Professional Documents
Culture Documents
International Corporate Governance
International Corporate Governance
International Corporate
Governance
Taxonomies of Corporate Governance
Systems
Goergen, International Corporate Governance, 1st Edition Pearson Education Limited 2012
Slide 4.2
Lecture Aims
This lecture reviews the main taxonomies of corporate
governance systems.
Before proceeding with this review, the lecture discusses
the economic and political context in which global
capitalism has risen.
This lecture reviews both the classifications based on the
law and finance literature (La Porta et al. on the quality of
law and investor protection; Pagano and Volpin on electoral
systems; and Roe on political orientation of governments in
power) and the varieties of capitalism (VOC) literature.
An important distinction between the two is that the
former prescribes a hierarchy of systems whereas the latter
argues that very different institutional arrangements may
generate similar economic performance.
Goergen, International Corporate Governance, 1st Edition Pearson Education Limited 2012
Slide 4.3
Learning Outcomes
By the end of this lecture, you should be able to:
1. Understand the economic and political context which
has enabled global capitalism to rise
2. Critically review the assumptions underlying the
taxonomies from the law and finance literature and
those from the VOC literature
3. Assess the possible limitations of the various
taxonomies as well as the validity of their predictions
4. Explain path dependence and distinguish between the
two types of path dependence.
Goergen, International Corporate Governance, 1st Edition Pearson Education Limited 2012
Slide 4.4
Introduction
This lecture reviews the various taxonomies of
corporate governance systems.
It is important to realise that the various
taxonomies have very different premises.
The taxonomies from the law and finance
assume that
individuals maximise their utilities in the presence
of institutions which constrain their behaviour, and
there is a zero-sum game between improving the
rights of investors and those of workers.
Goergen, International Corporate Governance, 1st Edition Pearson Education Limited 2012
Slide 4.5
Introduction (Continued)
In contrast, the varieties of capitalism
literature
focus on the concept of complementarities, and
do not assume that there is a zero-sum game
between worker and investor rights.
Goergen, International Corporate Governance, 1st Edition Pearson Education Limited 2012
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Goergen, International Corporate Governance, 1st Edition Pearson Education Limited 2012
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than governments.
The next few decades were to be dominated by
this new doctrine, also called financialisation
or globalisation.
Goergen, International Corporate Governance, 1st Edition Pearson Education Limited 2012
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Goergen, International Corporate Governance, 1st Edition Pearson Education Limited 2012
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Legal Families
Rafel La Porta, Florencio Lopez-de-Silanes,
Andrei Shleifer and Robert Vishny have started
the law and finance literature.
Their theory is based on the importance of
property rights, in particular investor protection.
They argue that in countries where investor
protection is high capital markets are highly
developed.
Ultimately, the degree of investor protection
drives economic growth.
Goergen, International Corporate Governance, 1st Edition Pearson Education Limited 2012
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Goergen, International Corporate Governance, 1st Edition Pearson Education Limited 2012
Slide 4.35
Political Determinants of
Corporate Governance
Mark Roe proposed politics and political
ideology as the main driver of corporate
governance.
Political ideology determines how countries
achieve social peace.
The Continental European social democracies
have achieved social peace by favouring
employees over investors.
Layoffs will be relatively hard, unemployment
benefits and unemployment will be high.
Goergen, International Corporate Governance, 1st Edition Pearson Education Limited 2012
Slide 4.36
Political Determinants of
Corporate Governance (Continued)
Managers will less likely focus exclusively on the
maximisation of shareholder value.
High incentive packages for managers will also be
less common to avoid the envy of other social
classes.
There will be less takeover activity as takeovers may
generate layoffs.
In summary, social democracies seek social equality
at the cost of economic efficiency.
Control will stay concentrated as this is the only way
to keep managers and employees at bay.
Goergen, International Corporate Governance, 1st Edition Pearson Education Limited 2012
Slide 4.37
Political Determinants of
Corporate Governance (Continued)
Goergen, International Corporate Governance, 1st Edition Pearson Education Limited 2012
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Political Determinants of
Corporate Governance (Continued)
Goergen, International Corporate Governance, 1st Edition Pearson Education Limited 2012
Slide 4.39
Political Determinants of
Corporate Governance (Continued)
Managers run the firms on behalf of the rentiers, but
do not themselves own shares.
Rentiers live off the revenues of their investments.
Both managers and employees prefer weaker
investor rights.
Weaker investor rights give more power to
managers and facilitate the extraction of private
benefits of control.
They also provide better job security for employees,
in particular less productive employees.
