FORM VS. FUNCTION: PROSPECTS FOR GLOBAL
CONVERGENCE IN CORPORATE GOVERNANCE
REGIMES
Jonathan C. Bond‡
1.
INTRODUCTION
At the intersection of two crucial threads of the economics of transition
literature—legal reform, and restructuring via privatisation—lies the same
phenomenon which has vexed and divided the leading lights of the
mainstream economics and management disciplines for decades. This puzzle
is the nature and future of global corporate governance, a conundrum which,
despite its deceptive appearance of simplicity, remains at the centre of a
heated debate which transcends disciplinary boundaries and which has only
grown more intense with time. The persisting diversity of corporate
governance regimes in polities around the globe begs a number of questions:
Why did the distinctive German-Japanese and Anglo-American paradigms
arise? What is preserving them now, and how long will the divergence
continue? Will the Anglo-American perspective eventually come to dominate
its opponents? Perhaps most controversial of all, which system, if any, ought
to dominate on efficiency or on normative grounds?
‡
M.Sc. candidate (Public Policy), School of Public Policy, University College London
(expected November 2005); 2004/05 US-UK J. William Fulbright Postgraduate Scholar.
Contact with questions/comments: jonathan@jonathancbond.com.
I wish to thank the UK Fulbright Commission (London) for funding and other support. I
am also grateful to Prof. Tomasz Mickewicz (School of Slavonic and Eastern European Studies,
UCL) for his patient guidance and insightful suggestions, Prof. David Coen (School of Public
Policy, UCL) for his persistent encouragement, as well as two anonymous referees for their
helpful comments. Responsibility for all remaining errors is solely my own.
INTERNATIONAL PUBLIC POLICY REVIEW, vol. I, no. 1 (September 2005): 93-110.
[ISSN 1748-5207]
© 2005 by The School of Public Policy, University College London, London, United Kingdom. All rights reserved.
93
94
INTERNATIONAL PUBLIC POLICY REVIEW
In their now-classic survey of corporate governance around the world,
Andrei Shleifer and Robert Vishny endeavoured to disarm those who dispute
the prospects of international convergence and/or the comparative merits of
the two dominant paradigms of corporate governance—the dispersedownership, shareholder-driven Anglo-American model or the concentratedownership, bank-centred German-Japanese template.1 The defining feature
of a system of corporate governance is not the way it is dressed up, but what it
accomplishes: so long as it provides an effective mechanism, legal or otherwise,
to protector investors’ holdings and thus foments efficient allocation of
invested savings.2 Such a theory would seem to pre-empt the entire debate
over whether the extant systems of corporate governance should or will
converge.
Yet the debate rages on. And well it should, for a number of reasons.
After first identifying why the question of the future of corporate governance
ought to remain at centre-stage, this essay will proceed by: first, sketching out
the essentials of the global convergence-divergence debate as it has been
framed in the economics and legal literature; second, exploring the underlying
forces which each side of the dispute has tried to account for; and finally, by
evaluating the strengths and weaknesses of one of the most novel approaches
in the literature—the ‘functional convergence’ hypothesis. It will be argued
that this functional theory of corporate governance, and the view of the future
it generates, offers on balance the most comprehensive and persuasive
perspective on corporate governance’s prospects as well as its past.
2.
WHY CONVERGENCE MATTERS
Given Shleifer and Vishny’s aforementioned observation, however, why
should comparison or progressive global convergence between differing
governance regimes be of interest? Seven reasons suggest themselves. First,
many discount or even deny the validity of Shleifer and Vishny’s proposition.3
1
A. Shleifer, and R. Vishny, “A survey of corporate governance,” Journal of Finance 52, no. 2
(June 1997): pp. 737-783. Other ways of characterising the distinction include that noted by R.
Morck, and L. Steier, “The global history of corporate governance: an introduction,” National
Bureau of Economic Research Working Paper #11062 (2005). In Morck and Steier’s work, the
Anglo-American system is identified as an “exit”-based system of governance (i.e. dispersed,
small-stake shareholders vote ‘with their feet’ as it were), while the German-Japanese model
(and particular extensions of it, such as the principle of ‘codetermination’ in France and
Germany) is identified as “voice”-based (i.e. bank shareholders, as well as customers, suppliers,
and employee groups each hold stable stakes in a given firm—upon which they do not seek to
gain from speculation, but rather as a means to remain informed and to have a channel by which
to express their interests and concerns directly to the firm’s management). Ibid., pp. 3-4.
2
Shleifer and Vishny, “A survey,” p. 739.
3
See, e.g., B. McDonnell, “Convergence in corporate governance: possible, but not
desirable,” Villanova Law Review 47 (2002): pp. 341-385.. McDonnell also notes his reservations
VOL. I,
NO.
1 — SEPTEMBER 2005
95
Second, the assertion of the two dominant systems’ relative equivalence fails to
explain why they arose and persisted.4 Third, these continuing differences
have important consequences for ownership structure—a point which Shleifer
and Vishny themselves helped to bring to light in their work with La Porta
and Lopez-de-Silanes,5 which in turn affects aspects from firm performance to
corporate responsiveness to stakeholders. Fourth, equivalence in the abstract
is far removed from context-specific operation. In other words, for a
multitude of reasons—from institutional environment to cultural
adaptiveness—one system may prove far superior in a given scenario.6
Fifth, even if Shleifer and Vishny are correct and the systems are in some
broad sense equivalent, the mechanisms by which the two paradigms converge
or remain divergent may be instructive for other similar areas of regional and
global public policy, such as pan-EU and transatlantic securities and exchange
harmonization. Sixth, the literature on the past and future of corporate
governance has splintered in too many ways to be of no concern: rightly or
wrongly, much has been attached to the debate, and thus much now hinges on
its outcome. Finally, as indicated at the outset, corporate governance and its
prospects lie right at the heart of the economics of transition and
development.
