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This article proposes a new, functional explanation of the different roles of non-shareholder groups (particularly labor) in different corporate governance systems. The argument depends on the analysis of a factor that has so far received relatively little attention in corporate governance research: the level of shareholder influence on managerial decision making. Pro-employee laws mitigate holdup problems�opportunism from which shareholders benefit ex post, but which will deter firm-specific investment in human capital ex ante. Since holdup takes place within what is considered legitimate managerial business judgment and all shareholders (both majority and minority) are its financial beneficiaries, the degree of managerial autonomy from shareholders is an important factor. In the United States, proponents of a stakeholder view of corporate law have argued that the insulation that U.S. boards of directors have from shareholders mitigates the risk of holdup of nonshareholder constituencies by shareholders, thus encouraging firm-specific investment such as investment in human capital. However, the large degree of autonomy of U.S. boards is unusual. This autonomy is eliminated, for example, by concentrated ownership, which prevails in Continental Europe. This article therefore suggests that, given their costs, laws aiming at the protection of stakeholders�such as codetermination and restrictive employment laws�may be normatively more desirable in the presence of stronger shareholder influence, particularly under concentrated ownership. The theory is corroborated by the observation that such laws tend to be more strongly developed in corporate governance systems with stronger shareholder influence. The United Kingdom, which has both stronger shareholder influence and stronger employment law than the United States, is classified as an intermediate case.
