger shareholders have resources and interest that others lack. All fiduciaries have an obligation to see that shares are voted, records are kept of votes and reports are made to beneficiaries. These obligations apply to insurers and mutual funds, as well as to pension funds.

Charkham and Simpson are at the cutting edge of democratic corporate governance. Their vision fits nicely with the technology of the internet which can facilitate the spread of democracy into the world of finance. Wide readership of Fair Shars and the recent move by Ms. Simpson to the World Bank are sure to further that vision.

Donald H. Chew

Chew, Donald H., editor Studies in International Corporate Finance and Governance Systems: A Comparison of the U.S., Japan and Europe Oxford University Press, 1997. Buy it from Amazon.com.

The editor of the Journal of Applied Corporate Finance, sponsored by Bank of America and published by Stern Stewart & Co., has compiled 28 articles and 2 roundtable discussions. Most of the articles are drawn from the Journal. They are written by the leaders in the field of corporate governance such as Michael Porter, Michael Jensen, John Pound, Steven Kaplan, Bernard Black, Mark Roe, Ronald Gilson, Carl Kester, and many others of equal prominence.

The book deals with issues of critical importance. While many in the field of corporate governance had become fascinated with the "relationship-based" systems of Japan and Germany, several of these authors were exploring the hidden costs and the ineffectiveness of such systems to return excess capital to investors. Japanese companies were following a strategy of value-reducing diversification, overcapacity in declining industries and failure to abandon unprofitable activities. Yet, there are few here who would embrace current U.S. practices without substantial changes. U.S. investors demand higher returns because, in general, the fragmented U.S. corporate governance system imposes higher risks.

Porter proposes to blend the strengths of both by giving board seats to major stockholders. Jensen calls for significant equity ownership by managers and directors, greater participation by active investors, and smaller and better informed boards. C.K. Prahalad turns the focus to corporate renewal through growth opportunities. The book ends with a discussion of Stern Stewart's EVA Financial Management System. Stern Stewart's EVA product got another ringing endorsement when CalPERS adopted its use in creating their annual focus list. (see October) Altogether an excellent book for academics and practitioners alike with an interest in comparative systems.

Betty Jane Dunn

Alan Downs begins by reminding us that corporations only exist as a social construct and that unless corporations act in a responsible manner voters will elect officials who mandate specific corporate behavior. "If history has proven anything, it is that legislated corporate morality is extremely costly and inefficient...The corporation must never turn its back on its role as a social agent. When that goes, so will its freedom. The book presents several articles on downsizing, its inevitability given a rising productivity ratio, the fact that financial benefits were greater when part of strategic restructuring rather than merely for cost reduction, and several alternatives are offered in an article by Rick Maurer.

Steven Wolowitz contributed an excellent article which goes over a few of the more important cases regarding the rights of "stakeholders" under the law. He concludes that "it does not appear likely that courts or legislatures will impose in the near future a generalized duty to consider non-shareholder interests when making business decisions. Corporate directors should recognize, therefore, that except to the extent that specific laws are enacted imposing particular obligations on them or their companies, their shareholder still come first."

Carolyn Kay Brancato and John C. Wilcox both contributed articles emphasizing the need to know your shareholders and how they measure your performance. One flippant statement in an otherwise solid article came from Wilcox who comments that "relational investing" enjoyed a brief period of favor, but its assumption that institutional investors could act like owners, avoid conflicts and participate in board decision-making proved unworkable." I'm not sure what this means. Yes, institutional investors cannot avoid conflicts, nor can they or should they participate in routine board decisions, but I never knew these to be assumptions for "relational investing." I wish Wilcox had provided some further explanation. Nonetheless, both Brancato and Wilcox offer good advice on how to better align the interests of stakeholders and shareholders, as do many other contributors to this timely volume.

Neil Fligstein

Fligstein develops a theory of corporate transformation based on a sociological framework. For Fligstein, organizations are embedded in organizational fields defined in terms of product line, industry, firm size or suppliers, distributors or owners. The state sets the rules of behavior within which corporations employ strategies, structures, ad technologies which shape and constrain their patterns of growth. These organizational fields are not benign but are "set up to benefit their most powerful members."

He argues the first corporate strategy consisted of predatory competition. With the rise of antitrust suits, cartelization and then monopolies developed. The manufacturing conception of control was developed by absorbing suppliers and marketing functions into their organization in an attempt to stabilize the production process through oligopolistic pricing. A sales and marketing conception of the firm next evolved in the 1920s. Finally, the currently dominant conception of the corporation emphasizes the use of financial tools which measure performance according to profit rates.

Fligstein devotes the bulk of the book to documenting this evolution. Importantly, he attempts to do this from the historical perspective of the actors involved, in order to demonstrate that what has survived is not necessarily the most efficient form but rather it has come into existence as a "result of a social and political process that defines and redefines markets."