Both legal reform and corporate restructuring through
privatisation are all closely connected via the same fundamental principalconcerning the extended work of La Porta, Lopez-de-Silanes, Shleifer, and Vishny, whom he
refers to as the “Gang of Four.”
4
S. Jacoby, “Corporate governance in comparative perspective: prospects for convergence,”
Comparative Labor Law and Policy Journal 22 (2000): pp. 5-32.
5
R. La Porta, F. Lopez-de-Silanes, and A. Shleifer, “Corporate ownership around the
world,” Journal of Finance 54, no. 2 (April 1999): pp. 471-517; R. La Porta, F. Lopez-de-Silanes,
A. Shleifer, and R. Vishny, “Legal determinants of external finance,” Journal of Finance 52, no. 3
(1997): pp. 1131-1150; R. La Porta, F. Lopez-de-Silanes, A. Shleifer, and R. Vishny, “Law and
finance,” Journal of Political Economy 106, no. 6 (December 1998): pp. 1113-1155. R. La Porta, F.
Lopez-de-Silanes, A. Shleifer, and R. Vishny, “Investor protection and corporate governance,”
Journal of Financial Economics 58 (2000): pp. 3-27; see also Morck and Steier, “The global
history,” pp. 2-4. [Following the convention in the literature (to which McDonnell’s appellation
is the exception; see note 3 supra), the collective work of these four authors will be referred to
as “LLSV”. See M. Ayyagari, “Does cross-listing lead to functional convergence?: Empirical
evidence,” World Bank Policy Research Working Paper #3264 (April 2004), p. 1.] Specifically,
though the literature as a whole does not yield a complete consensus on the determinants of
dispersed vs. concentrated ownership are, LLSV have persuasively established the link between
Anglo-American and common law systems with dispersed ownership, and vice versa. See
LLSV, “Legal determinants,”; LLSV, “Law and finance,”; LLSV, “Investor protection.”
McDonnell, once again, disagrees with LLSV’s attribution of causality. See McDonnell, op cit.,
at note 38.
6
M. Guillen, Corporate governance and globalization: arguments and evidence against
convergence. Reginald H. Jones Center Working Paper [no number available], The Wharton
School, University of Pennsylvania (1999). This is the heart of the complementarities/pathdependency argument which has filled so much of the literature. This is discussed in much
greater depth below.
96
INTERNATIONAL PUBLIC POLICY REVIEW
agent dilemma. Moreover, the aspects described above are amplified in a
transition or development context.7
3. A DEBATE IN DISARRAY
Despite the critical importance of the issue of corporate governance and
its future, the debate which has developed especially in the last fifteen years
now sits in an unfortunate state. Participants from all sides acknowledge (and
lament) the degree to which the dispute has remained one of theory, opinion,
and often mere conjecture rather than robust empirical inquiry.8 Specifically,
there is precious little hard evidence testifying to the actual convergence of
legal rules or the absence of such convergence. In fairness, some noteworthy
empirical results have been gathered—again, most notably in the area of legal
transformation in transitioning economies.9 For example, in her study of the
change in legal regimes in twenty-four transition countries from 1990 to 1998,
Katharina Pistor identifies a very strong trend of convergence toward the
Anglo-American model of corporate law, regardless of the legal family to
which each country belonged prior to the imposition of socialism.10 As Pistor
acknowledges, much of this convergence is “largely the result of an external
supply of legal solutions,”11 and yet this explanation is not incompatible with
the general convergence thesis.
Additionally, whether as a cause or effect of the generally poor state of
empirical investigation to-date (with the exception of Pistor’s study, supra),
the debate is inundated by myriad theories (and variations upon those
theories) of how the paths diverged and where they are now headed. Brett
McDonnell, for instance, offers a typology of sixteen past-present theory pairs,
A. Durnev, and E. H. Kim, “To steal or not to steal: firm attributes, legal environment
and valuation,” University of Michigan-Ann Arbor Working Paper [no number available] (2002).
8
The most vitriolic expression in this vein is that offered by D. Branson, “The very
uncertain prospect of ‘global’ convergence in corporate governance,” Cornell International Law
Journal 34 (2001): pp. 321-362. Arguing vehemently against the convergence hypothesis in all its
forms (including Coffee’s functional convergence theory, which Branson appears to entirely
misunderstand; see Branson, “The very uncertain,” pp. 329), Branson declares that his opponents
are guilty of “pontificating” without any appeal to evidence, and rather cite their own prior
work as sufficient authority. Branson goes on to assert that aside from quoting themselves, such
authors cooperatively quote one another in what he terms “inbred scholarship.” Ironically,
Branson himself makes no appeal to empirical evidence. Ibid., pp. 332-34.
9
“Transitioning countries” here refers to the successor states of both the Former Soviet
Union (FSU) and soviet-type regimes in Central and Eastern Europe (CEE)
10
K. Pistor, “Patterns of legal change: shareholder and creditor rights in transition
economies,” European Bank for Reconstruction and Development Working Paper #49 (May
2000), pp. 21-22.
11
Ibid., p. 27.
7
VOL. I,
NO.
