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Tuesday, May 13, 2014

Chris Bruner on Corporate Governance in the Common Law World-Is There a New Grand Bargain Underlying the Varieties of Liberalism?

In his recent book, Corporate Governance in the Common-Law World, Christopher Bruner has made an important contribution not only to the literature on comparative corporate governance, but also to the broader field on comparative political economy. The book advances our understanding of these subjects in two broad respects. First, as he is at pains to point out, Bruner powerfully explodes the analytical categories of the “common law countries” and “liberal market economies” by analyzing at length and in depth the substantial legal and political economic differences across these nations.

Second, he teases out the significant differences and wide variation among the common law countries by situating corporate governance systems within a broader web of regulation, policy mechanisms, and stakeholder relationships that materially alter the operation, function, and economic consequences of different governance regimes. Most importantly, Bruner focuses on the interests of employees both as corporate stakeholders and as a political constituency. Other scholars have addressed the role of employees and worker interests in corporate governance (e.g. work by Roe, Gourevitch and Shinn, and Cioffi, among others), but I am unaware of a comparably sustained and in-depth comparative treatment of corporate and economic governance in the common law countries that so clearly articulates the systemic significance of the differences across them.

There is a marvelous trove of empirical and theoretical material here of great insight and pedagogical value. For these reasons alone, Bruner’s book is valuable, important, and should be widely read. These common law countries are often simply lumped together in a stylized, undifferentiated (and sometimes cartoonish) way that glosses over important cross-national variations and distorts comparative theory and analysis. Giving the common law countries their due as major political economies within the international system, Bruner book is particularly helpful in identifying the homogenizing weaknesses of the highly influential “legal families” and “varieties of capitalism” (VOC) theories, and thus of the large scholarly literatures that they have spawned.

The legal families theory classifies country cases on the basis of British common law heritage as one unified “family,” which allegedly explains a range of outcomes with respect to shareholding patterns and financial system development. Similarly, the VOC literature relies on a binary typology distinguishing between liberal market economies (LMEs) and coordinated market economies (CMEs). On the one hand, contractual and market relations play the primary roles in defining the structure, comparative competitive advantages, and developmental trajectories of LMEs, while CMEs are characterized by the foundational role of non-contractual and non-market institutional arrangements in structuring political economic relationships and their development. Bruner’s book highlights how these ostensibly very different theories overlap in that LMEs are associated with common law legal systems, while CMEs emerged in historically civil law jurisdictions. Both the legal families and VOC theories tend towards an extremely strong version of path dependence in which either the legal heritage or the institutional underpinnings of national economic organization have an overdetermining effect on future developments, which thus explain the persistence and predicted continuity of different models of the firm, financial system, and the broader political economy. By breaking out of the analytical straightjackets of the common law family, on the one hand, and the LME typology, on the other, Bruner confronts us with a wider range of juridical and political economic outcomes require explanation.

Liberalism and the common law may be far more capacious and adaptive than many credit; presumptions of TINA (there is no alternative) may be more deceptive, if not delusional, than recognized. Further, another salutary benefit of Bruner’s book is that it arguably expands the range of plausible policy outcomes and their interrelationships that may be fashioned in response to ongoing economic competition and crisis. In particular, his focus on corporate governance systems pays off by showing how the presence of more well-developed and comprehensive protection of employee and labor interests (e.g., through social welfare programs and/or labor and employment law) may be conducive to the adoption of policies and legal rules protecting and empowering shareholders. Where workers are protected by other means, shareholder power poses less of a threat. Where social welfare and regulatory protections are absent, shareholder primacy as a norm and pro-shareholder legal rules raise the specter of financial rent-seeking and zero-sum competition over governance processes that may blunt the development of pro-shareholder governance reforms.

In short, a political economy that protects stakeholder interests through multiple non-firm mechanisms and structural features allows for the adoption of pro-shareholder reforms, while weak systemic stakeholder protections may foster opposition to shareholder interests and, ironically, a more stakeholder-oriented form of corporate governance. These strengths of the book, however, also give rise to some reservations regarding the theoretical framework and empirics underlying these admirably succinct and provocatively counter-intuitive arguments. First, the book appears to ignore the possibility that employee/labor interests may receive minimal protection in any policy domain, whether in social welfare programs, labor law, or within corporate governance, or that these constituencies may be consistent losers in political battles over regulatory and governance policies. There appears to be an implicit logic that if employees lose in one policy domain (e.g., welfare state policies or labor relations law), their interests will be protected to some degree in another (i.e. corporate governance rules). The political and economic record of employees and labor interests during the past three decades has been rather dismal—a situation that informs many of the emerging political debates and tensions across the common law countries and beyond.