An important portion of Fligstein's extensive research centers around the emergence of the Celler-Kefauver Act which he credits with forcing corporations into a strategy of buying firms in unrelated industries starting with the rise of Textron. He provides statistical evidence that Celler-Kefauver greatly slowed the growth of horizontal and vertical mergers in favor of diversification. Diversification and antitrust action provided essential conditions for the rise of the financial conception of control.

One of the earlier adherents was James Ling of LTV who perfected the strategy later known as the leveraged buyout. "Ling never became attached to any particular product and would enter or exit an industry in a moment if he felt that there was much to gain by doing so." (p. 248) The most important goal became keeping the stock price above book value because if the assets were undervalued the firm became a takeover candidate and management could lose their jobs.

The historical view emphasizes the market as the source of efficiency. First, managers attempted to achieve economies of scale. Second, they attempted to take over the market through strategies such as product differentiation and advertising. The multiproduct firm was later developed as most efficient because it used capital to spread risks across product lines. However, Fligstein points out that this conceptual approach places the market outside the social process. Instead of a functionalist approach, Fligstein embraces the notion that "the forms of social organization produced the market, not the reverse." "The interpretation of the history of the corporation that stresses efficiency ignores the cental fact that managers and entrepreneurs were constantly trying to escape or control competition, not engage in it...the rules of the market could be changed by powerful corporate actors and the government." (p. 302)

"Markets are comprised of social structures or sets of rules which preserve the power and interests of the largest organizations. When the rules no longer produce positive results for those in control, the rules are changed." Fligstein's sociological conception of the corporation has the advantage of recognizing there is no absolute standard of efficiency or mode of organization which exits objectively outside social constraints. The rules by which worlds are constructed are constantly negotiated and changed. The market as the driving force of economic history is replaced by a variety of institutional constructs. "By dropping the notion that the most efficient economic solution is the predominant one and accepting that efficiency is a social construction, one can then see how the transformation of conceptions of control and their strategies rely on organizational dynamics and the interaction between organizations, their leaders, and the state." (p. 304)

Fligstein concludes that "the financial conception evaluates the consequence of any course of action in purely financial terms. Any possible shift in that view will require an alternative world view that challenges the financial perspective by creating firm growth more predictably. A shift is also dependent on a crisis in the current point of view." (p. 313)

While I agree that paradigm shifts are generally proceeded by a crisis, I don't think we are inevitably heading toward "creating firm growth more predictably." We could just as easily slide into a society of have and have-nots where major corporate and social disruptions are accepted on the basis of the inevitability of market driven forces.

Democratic reforms in the area of corporate governance offer our greatest hope for predictably enhancing wealth for corporations as well as for the broader society but, about that program, Fligstein has little to say. His message that human minds create and control market forces, instead of the reverse, is a powerful message worth wide discussion and acceptance. Fligstein is to be congratulated for making this point so well in a clearly written text and for supporting it with a mass of evidence.

Howard M. Friedman

Friedman, Howard M., email: hfriedm@uoft02.utoledo.edu Securities Regulation In Cyberspace (New York: Bowne & Co., Inc., 1997, 1998). Second Edition, is a one-volume loose-leaf binder to accommodate periodic updates, 1000 pages ($225). Order online at http://www.bownepublishing.com, by calling Bowne Publishing Division at (800) 370-8402, or from overseas (212) 229-7237.

This is the first comprehensive guide to the emerging body of laws, regulations and rulings that impact corporate communications, capital formation, proxy fights, takeover bids and securities fraud in cyberspace. It includes an examination of securities fraud on the Internet, e.g., "misdirected" e-mail tricks and "pump-and-dump" schemes in which misinformation is sowed in chat rooms and Usenet newsgroups. It analyzes the personal liability of investors who circulate tips, rumors and "cybergossip" as well as the risks involved for online Internet service providers. The appendices include relevant SEC releases and no-action letters, regulations, state internet orders, foreign regulations, a directory of self-regulating orgranizations and more.

Of particular interest to our readers are the preface by SEC Commissioner Steven M. H. Wallman and chapters on investor relations, corporate governance, and electronic fights for change and control. Friedman, for example, provides advise on using the Web to increase the liquidity securities sold through private offerings. He tells how management can use the Internet to test reaction from the investor community by posting a preliminary proxy statement without sacrificing traditionally tight time frames. In the first edition, Friedman eluded to the likely benefits of shareholders communicating to other shareholders by including their Internet site within the 500 words allowable on management's proxy statement.

With the second edition, Friedman must inform his readers that SEC staff last year granted a no-action relief to the Templeton Dragon Fund, allowing it to omit a reference to a shareholder's Internet site in the proxy statement. The no-aciton letter is a real blow to shareholder rights and action. (see also the Money Manager's Compliance Guide from Thompson Publishing Group)

Friedman offers valuable advise on how SEC regulations might be applied to cyberspace and how to push the frontier while remaining in compliance. The revised edition ofSecurities Regulation in Cyberspace is a must read for anyone concerned with the future of shareholder communications and the use of cyberspace in corporate governance.

In the new edition, Friedman has added analyst input and advice on the practical applications and legal implications of important new developments, including:

Margaret M. Blair