1 — SEPTEMBER 2005
97
and yet even this is far from a complete representation of the landscape.12
McDonnell’s typology aside, the core of the debate is on its face a five-way
contest between: those stressing neoclassical efficiency and institutional
competition,13 those emphasising rent-seeking by politicians and other key
actors,14 scholars focused on path-dependency and static complementarities
between governance and institutional environment,15 others stressing the
importance of culture,16 and finally those who argue that convergence should
be seen (and forecast) in functional, as opposed to formal, terms.17
4. WHAT LIES BENEATH: FORCES OF CONVERGENCE AND DIVERGENCE
Beneath all the nomenclature, however, each of the positions championed
in the debate over convergence in corporate governance merely reflects each
author’s attempt to portray the balance which is or will be struck between the
pressure toward convergence and the barriers against it. In short, the debate
has become a question of emphasis or weighting the forces which interact, not
a contest between mutually exclusive alternatives. Thus, before one can
understand both where the debate stands today and which position is
comparatively superior, one must first understand the forces which nearly all
the contestants agree are at work. To that end, both the pressures pushing in
McDonnell’s typology is helpful to a point, though (as noted supra) it patently fails in its
chief purpose of representing the range of perspectives one could logically hold concerning
corporate governance. See Tables 1 and 2 in the Appendix, infra, for a reconstruction of his
typology. Among other things, McDonnell entirely fails to account in his systematization for
the entire concept of functional convergence; accounting for this could easily multiply his entire
outcome range by a factor of two, if not much more. McDonnell himself argues that the
combination of P3:F3 in his Table 2 is the most likely pairing.
13
See, e.g., H. Hansmann, and R. Kraakman R., “The end of history for corporate law,”
Georgetown Law Journal 89 (2001), pp. 439-468.
14
See, e.g., M. Roe, “A political theory of American corporate finance,” Columbia Law
Review 91 (1991), pp. 10-67; M. Roe, “Some differences in corporate structure in Germany,
Japan, and the United States,” Yale Law Journal 102 (1993), pp. 1927-1997.
15
See, e.g., L. Bebchuk, and M. Roe, “A theory of path dependence in corporate ownership
and governance,” Stanford Law Review 52 (1999), pp. 127-170.
16
Branson, “The very uncertain.”
17
J.C. Coffee, Jr., “The future as history: the prospects for global converge in corporate
governance and its implications,” Northwestern University Law Review 93 (1999): pp. 641-706;
J.C. Coffee, Jr., “The rise of dispersed ownership: the roles of law and the state in the separation
of ownership and control,” Yale Law Journal 111 (2001): pp. 1-82; J.C. Coffee, Jr., “Racing
towards the top?: The impact of cross-listings and stock market competition on international
corporate governance,” Columbia Law Journal 102 (2002): pp. 1757-1831; J.C. Coffee, Jr., “Law
and regulatory competition: can they co-exist?,” Texas Law Review 80 (2002): pp. 1729-1736. R.
Gilson, “Corporate governance and economic efficiency: when do institutions matter?,”
Washington University Law Quarterly 74 (1996): pp. 327-345; R. Gilson, “Globalizing corporate
governance: convergence of form or function,” American Journal of Comparative Law 49 (2001):
pp. 329-357.
12
98
INTERNATIONAL PUBLIC POLICY REVIEW
favour of convergence and the forces preserving divergence will be
enumerated and illustrated before the landscape of the present debate is
portrayed in greater detail.
Why should one expect corporate governance practices around the world
to converge in the first place? The strongest answer is also the most obvious:
economic efficiency. The conventional (if stylised) argument runs as follows:
First, competitive pressure operates at the level of the firm with respect to its
suppliers of external finance. There exists, ex hypothesi, some optimal package
(given some array of investor preferences, etc.) of residual claim rights and
control rights which firm managers will yield to investors, and thus
competitive pressure will pull all firms which survive to this optimal
package.18 Firms which fail to conform to the optimal level will face higher
costs of finance and will thus, ceteris paribus, be forced out of the
marketplace.19 Increasing mobility of capital and plummeting costs of
communication mean that this abstract model applies, it is argued, on a global
scale, such that investors will have their choice of rights packages offered by
firms soliciting capital.
An important objection immediately arises, however: the foregoing
simplistic scenario assumes (arguendo) that firms are the only actors who
directly choose which governance practices will apply to their relationships
with their suppliers of external finance, but clearly this is untrue in the real
world. Instead, continues the objection, corporate governance is intricately
controlled in any given polity by a web of government, quasi-government, and
private actors above and beyond the firm and its investor. Thus, if corporate
governance is a matter of law, not merely of what rituals businesses privately
observe, how does efficiency yield convergence?
Proponents of convergence offer several responses. First, explicit,
deliberate efforts by any of the aforementioned involved actors to ‘harmonise’
the corporate governance regime may take place, such as standardization
across the EU.20 Second, a further simple explanation is that either firms or
shareholders will directly lobby their respective polities to mimic the more
efficient practices of a jurisdiction whose example they have witnessed.21
Third, the experience of U.S. states’ corporate laws may be replayed (writ
large) on the international stage: namely, if firms are relatively uninhibited
from reincorporating in more favourable jurisdictions (i.e. those whose formal
corporate governance requirements more closely match the optimal
arrangement vis-à-vis the firm in question), they will do so.22 Jurisdictions
Hansmann and Kraakman, “The end of history,” p. 449.
Coffee, “The future as history,” p. 646.
20
Hansmann and Kraakman, “The end of history,” p. 454.
21
Ibid., p. 455.
22
Ibid., pp. 454-55.
18
19
VOL. I,
NO.
