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

2. May 25, 2006Northwestern Key Questions: What explains variance in corporate governance around the globe?

3. May 25, 2006Northwestern Figure 1.1: Ownership Concentration Figure 1: ownership conent.

4. May 25, 2006Northwestern 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. The corporate governance problem :

5. May 25, 2006Northwestern 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?

6. May 25, 2006Northwestern Diffuse Ownership Model Roe, p 2 Roe chart 1 diffuse model

7. May 25, 2006Northwestern Dominant stockholder model Roe, p. 3 Roe Chart two l block

8. May 25, 2006Northwestern 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 Solution: two models:

9. May 25, 2006Northwestern MSP index from book

10. May 25, 2006Northwestern Blockho, msp Figure

11. May 25, 2006Northwestern What explains strong MSP ? Politics: authoritative law, regulation and their enforcement.

12. May 25, 2006Northwestern Why Do Corporate Governance systems differ around the world? Minority shareholder protections (MSP ): Regulations in product markets, competition, prices, education, etc.: Varieties of capitalism

13. May 25, 2006Northwestern 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.

14. May 25, 2006Northwestern 1. Legal formalism: legal family Procedures and mechanisms of a particular legal system..

15. May 25, 2006Northwestern 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.

16. May 25, 2006Northwestern 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 Common civil distribution

17. May 25, 2006Northwestern 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 Problems with Legal Family argument

18. May 25, 2006Northwestern R and Z over time

19. May 25, 2006Northwestern 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:

20. May 25, 2006Northwestern 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):

21. May 25, 2006Northwestern Left right -block diagram

22. May 25, 2006Northwestern Left right measures (Roe)

23. May 25, 2006Northwestern Law vs. Politics: the combat

24. May 25, 2006Northwestern 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? Groups in corporate governance conflict

25. May 25, 2006Northwestern table Coalitions

26. May 25, 2006Northwestern 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) Coalitions

27. May 25, 2006Northwestern 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:

28. May 25, 2006Northwestern Pension Assets & MSPs

29. May 25, 2006Northwestern Pension Debt & MSPs

30. May 25, 2006Northwestern 3.Political Institutions: Institutions: == Mechanisms for aggregating demands Vary the political institutions, you get different results. -- parchment institutions, formal rules, procedures, constitutions.

31. May 25, 2006Northwestern 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

32. May 25, 2006Northwestern Political institutions and Block- holding

33. May 25, 2006Northwestern 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.

34. May 25, 2006Northwestern Preferences (Owners, Managers, Workers) Institutions (Majoritarian, Consensus) Shareholder Diffusion or Blockholding POLITICS Minority Shareholder Protections VoC = LME/CME POLICIESOUTCOMES Causal Schema

35. May 25, 2006Northwestern Conclusion: Lessons The argumentation summary: a.Legal family depends on politics b. Politics turns on interaction of institutions and social demands

36. May 25, 2006Northwestern 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?

37. May 25, 2006Northwestern 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 ?

38. May 25, 2006Northwestern 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:

39. May 25, 2006Northwestern 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.

40. May 25, 2006Northwestern 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”

41. May 25, 2006Northwestern 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 )

42. May 25, 2006Northwestern 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

43. May 25, 2006Northwestern 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

44. May 25, 2006Northwestern End!!!

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46. May 25, 2006Northwestern Ownership concentration

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48. May 25, 2006Northwestern 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

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