competing explanations of corporate governance the...

“Politics, Institutions, Society: Competing Explanations of Corporate Governancethe World Around"

Peter Gourevitch IR/PSUCSD

UC Human Social Complexity VideoconferenceJanuary 5, 2007

May 25, 2006 Northwestern

Key Questions:What explains variance in corporate governance around the globe?


Figure 1.1: Ownership ConcentrationFigure 1: ownership conent.


Monitoring the managers: the “incomplete contract”

-- how to avoid:

--getting ripped off by managers (Enron)

--getting ripped off by insider owners (Adelphia, Parmalat in Italy)

-- getting ripped off by the other players: subcontractors, workers, etc.

The corporate governance problem:


What works: crony capitalism, arms length market?

Before 1997: Japan, German > US

After 1997: Crony capitalism US> Japan, Asia,

After 2001/02: Enron, World Com, Adelphia, Parmalat, etc.

So, why the variance in systems?


Diffuse Ownership Model

Roe, p 2

Roe chart 1 diffuse model


Dominant stockholder model

Roe, p. 3

Roe Chart two l block


External diffuse shareholder model:--many shareholders, elect board, board picks managers;

-Strong(MSP-Minority shareholder protection in law--Forbids insider trading; accounting and other informationwith RI-reputational intermediaries; strong market for control

Internal concentrated blockholder model (“stakeholder”)--few large shareowners; control board which picks

Managers ---Weak MSP, -- no rules on insider trading, --weak information reporting standards, --weak market for control, weak anti trust -- lots of Cross shareholding or pyramid control

Solution: two models:


Blockho , msp Figure


What explains strong MSP ?

Politics: authoritative law, regulation and their enforcement.


Why Do Corporate Governance systems differ around the world?

Minority shareholder protections (MSP):

Regulations in product markets, competition, prices, education, etc.: Varieties of capitalism


Three meanings to Politics:1. Legal formalism

2. Political institutions : de jure forms of power.

3. Political sociology: de facto forms of power: economic/political sociology: interest groups, etc.


1. Legal formalism: legal family

Procedures and mechanisms of a particular legal system..


What determines level of MSP?Standard view in Law and economics:

COMMON VS. CIVIL LAW--LLSV

Common law produces high MSP, and thus high Diffusion

Civil law produces low MSP, thus low diffusion, andBlockholding.


COMMON LAW --English Origin. UK, US, Canada, Ireland, Australia, Hong Kong,

India, Kenya, Malaysia, New Zealand, Nigeria, Pakistan , Singapore, South Africa, Sri Lanka, Zimbabwe, plus Thailand, Israel

CIVIL LAW:French—All of France’s former colonies, Spain, most of

Latin America, Turkey, Indonesia, Netherlands, Greece

German law—Austria, Germany, Japan, South Korea, Switzerland, Taiwan

Scandinavian – Denmark, Finland, Norway, Sweden

Common civil distribution


I. VARIANCE OVER TIME Countries have changed MSP but not legal system, thus

Japan and France and US. -- not unidirectional.

II. Does CODE equal LAW: Any common law country could legislate overrides of protectionsby judges. Any civil law country could legislate protections

III. ENFORCEMENTCommon law country could have poor enforcement, civil law good

III. CIVIL LAWS COUNTRIES IN FACT VARY A LOTScandinavian ones have high MSP but low diffusion

Problems with Legal Family argument


Political Processes and Corporate Governance outcomes

Policy expresses outcomes of Political processes:

II. Formal political institutions -- mechanisms which aggregate preferences

III. Preferences and political resources of major groups:


2. Preferences

Policy expresses social demands on politicians: --

Importance of Civil society what do actors want:

what power resources:

(de facto vs. de jure: De jure cannot bind in the face of de facto: “self enforcing” so long as they want them):


Left right -block diagram


Left right measures (Roe)


Law vs. Politics: the combat


Preferences of groups; form political coalitions . It is not about efficiency, but about who benefits:

--Owners (investors) : -- outsider vs. insider?

--Managers-- autonomous or subordinate?

--Workers-- as employees ?-- as pension asset holders?