1 — SEPTEMBER 2005
99
which lose corporate charters will either conform or, perhaps, become
irrelevant.23
Two further explanations are offered by those who emphasise functional
over formal convergence in corporate governance, such as John Coffee, Jr.,24
and Ronald Gilson.25 The functional hypothesis, which will be treated in
greater detail below, primarily asserts that rules ‘on the books’—which may
take a long time to reach a common global midpoint—are far less significant
than the actual practices used by firms in the face of formal legal requirements.
Thus, they argue, convergence can take place despite the fact that corporate
governance is often a matter of legislative prerogative. First, even firms which
cannot reincorporate can list themselves on a foreign stock exchange and thus
bind themselves to a more stringent set of rules than those in force in their
home jurisdiction.26 Second, given a business climate saturated with mergers
and acquisitions activity [“M&A”], one might argue, as Coffee does, that better
corporate governance will yield higher equity values for a firm, thus giving a
firm which makes use of superior governance a strategic advantage in M&A
transactions (i.e. since the value of its shares is higher, it has a stronger
bargaining position in a stock-for-stock deal).27
Given these accounts of the pressures towards international convergence
in corporate governance standards (of varying degrees of plausibility), what is
to stand in the way of the march toward a single, universally-employed,
globally-optimal governance regime? Among the barriers identified by
sceptics of convergence, at least three broad categories stand out: pathdependency (and static complementarities), rent-seeking, and multiple
equilibria.28 The first barrier, path dependency, is also the broadest and most
Viz. In maximic form, Quae neminem constringat lex non est. (lit. “A law which binds no
one is no law.”) (Original to the author.)
24
Coffee, “The future as history”; Coffee, “The rise of dispersed ownership”; Coffee,
“Racing towards the top?”; Coffee, “Law and regulatory competition.”
25
Gilson, “Corporate governance”; Gilson, “Globalising corporate governance.”
26
Coffee, “The future as history,” pp. 648-49.
27
Ibid., p. 649.
28
Numerous other specific hypothetical barriers to convergence could be named, though
few if any are the subject of anything near a consensus in the literature. One less-frequentlycited, yet still somewhat persuasive, example is that of control premia identified by Coffee,
“The future as history,” pp. 658-59: The argument is premised upon what is already accepted
about the nature of concentrated ownership structures—viz. the value of the control block need
not be identical to the proportional value of the other shares which trade on the open market.
Thus, while increased corporate governance may result in higher share values on the market,
these higher prices reflect the value of shares which are being or are offered for sale—which are
ex hypothesi the non-control-block, i.e. minority, shares. (This makes intuitive sense as well,
since improved corporate governance may be more important to minority shareholders than
control-block-holders, given the minority owner’s fear of expropriation by the majority owners.)
The price of the control-block is likely to remain constant or decrease, however, with
improvements in corporate governance (as the ability to expropriate decreases). As their
interests will suffer from this likely drop in their equity holding’s value, the controlling
23
100
INTERNATIONAL PUBLIC POLICY REVIEW
amorphous. To be sure, its elementary logic is intuitively persuasive: prior
choices, actions, or accidents have predestined a certain actor, jurisdiction, or
even society to a particular outcome, even if it is not the most efficient as
viewed from the present.29 However, it is the application of the notion to the
global development corporate governance which has yielded difficulty. For
instance, Mark Roe, among its chief heralds, argued in a number of articles
that although the German-Japanese model of concentrated, bank-centred
governance was more efficient, the United States remains unlikely to adopt
such a model because of a series of events and popular attitudes in America
traceable to at least the mid-nineteenth century.30 Yet, in later work, Roe
along with others (e.g. Bebchuck and Roe 1999) argues that path-dependent
features in Germany, Japan, and in other concentrated-ownership jurisdictions
are at least equally to blame for the lack of convergence.
The path-dependency argument is very closely linked to the issue of rentseeking behaviour by political, economic, or other categories of actors which
yields barriers to particular jurisdictions arriving at the most efficient outcome.
However, discussions of “rent-seeking” as a barrier to convergence in corporate
governance have moved beyond the classic case of profit-maximising
behaviour by elected or appointed political officials. At present, the term is
applied in general terms to the barriers which arise due to the mismatch of
those with political power over a particular firm’s legal environment and those
with control of the firm itself (both managers and owners). A variety of
scenarios falls under this heading in its present usage, common examples
including that in which a jurisdiction implements restrictions on hostile
takeovers, which may not benefit any or a majority of shareholders of a given
firm whose owners are mostly non-citizens, but does benefit the majority of
shareholders will attempt to avoid changes to corporate governance. Thus, the argument
identifies a weak link in the traditional case that increased share value will induce controlling
owners to adopt better governance as a matter of efficiency. See Coffee, op cit.
29
Coffee, “The future as history,” pp. 660-62. When the time dimension is removed from
the basic path-dependency model, it is often labelled as the issue of “complementarities.” Like
path-dependency, “complementarities” signifies a wide array of forces at work, but most
basically refers to the static compatibility of particular legal, regulatory, or other institutions
with other political or social apparatuses and attitudes in society. Ibid., pp. 660ff. Thus, the
concept is closely tied to the demand-for-law literature, discussed below in relation to the
functional convergence hypothesis.
30
Roe, “A political theory”; Roe, “Some differences.” Specifically, runs one version of the
argument, as reconstructed by Coffee, the general public and political distrust of concentrated
financial power led to both statutory and market pressures towards the proliferation of small
intermediaries (for instance, banks were limited to operations within a single state, etc.).
