“Politics, Institutions, Society:
Competing Explanations of Corporate Governance
the World Around"
Peter Gourevitch
IR/PS
UCSD
UC Human Social Complexity Videoconference
January 5, 2007
Key Questions:
What explains variance in corporate
governance around the globe?
May 25, 2006
Northwestern
Figure 1: ownership conent.
Figure 1.1: Ownership Concentration
May 25, 2006
Northwestern
The corporate governance problem:
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.
May 25, 2006
Northwestern
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?
May 25, 2006
Northwestern
Roe chart 1 diffuse model
Diffuse Ownership Model
Roe, p 2
May 25, 2006
Northwestern
Roe Chart two l block
Dominant stockholder model
Roe, p. 3
May 25, 2006
Northwestern
Solution: two models:
External diffuse shareholder model:
--many shareholders, elect board, board picks managers;
-Strong(MSP-Minority shareholder protection in law-Forbids insider trading; accounting and other information
with 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
May 25, 2006
Northwestern
May 25, 2006
Northwestern
Blockho , msp Figure
May 25, 2006
Northwestern
What explains strong MSP ?
Politics: authoritative
law,
regulation and their enforcement.
May 25, 2006
Northwestern
Why Do Corporate Governance systems
differ around the world?
Minority shareholder protections (MSP):
Regulations in product markets,
competition, prices, education, etc.:
Varieties of capitalism
May 25, 2006
Northwestern
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.
May 25, 2006
Northwestern
1. Legal formalism: legal family
Procedures and mechanisms of a particular legal
system..
May 25, 2006
Northwestern
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, and
Blockholding.
May 25, 2006
Northwestern
Common civil distribution
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
May 25, 2006
Northwestern
Problems with Legal Family argument
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 protections
by judges. Any civil law country could legislate protections
III. ENFORCEMENT
Common law country could have poor enforcement, civil law good
III. CIVIL LAWS COUNTRIES IN FACT VARY A LOT
Scandinavian ones have high MSP but low diffusion
May 25, 2006
Northwestern
May 25, 2006
Northwestern
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:
May 25, 2006
Northwestern
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):
May 25, 2006
Northwestern
Left right -block diagram
May 25, 2006
Northwestern
Left right measures (Roe)
May 25, 2006
Northwestern
Law vs. Politics: the combat
May 25, 2006
Northwestern
Groups in corporate governance conflict
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?
May 25, 2006
Northwestern
table Coalitions
Table 1.xxx.x Political Coalitions a nd
Out comes
Coalitional Lineup
Pair A: Class Conflict
Ow ner s + Manag er s vs .
Worker s
Ow ner s + Manag er s vs .
Worker s
Pair B: Sectoral
Ow ner s vs. Mana ger s +
Worker s
Ow ner s vs. Mana ger s +
Worker s
Pair C: Prop erty and
Vo ice
Ow ner s + W orker s vs.
Mana ger s
Ow ner s + W orker s vs.
Mana ger s
May 25, 2006
Winner
Mode l
Outcome
Ow ner s +
Mana ger s
Inv estor
Diffusi on
Worker s
Labo r
Blo ckh old ing
Mana ger s +
Worker s
Socia l Barga in
Blo ckh old ing
Ow ner s
Oligarchy
Blo ckh old ing
Ow ner s +
Worker s
Tran spar en cy
Diffusi on
Mana ger s
Mana ger ism
Diffusi on
Northwestern
Coalitions
POLITICAL VARIABLES -- alternative alignments:
--LEFT VS. RIGHT PARTISANSHIP
LABOR VS. CAPITAL -
--CROSS CLASS--SECTOR: WORKERS AND MANAGERS
VS. OWNERS - CORPORATIST COMPROMISE
--CROSS CLASS: VOICE TRANSPARENCY-WORKER AND OWNERS VS. MANAGERS
(Pension funds and external shareholders)
May 25, 2006
Northwestern
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, South
Korea, an important development in politics of
corporate governance-- pension funds:
May 25, 2006
Northwestern
Pension
Assets
&
MSPs
May 25, 2006
Northwestern
Figure 7.1 Implicit Pension Debt and Shareholder Protections
Pension
Debt
&
MSPs
May 25, 2006
Northwestern
3 .Political Institutions:
Institutions: == Mechanisms for aggregating demands
Vary the political institutions, you get different
results.
-- parchment institutions, formal rules, procedures,
constitutions.
May 25, 2006
Northwestern
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
May 25, 2006
Northwestern
Political Figure 4.2 Political Cohesion and Blockholding
institutions
and
Blockholding
May 25, 2006
Northwestern
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.
May 25, 2006
Northwestern
Causal Schema
POLITICS
Preferences
(Owners, Managers,
Workers)
Institutions
(Majoritarian,
Consensus)
May 25, 2006
POLICIES
Minority Shareholder
Protections
VoC = LME/CME
Northwestern
OUTCOMES
Shareholder Diffusion
or
Blockholding
Conclusion: Lessons
The argumentation summary:
a. Legal family depends on politics
b. Politics turns on interaction of institutions and
social demands
May 25, 2006
Northwestern
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?
May 25, 2006
Northwestern
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 ?
May 25, 2006
Northwestern
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 corporate
governance -- :
CalPERS Wisconsin, Ohio Fund and Vanguard
vs.
Private firms, Fidelity, Merrill Lynch
Role of “reputational intermediaries” understudied:
May 25, 2006
Northwestern
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 .
May 25, 2006
Northwestern
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”
May 25, 2006
Northwestern
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)
May 25, 2006
Northwestern
De facto forms of power
Types 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
May 25, 2006
Northwestern
De jure vs. de facto forms of
power
Causal Hierarchy:
1. Political Institutions trump legal code, de jure
trumps legal code
2. De facto trumps de jure:
De facto power can undermine de jure
commitments
--a coup
--altering interpretation of the rules
--changing the laws
--changing enforcement
May 25, 2006
Northwestern
End!!!
May 25, 2006
Northwestern
May 25, 2006
Northwestern
Ownership
concentration
May 25, 2006
Northwestern
May 25, 2006
Northwestern
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
May 25, 2006
Northwestern
May 25, 2006
Northwestern
May 25, 2006
Northwestern
May 25, 2006
Northwestern
May 25, 2006
Northwestern
May 25, 2006
Northwestern