“Politics, Institutions, Society: Competing Explanations of Corporate Governance the World Around"

1. “Politics, Institutions, Society: Competing Explanations of Corporate Governancethe World Around" Peter Gourevitch IR/PS UCSD UC Human Social Complexity Videoconference January 5, 2007

2. Key Questions: • What explains variance in corporate governance around the globe? Northwestern

3. Figure 1: ownership conent. Figure 1.1: Ownership Concentration Northwestern

4. 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. Northwestern

5. 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? Northwestern

6. Roe chart 1 diffuse model Diffuse Ownership Model Roe, p 2 Northwestern

7. Roe Chart two l block Dominant stockholder model Roe, p. 3 Northwestern

8. 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 Northwestern

9. MSP index from book Northwestern

10. Blockho , msp Figure Northwestern

11. What explains strong MSP ? Politics: authoritative law, regulation and their enforcement. Northwestern

12. Why Do Corporate Governance systems differ around the world? • Minority shareholder protections (MSP): • Regulations in product markets, competition, prices, education, etc.: Varieties of capitalism Northwestern

13. 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. Northwestern

14. 1. Legal formalism: legal family Procedures and mechanisms of a particular legal system.. Northwestern

15. 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. Northwestern

16. 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 Northwestern

17. 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 Northwestern

18. R and Z over time Northwestern

19. 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: Northwestern

20. 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): Northwestern

21. Left right -block diagram Northwestern

22. Left right measures (Roe) Northwestern

23. Law vs. Politics: the combat Northwestern

24. 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? Northwestern

25. table Coalitions Northwestern

26. 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) Northwestern

27. 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: Northwestern

28. Pension Assets& MSPs Northwestern

29. PensionDebt &MSPs Northwestern

30. 3 .Political Institutions: Institutions: == Mechanisms for aggregating demands Vary the political institutions, you get different results. -- parchment institutions, formal rules, procedures, constitutions. Northwestern

31. 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 Northwestern

32. Political institutions and Block-holding Northwestern

33. 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. Northwestern

34. Causal Schema POLITICS POLICIES OUTCOMES Preferences (Owners, Managers, Workers) Institutions (Majoritarian, Consensus) Minority Shareholder Protections VoC = LME/CME Shareholder Diffusionor Blockholding Northwestern

35. Conclusion: Lessons The argumentation summary: Legal family depends on politics b. Politics turns on interaction of institutions and social demands Northwestern

36. 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? Northwestern

37. 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 ? Northwestern

38. 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: Northwestern

39. 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 . Northwestern

40. 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” Northwestern

41. 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) Northwestern

42. 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 Northwestern

43. 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 Northwestern

44. End!!! Northwestern

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46. Ownership concentration Northwestern

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48. 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 Northwestern

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