Coffee, “The future as history,” pp. 660ff. Consequently, the banking sector’s growth was
presumably stunted, and the banks which did grow and prosper on their limited scale were far
too small and/or geographically constrained to serve as effective monitors of multi-state
enterprises.
VOL. I,
NO.
1 — SEPTEMBER 2005
101
those shareholders who are also voting citizens of the jurisdiction.31 As with
path-dependency, the predominance of rent-seeking as a reason for continued
divergence is likely due more to its intuitive appeal than to any systematic
evidence demonstrating its validity.
Finally, opponents of convergence have repeatedly argued that the
convergence thesis is flawed because its ‘motor’—the dominant pressure
towards ‘the’ efficient arrangement—is premised on the faulty assumption that
a single system exists or could exist which is optimal relative to all contexts.
Two forms of this argument can be formulated. In its stronger form, the
argument merely asserts that no single microeconomic model of corporate
governance can be ‘superior’ in any meaningful sense.32 In its weaker form, the
argument asserts that the superiority of a governance model is always contextspecific.33 The inference in either case is that multiple equilibria may exist in
the arrangement of corporate governance apparatuses, such equilibria
presumably rendered stable either by economic forces or by pathdependencies. Thus, one could conclude, the pertinent pressure acting on a
particular country’s corporate governance system are not pushing it towards a
single global equilibrium, but towards a more localised point of stasis.
Given, then, both the pressures towards and barriers against convergence
as summarised above, it appears that the convergence debate has become a
metaphor for the state of its own subject: just as the diverging systems of
governance have arisen, persisted, and now seem to be intermingling while yet
maintaining considerable distinctness, so too the scholars most concerned have
developed starkly different perspectives, which have survived more than a
decade, and yet a limited degree of intermingling among their key ideas is
observable. As it stands, the debate is primarily a contest between those
believing Anglo-American corporate governance is superior and thus favoured
by institutional evolution34 and those who believe convergence towards that
system will not take place.35 Attempts at a middle-position (via reframing the
question at issue) include those like McDonnell’s, which views convergence as
31
Coffee, “The future as history,” p. 654. Implicit in this type of scenario is some
presumption that shareholders taken as a whole mirror Mancur Olson’s model of the “inchoate
group.” See M. Olson, The logic of collective action (Cambridge, MA: Harvard Univ. Press,
1999).
32
Jacoby, “Corporate governance,” pp. 21-25.
33
Branson, “The very uncertain,” pp. 347ff.
34
Hansmann and Kraakman, “The end of history.”
35
See, e.g., Branson, “The very uncertain”; Jacoby, “Corporate governance”; L. Cunningham,
L. “Commonalities and prescriptions in the vertical dimension of global corporate governance,”
Cornell Law Review 84 (1999): pp. 1133-1194; M. Kissane, “Global gadflies: applications and
implementations of U.S.-style corporate governance abroad,” New York Law School Journal of
International and Comparative Law 17 (1997): pp. 621-672; G. Visentini, “Compatibility and
competition between European and American corporate governance: which model of
capitalism?” Brooklyn Journal of International Law 23 (1998), p. 833ff.; and many others.
102
INTERNATIONAL PUBLIC POLICY REVIEW
unlikely but normatively undesirable.36 As noted earlier, however, the general
dearth of credible, systematic empirical evidence on either side threatens to
ossify the divide, as neither side can persuade the other on the merits of their
intuition and conjecture alone.
5. ‘CONVERGENCE BY ANY OTHER NAME’: THE FUNCTIONAL THEORY
It is precisely this gridlock which one more recent theory—the “functional
convergence” hypothesis extolled by both Coffee and Gilson—is designed to
solve. While by no means perfect, it is this functional view which represents
the best hope of understanding corporate governance as it operates in the
present and how it is likely to evolve in the future. The theory is premised
upon the seemingly elementary distinction between “formal” corporate
governance and “functional” governance. In short, corporate governance law as
it exists ‘on the books’ in any given jurisdiction is related to but distinct from
the ways in which firms are actually governed in practice.37 Applying this
distinction to global convergence, Coffee and Gilson assert that while the laws
on paper may be quite slow to change, governance in practice can adapt to
some degree around the laws as they exist on paper. Two of the mechanisms
by which this could occur were discussed above: firm migration, and M&A
activity. The more central point to the argument is that while systems of
governance can remain divergent in name, entrepreneurial actors can (and, it is
asserted, will) drive the two systems towards the optimum governance
arrangement.38
Though participants in the convergence debate who stand firmly on one
side or the other may on occasion dismiss the functional convergence
hypothesis as an attempt to “predict global convergence through ‘the
backdoor’”,39 there are at least three broad reasons to prefer the functional
view over and against any other theory yet on offer. First, precisely by
36
McDonnell, “Corporate governance,” pp. 382-84. McDonnell’s arguments against the
desirability of convergence include, in addition to a vague and generic appeal to equality of
resources for all, a rather peculiar additional rationale: McDonnell argues that given our great
uncertainty as to what the business environment and needs of the future will look like, it may
be that a system of corporate governance being employed today but which is not optimal given
today’s parameters may be exactly what is needed in (say) fifty years. Consequently, the
knowledge and expertise already built up in this given system should be preserved, in case
entrepreneurs and policymakers of the future need to call upon it. Thus, McDonnell concludes,
convergence today is undesirable, as it means the all-but-theoretical extinction of potentially
quite valuable systems. McDonnell explicitly compares this to preventing the extinction of
biological species, “which do not seem to add much to the world at this point, because at some
point in the future those species may become more valuable, for example, by becoming the
source for a cure to a new disease.” Ibid., pp. 382-83.
