Tuesday, May 13, 2014
Common Law Corporate Governance
Chris Bruner's book Corporate Governance in the Common-Law World: The Political Foundations of Shareholder Power makes an important contribution to the academic literature on legal origins and to the study of comparative corporate law. Let me begin with why the study of this field is important. In terms of disclosure,I read the entire pre-publication manuscript and provided extensive comments at that time.
Beginning in 1997 and spanning a series of papers for roughly a decade, Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert Vishny (commonly referred to as “LLSV” even though some subsequent articles have had a slightly different cast of characters) transformed the debate on corporate governance by coding at the country level the amount of investor protection provided under corporate law. the level of investor protection of the underlying rules varied systematically based upon the origin of the legal system. LLSV concluded that common law jurisdictions were more protective of outside investors than civil law jurisdictions. In a series of papers in the subsequent decade, the LLSV team extended this initial research to determine that legal origin had an impact in the area of law and finance. Additional LLSV articles found that legal origins could explain outcomes in areas as diverse as bank ownership, legal formalism, government ownership of media, and regulatory schemes that created barriers to entry. LLSV country coding (and others have created their own legal origins schemes - including the CIA!) is now a standard variable that is included in the finance literature for any cross country studies. There also have been important policy implications for LLSV in terms of multilateral lending policies by the World Bank and IMF.
One issue that emerged as a result of the LLSV set of papers is that the coding reduces the differences and nuances of various legal systems to a simple coding of "1" or "2". Chris' book shows that not all common law systems are the same and that, indeed, there may be some significant divergences based on each country's own particular path dependency based on political and macro factors. This book is a significant accomplishment. If we merely focused on the positive elements of the book, readers would not find the discussion very fun. As a result, let me suggest some areas of criticism.
Where I have pushed Chris before is to focus a bit more on the law and finance literature and to engage more significantly in that debate. There are also some implications regarding the public choice literature that may help to explain the trajectory of developments in each of these jurisdictions that could have been teased out more. I also think that there is some room in the discussion of some of the civil law systems for additional exposition. Finally,let me suggest that concentrated shareholders is an issue that in retrospect should have deserved more attention. I am in Israel at the moment teaching Law and Entrepreneurship at the University of Haifa (think Start Up Nation) and like many other countries, a small group of controlling shareholders control much of the country's wealth through business groups. Some of the interesting work on business groups has been written by Hebrew University professor Yishay Yafeh (including a nice literature review in the Journal of Economic Literature). The Berle and Means notion of disparate shareholders common in the United States is simply not found in much of the rest of the world. There is also a significant concentration of control in some of the jurisdictions that Chris surveyed. However, Chris framed much of the book in terms of the salient corporate governance issues that we think about in the United States and how other countries differ. The idea of business groups is not a significant part of the US present day experience but shapes business outcomes and regulation elsewhere.
These critiques should not take away from the fact that Chris wrote an impressive piece of scholarship that makes a significant contribution to the scholarship.
Posted by D Daniel Sokol on May 13, 2014 at 01:14 AM | Permalink