If employees have lost ground politically and economically across the board, the kinds of trade-offs Bruner describes may no longer characterize our politics or political economic development. Second, I thought the description of the U.S., and the state of Delaware corporate law jurisprudence in particular, as a stakeholder system was at best a stretch and at worst a misconception of the actual character of the American corporate governance regime and the position of the principal interests within it. As Bruner notes, the American governance regime strengthens the position of management via the discretionary powers of the board. In some instances, managerial empowerment, if not entrenchment, was effected by legal doctrine or statutory provisions that nominally valorize the interest of employees and other stakeholders. However, these stakeholders have no formal governance role or representation, nor do they have enforceable legal rights within governance processes. Stakeholder interests were a cat’s paw in a long-term politico-legal struggle between managerial and financial interests. Conversely, Bruner’s assertion that the hostile takeover market was effectively suppressed in the U.S. by stakeholder-oriented legal developments overstates this case as well. The hostile market was certainly constrained, but the market for control as reflected in M&A activity continued in ways that allowed managers and directors to benefit massively from what remained of this modified market for control. The acquisition and sale of control continued, but through ostensibly voluntary transactions that appear to be one key element in the upward spiral of managerial compensation.

Even as the average tenure of managers of public firms declined, their compensation skyrocketed—and side payments to facilitate mergers and acquisitions became routine. (Compare the case of Germany, where side payments to the former managers of Mannesmann following Vodafone’s acquisition of the firm resulted in their criminal prosecution. Even though the prosecution eventually ended the case after receiving a favorable court ruling, the signal sent to German managers was brutally clear and precluded an easy, if somewhat sleazy, way of facilitating takeovers.) These observations raise two broader and more important points about political economic competition and conflict within the domain of corporate governance and its development in the common law countries (or at least those with which I am more familiar, the U.S. and U.K.).

First, the legal reforms and structural changes since the 1980s, and most clearly in the common law countries, reflected a secular transformation of the managerial and more stakeholder-oriented capitalism of the post-war era into out current era of finance capitalism. Hence, the political and legal history of conflict and negotiation over the formal characteristics of corporate governance is of limited use in accounting for the dynamics of change or in describing the juridical and policy outcomes more recently.

Second, employees and organized labor have been on the losing end of the corporate governance and broader political economic changes of recent decades, which were coincident with and constitutive of the emergent variants of finance capitalism. The losses may be starker in the American case, but it’s awfully hard to make a convincing case that employees’ interests have not been compromised in the U.K., Canada, and Australia. I have long viewed the politics of corporate governance as a triadic conflict among managers, holders of financial assets (most importantly shareholders), and employees (whether unionized or not). The vast literature on comparative corporate governance reveals the manifold ways in which these conflicts can be resolved, if only provisionally—and the difficulty in identifying and explaining patterns in these forms of resolution. Neither financiers advocating shareholder interests nor managers may have gotten all they wanted in this struggle, but they appear to have come to a systemic accommodation in which resources were increasingly channeled to and split between managerial and financial elites.

The new grand bargain between managers and finance in its nationally specific instantiations is a central feature of the contemporary political economy. This broad, if variable shift in the power and governance relations underlying capitalism has contributed to rising inequality, financialization, secular stagnation, and ultimately a widening crisis of political economic functionality and legitimacy, across the common law countries and beyond. Indeed, this is a principal reason why corporate governance has become a subject of rising political salience (if not popular comprehension), and why it is such a vital area of study.

Chris Bruner’s book has made a notable advance in understanding these developments in the countries where they originated and became most consequential. By challenging much conventional wisdom with painstaking and subtle analysis of the common law countries, his fine and laudable work will (or at least should) set off a wider reconsideration of the internal politics, dynamics of legal change, and market developments in countries that remained shrouded in abstract and hoary stereotypes.

Posted by John W. Cioffi on May 13, 2014 at 07:09 PM | Permalink

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