37
Coffee, “The future as history,” pp. 652ff.
38
Ibid., pp. 649ff.
39
Branson, “The very uncertain,” p. 329.
VOL. I,
NO.
1 — SEPTEMBER 2005
103
distinguishing between the formal and functional dimensions, it allows one to
accept the merits of both sides of the convergence debate. On the one hand, if
one sets the political and path-dependent barriers aside, the pressure of
efficiency driving toward the most efficient governance practices available is
difficult to challenge. On the other hand, the political—as well as social and
cultural—barriers to efficiency-driven institutional evolution are just as
intuitively appealing. Moreover, to construct a theory which merely staked
out a middle ground between these two opposing forces without providing a
substantive explanation would be futile. Yet the functional theory avoids this
in that it is not merely a synthetic summary of the “inevitability of the
tradeoffs and tensions”,40 but instead proffers an independent, substantive
argument which explains the development of corporate government while
accounting for both the pressures for and barriers to convergence. This
argument, resting on the formal-functional distinction, asserts that companies
will voluntarily find ways to bring upon themselves the most efficient
governance regimes, regardless of the limitations of their formal environment.
Second, as part of this substantive argument, Coffee in particular offers a
plausible prima facie case for how this functional convergence would come
about. As noted above, the process of cross-listing and M&A activity both
describe feasible mechanisms by which the statutory differences between
jurisdictions become less relevant while firms either deliberately or
inadvertently bring their transactions under the scope of the most efficient
governance arrangements. In the case of cross-listing in particular, firms which
voluntarily list themselves (directly or indirectly) on a foreign stock
exchange—most notably for Coffee’s argument the New York Stock
Exchange—actually bind themselves to a particular set of securities and
governance rules and at the same time trigger an important signalling
mechanism to would-be investors.41 There are, to be sure, important
empirical challenges to these mechanisms on the horizon, but the explanations
themselves are in many ways convincing.
Third, the functional hypothesis is the best available to-date in terms of
compatibility with the theory of the demand-for-law. The theory, as best
elucidated by Pistor,42 corroborates the formal-functional distinction in relation
to legal rules, both explicitly and implicitly. Indeed, except when applied in
very narrow cases, the demand-for-law concept is precisely concerned with
economic actors’ demand for particular functions of contract-enforcement and
monitoring to be carried out, whether by legal institutions or by private
means. The functional view of corporate governance has, moreover,
Coffee, “The future as history,” p. 648.
Ibid., pp. 657ff.
42
K. Pistor, “Supply and demand for law in Russia. East European Constitutional Review 8,
no. 4 (Fall 1999), n.p., available online: <http://www.law.nyu.edu/eecr/ >; K. Pistor, “The
demand for constitutional law,” Constitutional Political Economy 13 (2002), pp. 73-87.
40
41
104
INTERNATIONAL PUBLIC POLICY REVIEW
attempted to apply the demand-for-law insights in the effort to demonstrate
that formal legal rules very often follow, rather than create, the functional or
practical governance systems with which they are concerned. Specifically, in
analysing the aforementioned study by Pistor of the shift towards AngloAmerican corporate law in transition economies from 1990 to 1998,43 Coffee
argues that even here, where the proximate cause of such a shift was the
involvement of many Western expert advisors, there is still evidence of form
following function.44 In particular, argues Coffee, the usual (LLSV-inspired)
sequencing of strong shareholder protections driving dispersed ownership was,
of necessity, turned on its head. It is at least a defensible reading of the
transition experience, he maintains, that mass privatisation created dispersed
ownership very rapidly, thus generating a constituency demanding some level
of investor protection.
Thus, in the absence of clear evidence supporting either of the standard
positions in the convergence debate, the functional theory seems at present to
be in a class by itself. However, caution is certainly warranted: despite both
Gilson’s and Coffee’s repeated claims that the empirical evidence clearly
supports the functional theory, this evidence has been slow in coming.45 More
disconcertingly, at least one recent study explicitly attempting to test one part
of the functional convergence hypothesis found little to support the intuitively
appealing thesis. Meghana Ayyagari, in a study published by the World Bank,
specifically investigated whether firms which cross-listed onto a U.S. stock
exchange experienced a decrease in the concentration of ownership.46
Following the general functional theory and the LLSV conclusion that the
extent of minority shareholder protection is the key determinant of dispersed
ownership,47 one expects firms that cross-list into a system where minority
protections are stronger to eventually witness greater dispersion in ownership.
However, the results are disappointing: only a small, short-lived decline in
concentration of ownership appears after firms cross-list, and many crosslistings are clearly designed for the sale of control blocks, not to raise capital
from new minority shareholders.48 There are several non-trivial shortcomings
in Ayyagari’s empirical investigation, however—the most obvious of which is
Pistor, “Patterns of legal change.”
Coffee, “The rise of dispersed ownership.”
45
Coffee, “The future as history”; Coffee, “Racing towards the top?”; Coffee, “Law and
regulatory competition.”
46
Ayyagari, “Does cross-listing lead.”
47
LLSV, “Law and finance.”
48
Ayyagari, “Does cross-listing lead,” pp. 3ff. Additionally, many which do cross-list onto
U.S. exchanges do so using American Depositary Receipts (ADRs), negotiable instruments
which represent claims to shares, fractions of shares, or blocks of shares on deposit at a bank or
other institution. These are much better suited to marketing entire control blocks for sale on a
foreign exchange, and there are severe limitations on the extent to which those who cross-list
via ADR actually bind themselves to stricter rules. Ibid., pp. 5-6.
