Roundtable on Government Business Relations and Corporate Governance

1. Roundtable on Government Business Relations and Corporate Governance By Stijn Claessens World Bank and University of Amsterdam International Conference on Corporate Governance in China and Asia Shanghai, China March 11-13, 2005

2. Multiple links between government and corporate governance • Weak public governance means poor corporate governance in state-owned enterprises • Weak public governance induces bad corporate behavior, e.g., direct contracts, bribes, corruption • Weak public governance allows easier for poor corporate sector behavior of firms, e.g., as public enforcement is bad, expropriation will be greater • Weak public governance makes it harder for firms to signal good corporate governance as the overall environment is weak, e.g., externality

3. Data support, however, only to some degree and with qualifications • Links between measures of public governance and of formal private corporate governance not obvious • Relationships between: Corruption, Rule of Law, Political Accountability and Legal Protection of Minority Rights mostly positively, but weak. Sometimes, public governance good, yet “corporate governance” formally poor; and vice-versa • This applies to both developed countries and developing countries

4. Positive, but weak relationships

5. Positive, but weak relationships

6. Positive, but weak relationships

7. Measurement, but also other issues • Partly depends on how one measures corporate governance, e.g., laws versus practices/enforcement, but then measuring and mixing similar concepts • While government business relations and corporate governance go together in many ways, the links are not always direct and may depend on other factors • Need to consider, among others: • Shareholder versus stakeholders dimensions • Public accountability in general • Dynamics of fostering change • The level of development of country

8. Stakeholder model • Example: genuine tradeoffs in stakeholder models • Good equilibrium: banks, but also labor monitor management/insiders, with low shareholders rights, if government is accountable to many • Bad equilibrium : corporatist model: labor colludes with insiders to produce weak investors rights, if government is only accountable to some • Worse equilibrium : insiders collude with government if government is only accountable to very few

9. Stronger relationship (?)

10. Accountability, dynamics and level of development • Accountability of government matters • To whom? Taxpayers are not shareholders • Dynamics of fostering change • May require short-run tradeoffs as the need to buy political support may require compromises • Too rigid property rights may hinder development • The level of development of country • Can alter priorities: in many developing countries public governance more important than corporate governance

11. Conclusions • Do not know all the mechanisms from public governance to private corporate governance • There maybe threshold effects: beyond some level of public governance, the relationship drops off • Stakeholder model can deliver superior results, but also inferior results. Depends on accountability • Need to be careful not to go overboard on corporate governance in a narrow sense • In some countries, minimalist government may be the third best • Need to exploit what country differences in the institutional environment difference drive results