Groups in corporate governance conflict


Table 1.xxx.x Pol itical Coaliti ons a ndOut comes

Coalitional Lineup Winner Mode l Outcome

Pair A: Class ConflictOwners + Manag ers vs .Worker s

Owners +Mana ger s Inv estor Diffusi on

Owners + Manag ers vs .Worker s Worker s Labo r Blockh old ing

Pair B: SectoralOwners vs. Mana ger s +Worker s

Mana ger s +Worker s Social Barga in Blockh old ing

Owners vs. Mana ger s +Worker s Owners Oligarchy Blockh old ing

Pair C: Property andVoiceOwners + Worker s vs.Mana ger s

Owners +Worker s Tran spar en cy Diffusi on

Owners + Worker s vs.Mana ger s Mana ger s Mana ger ism Diffusi on

table Coalitions


POLITICAL VARIABLES -- alternative alignments:

--LEFT VS. RIGHT PARTISANSHIPLABOR VS. CAPITAL -

--CROSS CLASS--SECTOR: WORKERS AND MANAGERSVS. OWNERS - CORPORATIST COMPROMISE

--CROSS CLASS: VOICE TRANSPARENCY--WORKER AND OWNERS VS. MANAGERS(Pension funds and external shareholders)

Coalitions


Coalition Combinations -- external investor dominant: MSP high

--manager, internal blockholders, labor: MSP low

--transparency coalition: labor pension funds plus external investors: MSP high Several examples of this in US, Germany, SouthKorea, an important development in politics of corporate governance-- pension funds:


Pension Assets&

MSPs


PensionDebt &MSPs

Figure 7.1 Implicit Pension Debt and Shareholder Protections


3 .Political Institutions:

Institutions: == Mechanisms for aggregating demands

Vary the political institutions, you get different results.

-- parchment institutions, formal rules, procedures, constitutions.


Aggregating mechanisms

a. Consensus institutions --PR electoral laws, multi party coalition governments:

CONSENSUS == weak MSP

b. Majoritarian institutions -- single member districts, two party systems --- produce stronger MSP

MAJORITARIAN == strong MSP

See Pagano Volpin AER 2005,Gourevitch and Shinn, 2005


Politicalinstitutionsand Block-holding

Figure 4.2 Political Cohesion and Blockholding


INSTITUTIONS INFLUENCE COALITIONS

Impact:

Small electoral shifts have larger consequences in Majoritarian than in Consensus systems, so undermines basis for cross -class corporatist bargains, more policy variance, and leads to the diffuse market model.


Preferences(Owners, Managers,

Workers)

Institutions(Majoritarian,Consensus)

Shareholder Diffusionor

Blockholding

POLITICS

Minority Shareholder Protections

VoC = LME/CME

POLICIES OUTCOMES

Causal Schema


Conclusion: Lessons

The argumentation summary:

a. Legal family depends on politics

b. Politics turns on interaction of institutions and social demands


a. Codes are converging but laws and

practice are not:

Corporate Governance: widespread adoption of Codes of practice ( OECD and other) -- following the legal family approach: what does this mean? What are actual behaviors:

a) From codes to Law: Does the adoption of codes lead to change of laws?

b) From Laws to enforcement: does the adoption of laws lead to enforcement?


b. Political Framing

What are the disputes on governance?

•is it More vs. Less regulation ? :

•Or is it “Interest group differences” : who benefits from specific regulations, who wants, who opposes ?


c. Institutional Investors: -- Cross nationally: pension fund structure correlates with MSP.

--Investors: a coherent group, or fragmented category?

needs more research: there is a lot of variance AMONG institutional investors, on how proactive they are on corporategovernance -- :

CalPERS Wisconsin, Ohio Fund and Vanguardvs.

Private firms, Fidelity, Merrill Lynch

Role of “reputational intermediaries” understudied:


d. One size does not fit all

No sure fixes: institutions and social patterns interact

Since de facto influences de jure, purely institutional arrangements will vary in how they operate.

So , solutions will vary by country, should not assume all do the same .


f. Regulations need a politics of support

Designing regulations requires evaluating the support coalitions that make them work:

Designing institutions that encourage lobbies for “good regulations”


g. De jure vs. de facto institutions

De jure institutions seek to constrain the users: congealed preferences, to bind players over time.

De facto: distribution of political resources in society

De jure vs. de facto institutions ( see Acemoglou, Johnson, Robinson)


De facto forms of powerTypes of power in civil society:

-landowners,

--money for lobbying, votes

-functional leverage: ability to strike , both labor and capital

--demonstrations:

--paramilitary

-media, schools, churches, ideas


De jure vs. de facto forms of power

Causal Hierarchy: 1. Political Institutions trump legal code, de jure

trumps legal code2. De facto trumps de jure:

De facto power can undermine de jurecommitments

--a coup--altering interpretation of the rules--changing the laws--changing enforcement


End!!!


Ownership concentration


MSP are not the full story"…world’s wealthy democracies have two broad

packages: (1) competitive product markets, dispersed ownership and conservative results for labor; and

(2) concentrated product markets, concentrated ownership ,and pro labor results. These three elements in each package mutually reinforce each other.” Roe, 2002

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