43
44
VOL. I,
NO.
1 — SEPTEMBER 2005
105
the time-span of her study: some firms were observed only in the year before
and the year after cross-listing, and the entire sample is derived from the 1990
to 2002 period.49 Given the gradual nature of the effects—and moreover the
perceptions—of improved governance, these time limitations may yield
considerably understated results. Thus, while Ayyagari’s findings represent an
important challenge to the functional hypothesis, they are not as fatal as they
at first appear.
6. CONCLUSION
It is evident that the debate over global convergence has relevance for
both legal and economic investigations into corporate governance. This
relevance is only heightened when the focus is narrowed to transitioning
economies. While the debate is and is likely to remain unresolved in the
literature for years to come, the breakthrough reflected by the functional
thesis (as propounded by Coffee and Gilson, supra) must be acknowledged.
Though even the functional thesis is vulnerable to empirical critiques, it is this
framework which identifies the right empirical questions to ask. Given this, in
conjunction with its uncontroversial policy recommendations50 and its ability
to meaningfully and substantively integrate of the other prevailing theories, it
is not unlikely that the competing frameworks themselves will converge
towards the theory which distinguishes form from function.
Ibid., pp. 12-13.
Generally, these including making more transparent and straightforward the processes
and legal ramifications of cross-listing; see Coffee, “The future as history.”
49
50
106
INTERNATIONAL PUBLIC POLICY REVIEW
REFERENCES
Ayyagari, M. “Does cross-listing lead to functional convergence?: Empirical
evidence.” World Bank Policy Research Working Paper #3264 (April
2004).
Bebchuk, L. and Roe, M. “A theory of path dependence in corporate
ownership and governance.” Stanford Law Review 52 (1999): pp. 127-170.
Black, B. “Does corporate governance matter?: A crude test using Russian
data.” University of Pennsylvania Law Review 149 (2001): pp. 2131-2149.
Branson, D. “The very uncertain prospect of ‘global’ convergence in corporate
governance.” Cornell International Law Journal 34 (2001): 321-362.
Choi, S. “Law, finance, and path dependence: developing strong securities
markets.” Texas Law Review 80 (2002): pp. 1657-1727.
Coffee, Jr., J.C. “The future as history: the prospects for global converge in
corporate governance and its implications.” Northwestern University Law
Review 93 (1999): pp. 641-706.
———. “The rise of dispersed ownership: the roles of law and the state in
the separation of ownership and control.” Yale Law Journal 111 (2001):
pp. 1-82.
———. “Racing towards the top?: The impact of cross-listings and stock
market competition on international corporate governance.” Columbia
Law Journal 102 (2002): pp. 1757-1831.
———. “Law and regulatory competition: can they co-exist?” Texas Law
Review 80 (2002): pp. 1729-1736.
Cunningham, L. “Commonalities and prescriptions in the vertical dimension
of global corporate governance.” Cornell Law Review 84 (1999): pp. 11331194.
Djanov, S., McLiesh, C., and Shleifer, A. “Private credit in 129 countries.”
National Bureau of Economic Research Working Paper #11078 (2005).
Durnev, A. and Kim, E.H. “To steal or not to steal: firm attributes, legal
environment and valuation.” University of Michigan-Ann Arbor Working
Paper [no number available] (2002).
Garrett, A. “Themes and variation: the convergence of corporate governance
practices in major world markets.” Denver Journal of International Law
and Policy 32 (2004): pp. 147-174.
Gilson, R. “Corporate governance and economic efficiency: when do
institutions matter?” Washington University Law Quarterly 74 (1996): pp.
327-345.
———. “Globalizing corporate governance: convergence of form or function.”
American Journal of Comparative Law 49 (2001): pp. 329-357.
Gordon, J. “Pathways to corporate convergence?: Two steps on the road to
shareholder capitalism in Germany.” Columbia Journal of European Law
5 (1999): pp. 219-241.
VOL. I,
NO.
1 — SEPTEMBER 2005
107
Gregoriè, A., Prašnikar, J., and Ribnikar, I. “Corporate governance in
transitional economies: the case of Slovenia.” University of Ljubljana
Working Paper #119 (2001).
Guillen, M. “Corporate governance and globalization: arguments and
evidence against convergence.” Reginald H. Jones Center Working Paper
[no number available], The Wharton School, University of Pennsylvania
(1999).
Hansmann, H. and Kraakman R. “The end of history for corporate law.”
Georgetown Law Journal 89 (2001): pp. 439-468.
Jacoby, S. “Corporate governance in comparative perspective: prospects for
convergence.” Comparative Labor Law and Policy Journal 22 (2000): pp.
5-32.
Kingsley, J. “Legal transplantation: is this what the doctor ordered and are the
blood types compatible?: The application of interdisciplinary research to
law reform in the developing world—a case study of corporate governance
in Indonesia.” Arizona Journal of International and Comparative Law 21
(2004): pp. 493-534.
Kissane, M. “Global gadflies: applications and implementations of U.S.-style
corporate governance abroad.” New York Law School Journal of
International and Comparative Law 17 (1997): pp. 621-672.
Klapper, L. and Love, I. “Corporate governance, investor protection and
performance in emerging markets.” World Bank Policy Research Working
Paper #2818 (April 2002).
La Porta, R., Lopez-de-Silanes, F., and Shleifer, A. “Corporate ownership
around the world.” Journal of Finance 54, no. 2 (April 1999): pp. 471-517.