Goergen, International Corporate Governance, 1st Edition Pearson Education Limited 2012
Slide 4.40
Political Determinants of
Corporate Governance (Continued)
While managers and employees have similar
preferences, rentiers are assumed to be a less
homogenous group.
Pagano and Volpin distinguish between
majoritarian electoral systems and
proportional electoral systems.
Under a majoritarian system, the political party
with a majority of districts wins the elections.
Pagano and Volpin assume that the pivotal
district is the district of the rentiers.
Goergen, International Corporate Governance, 1st Edition Pearson Education Limited 2012
Slide 4.41
Political Determinants of
Corporate Governance (Continued)
Hence, under a majoritarian system political
parties will cater for the rentiers and focus on
improving investor rights.
Under a proportional system, the political party
that obtains a majority of votes wins the
elections.
Under the latter, political parties will focus on the
homogenous group of the managers and workers.
The focus will be on employee rights at the
expense of investor rights.
Goergen, International Corporate Governance, 1st Edition Pearson Education Limited 2012
Slide 4.42
Political Determinants of
Corporate Governance (Continued)
Pagano and Volpin test their theory on 21 OECD
countries.
In line with their predictions, they find that countries
with more proportional voting systems have stronger
employment protection and weaker investor rights.
However, they only find that the La Porta et al. legal
families only explain the levels of employee rights,
but not those of investor rights.
They conclude that the proportionality of the
electoral system is better at explaining the level of
investor rights than the legal family.
Goergen, International Corporate Governance, 1st Edition Pearson Education Limited 2012
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Conclusions
While the last few decades have seen major political,
economic and technological upheavals on a global level,
giving rise to global capitalism, national systems of
corporate governance and capitalism nevertheless are still
characterized by a series of idiosyncrasies. This chapter has
reviewed the various taxonomies of national systems that
have been proposed by business historians, as well as
financial, legal and management scholars.
This first attempts at categorising national corporate
governance systems were grounded in historic analysis and
were made by John hicks and Alfred Chandler Jr. Hicks
distinguished between market-based capitalism and bankbased capitalism. A major recent attempt by Julian Franks
and Colin Mayer distinguishes between insider and outsider
systems of corporate governance.
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Goergen, International Corporate Governance, 1st Edition Pearson Education Limited 2012
Slide 4.58
Conclusions
In insider system, stock markets are relatively underdeveloped,
corporate control is highly concentrated and badly performing
managers are disciplined by the large shareholder. In outsider
systems, organised capital markets are highly developed, most
companies are listed on the stock market and have dispersed
ownership and control and managerial disciplining is done via the
market for corporate control.
Lucian Bebchuk and Mark Roe have formalised the way history
shapes current corporate governance via their concept of path
dependence,
they distinguish between structure-driven path
dependence and rule-driven path dependence. Structure-driven
path dependence relates to how the original structures of a country
have influenced its current structures. Rule-driven path dependence
refers to how current regulation was influenced by the structures or
economic actors that initially dominated the countrys economy.
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Goergen, International Corporate Governance, 1st Edition Pearson Education Limited 2012
Slide 4.59
Conclusions
A new strand of the academic literature is the so-called law and
finance literature. This literature proposes taxonomies based on
legal families (La Porta et al.) and political determinants, i.e. the
countrys way of achieving social peace and the governments
political orientation (Mark Roe) as well as the type of electoral
system (Marco Pagano and Paolo Volpin). At the core of most of
the taxonomies originating from the law and finance literature is
the premise that highly flexible and liquid markets, such as
capital markets and labour markets, are better at allocating
resources than other mechanisms, such as informal networks
and governments. According to this school of thought, corporate
governance systems , which put in place regulation that
facilitates rather than constrains the operation of markets, are
superior to those that do not.
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Goergen, International Corporate Governance, 1st Edition Pearson Education Limited 2012
Slide 4.60
Conclusions
In contrast, the varieties of capitalism (VOC)
literature is based on the notion of
complementarities. This notion implies that
very different set of institutional arrangements
may generate similar levels of economic
growth and output importantly, the VOC
literature does not assume that welldeveloped
capital
markets
and
weak
employee rights are the only way of achieving
strong economic growth.
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Goergen, International Corporate Governance, 1st Edition Pearson Education Limited 2012
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Conclusions
The rise of global capitalism.
First attempts at categorising corporate
governance systems.
Path dependence.
The law and finance literature and the
hierarchy of corporate governance systems.
The VOC literature and the concept of
complementarities.
Goergen, International Corporate Governance, 1st Edition Pearson Education Limited 2012