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

• Peter Gourevitch
• IR/PS
• UCSD
• UC Human Social Complexity Videoconference
• January 5, 2007

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Key Questions

• What explains variance in corporate governance
  around the globe?

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Figure 1 ownership conent.
Figure 1.1 Ownership Concentration
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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.
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What works crony capitalism, arms length market?
Before 1997 Japan, German gt US After 1997
Crony capitalism USgt Japan, Asia, After
2001/02 Enron, World Com, Adelphia, Parmalat,
etc. So, why the variance in systems?
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Roe chart 1 diffuse model
Diffuse Ownership Model Roe, p 2
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Roe Chart two l block
Dominant stockholder model Roe, p. 3
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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
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MSP index from book
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Blockho , msp Figure
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What explains strong MSP ?
Politics authoritative law, regulation and
their enforcement.
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Why Do Corporate Governance systems differ around
the world?

• Minority shareholder protections (MSP)
• Regulations in product markets, competition,
  prices, education, etc. Varieties of capitalism

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Three meanings to Politics

• Legal formalism
• Political institutions de jure forms of power.
• Political sociology de facto forms of power
• economic/political sociology
• interest groups, etc.

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1. Legal formalism legal family

Procedures and mechanisms of a particular legal
system..
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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.

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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 FrenchAll of
Frances former colonies, Spain, most of Latin
America, Turkey, Indonesia, Netherlands,
Greece German lawAustria, Germany, Japan,
South Korea, Switzerland, Taiwan Scandinavian
Denmark, Finland, Norway, Sweden
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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

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R and Z over time
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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
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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)
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Left right -block diagram
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Left right measures (Roe)
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Law vs. Politics the combat
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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?
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table Coalitions
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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)
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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
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Pension Assets MSPs
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PensionDebt MSPs
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3 .Political Institutions
Institutions Mechanisms for aggregating
demands Vary the political institutions, you
get different results. -- parchment
institutions, formal rules, procedures,
constitutions.
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Aggregating mechanisms

• 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

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Political institutions and Block-holding
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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.
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Causal Schema

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Conclusion Lessons

• The argumentation summary
• Legal family depends on politics
• b. Politics turns on interaction of institutions
  and social demands

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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?
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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
?
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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
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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 .
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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
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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)
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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 -med
ia, schools, churches, ideas
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De jure vs. de facto forms of power

• Causal Hierarchy
• 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

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End!!!
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Ownership concentration
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MSP are not the full story

• "worlds 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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