La Porta, R., Lopez-de-Silanes, F., Shleifer, A., and Vishny, R. “Legal
determinants of external finance.” Journal of Finance 52, no. 3 (1997): pp.
1131-1150.
———. “Law and finance.” Journal of Political Economy 106, no. 6
(December 1998): pp. 1113-1155.
———. “Investor protection and corporate governance.” Journal of Financial
Economics 58 (2000): pp. 3-27.
LaChance, C. “Nature v. nurture: evolution, path dependence and corporate
governance.” Arizona Journal of International and Comparative Law 18
(2000): pp. 279-310.
Licht, A. “The mother of all path dependencies: toward a cross-cultural
theory of corporate governance systems.” Delaware Journal of Corporate
Law 26 (2001): pp. 147-205.
———. “Legal plug-ins: cultural distance, cross-listing, and corporate
governance reform.” Berkeley Journal of International Law 22 (2004): pp.
195-239.
McDonnell, B. “Convergence in corporate governance: possible, but not
desirable.” Villanova Law Review 47 (2002): pp. 341-385.
108
INTERNATIONAL PUBLIC POLICY REVIEW
Morck, R., and Steier, L. “The global history of corporate governance: an
introduction.” National Bureau of Economic Research Working Paper
#11062 (2005).
Olson, M. The logic of collective action. Cambridge, MA: Harvard Univ.
Press, 1971.
Pistor, K. “Supply and demand for law in Russia.” East European
Constitutional Review 8, no. 4 (Fall 1999): n.p. Available online:
<http://www.law.nyu.edu/eecr/ >.
———. “Patterns of legal change: shareholder and creditor rights in transition
economies.” European Bank for Reconstruction and Development
Working Paper #49 (May 2000).
———. The demand for constitutional law. Constitutional Political
Economy 13 (2002): pp. 73-87.
Pistor, K., Keinan, Y., Kleinheisterkamp, J., and West, M. “The evolution of
corporate law: a cross-country comparison.” University of Pennsylvania
Journal of International Economic Law 23 (2002): pp. 791-872.
Roe, M. “A political theory of American corporate finance.” Columbia Law
Review 91 (1991): pp. 10-67.
———. “Some differences in corporate structure in Germany, Japan, and the
United States.” Yale Law Journal 102 (1993): pp. 1927-1997.
Roland, G. “Corporate governance systems and restructuring: the lessons from
the transition experience.” Paper presented at the Annual Bank
Conference on Development Economics, World Bank, Washington, D.C
(2000).
Shleifer, A. and Vishny, R. “A survey of corporate governance.” Journal of
Finance 52, no. 2 (June 1997): pp. 737-783.
Vancea, M. “Exporting U.S. corporate governance standards through the
Sarbanes-Oxley Act: unilateralism or cooperation?” Duke Law Journal 53
(2003): pp. 833-874.
Visentini, G. “Compatibility and competition between European and
American corporate governance: which model of capitalism?” Brooklyn
Journal of International Law 23 (1998): pp. 833ff.
Walsh, P. and Whelan, C. “Firm performance and the political economy of
corporate governance: survey evidence for Bulgaria, Hungary, Slovakia
and Slovenia.” Economic Systems 25 (2001): pp. 85-112.
VOL. I,
NO.
1 — SEPTEMBER 2005
APPENDIX
Table 1. McDonnell’s “Summary of Possible Stories” of Corporate
Governance
Stories of the Past:
P1
P2
P3
P4
The United States has evolved optimally; Japan and Germany have
not
Japan and Germany have evolved optimally; the United States has
not
The United States has taken a different path than Japan and
Germany, but neither path is clearly superior
The United States, Germany and Japan are roughly similar
Stories of the future
F1
F2
F3
F4
Japan and Germany will move toward the path currently followed
by the United States
The United States will move toward the path currently followed by
Japan and Germany
The United States, Japan and Germany will converge to a hybrid
form
The United States might remain, or become, distinct from Japan
and Germany
(Source: McDonnell, “Convergence in Corporate Governance,” p. 368, Table 1)
109
110
INTERNATIONAL PUBLIC POLICY REVIEW
Table 2. McDonnell’s “Summary of Possible Outcomes” of Corporate
Governance
Summary of Possible Outcomes
P1
P2
P3
P4
F1
American
Triumphalist
Convergence
F2
Converge to
inferior
JapaneseGerman
System
F3
Superior
American system
and inferior
Japanese-German
system converge
to hybrid
F4
Inferior
JapaneseGerman system
remains on
separate path
Convergence to
Inferior
American
System
Converge to
superior
JapaneseGerman
System
Superior
Japanese-German
system and
inferior American
system converge
to hybrid
Inferior
American
system remains
on separate path
Converge to
American
System though
not clearly
superior
Converge to
Japanese
German
system
though not
clearly
superior
Two noncomparable
systems converge
to hybrid
Noncomparable
systems remain
on separate
paths
Japan, Germany
and the United
States remain on
same path
Currently
similar systems
diverge or,
United States
stays ahead of
others though
on same path
Japan and
Germany,
already on same
path as United
States, catch up
Japan,
Germany and
the United
States remain
on same path
(Source: McDonnell, “Convergence in Corporate Governance,” p. 369, Table 2)
INTERNATIONAL PUBLIC POLICY REVIEW, vol. I, no. 1 (September 2005): Error! Bookmark not defined.-Error! Bookmark not
defined.. [ISSN 1748-5207]
© 2005 by The School of Public Policy, University College London, London, United Kingdom. All rights reserved.
111