You are on page 1of 17

Comparative Corporate Governance

A Review
Mark J. Roe
January 1998
Available at http://ssrn.com/abstract=11366

Electronic copy available at: http://ssrn.com/abstract=11366

COMPARATIVE CORPORATE GOVERNANCE. The focus for legal


academics interest in comparative corporate governance was once confined
to side-by-side comparisons of the formal mechanisms of corporate
governance, such as how boards were elected (who votes? when? what are
the quorums?), what formulas defined the permissible dividend level, and
what the proper business of the board might be, matters akin to the interest
of a stamp-collector in classifying and mounting tiny items of limited
general importance. Finance economists also limited their attention in
comparative corporate governance, partly because the task of describing
other systems was uninteresting and partly because high-powered event
studies were hard to execute without good pricing data from a good stock
market, which most other systems lacked.
Other reasons for the former lack of attention to comparative corporate
governance, particularly for Americans, are not hard to discern. In the
1970s, attention to corporate governance from the Securities and Exchange
Commission and the US courts tended to focus on scandal and corruption,
such as American corporate bribery of foreign government officials. And,
with the American economy the worlds leading economy, it was natural to
associate most American business institutions, such as a vibrant stock
market and diffuse ownership of large firms, as both inevitable and
efficient. Comparative corporate governance, if pursued at all, would
merely show how, other nations ought to organize the financing and
governance of large firms, or would lead American academics to observe
how other nations had imitated American institutions and how foreign firms
had developed toward the American type as their industrial systems
advanced.
These views changed in the US in the 1980s, not so much because of
immediate analytic and empirical breakthroughs, but because of European
and Japanese businesses success in selling their products in the United
States. After all, if these foreign firms produced goods that Americans
wanted to buy, particularly when some American firms faltered, then
foreign governance systems could not be so bad. Corporate governance the relationship between and among shareholders, the board of directors and
senior managers - could not be so bad abroad if the foreign firms succeeded
in making products that Americans wanted to buy. Global competition led
government commissions to look, sometimes wistfully, at foreign
governance and ownership structures as affecting industrial performance
(Competitiveness Policy Council 1993). Although macroeconomic
successes and failures might really have made the appearance of governance
success abroad and error here epiphenomena of the macroeconomies a
high dollar having made foreign-manufactured goods cheap, and cheap
foreign goods having made foreign corporate governance look better than it
had previously at a minimum we came to understand that the foreign

Electronic copy available at: http://ssrn.com/abstract=11366

Comparative Corporate Governance

governance systems were not disabling otherwise healthy economic


systems.
Foreign Blockholding. Some scholars saw strengths in the foreign
governance systems: foreign banks, firms and families with big blocks of
stock at first seemed able to monitor management more effectively than
could scattered American stockholders. The foreign blockholders had the
means to change the firms management or policy, and the owning
institution (if not the institutions own agents) had the economic motivation
to monitor well. Information, particularly proprietary and technically
complex information, could flow better from inside the company to a holder
of a nonsaleable, illiquid block of stock than to scattered traders on the
stock market. Special arrangements with labor could be made more credible
by a blockholder than by the diffuse owners of an American firm, owners
who some observers thought were breaking implicit contracts with
employees. Moreover, because blockholders that were banks, particularly in
Germany and Japan, were also usually lenders when they owned equity, this
simultaneous holding of debt and equity made their up-side and downside
incentives less distorted than were a pure debt-holders risk-avoiding
incentives or a pure stockholders risk-preferring incentives.
While those who found strengths in the foreign systems usually qualified
their endorsements, critics said that the claims made for the foreign systems
overstated the advantages. As the foreign economies weakened in the
1990s, some foreign firms- failed, and, with the governance systems unable
to rescue media-salient failed businesses, the positive claims for the foreign
systems seemed overstated. New analyses emphasized the conflicts of
interest that banker-lenders and supplier-directors faced, the difficulties
centrally organized governance systems faced when technologies and
markets moved rapidly, the adaptive difficulties of governance systems with
high levels of commitment to employees, and the likelihood that human
capital and productive benefits could be achieved without concentrated
ownership (see Aoki 1984; Cable 1985; Sheard 1989; Roe 1990; Porter
1992; Gilson and Kraakman 1993; Macey and Miller 1995; Sabel 1996).
And anecdotal reports of blockholders as spectacularly inattentive to
corporate governance, particularly in Germany, seemed to clash with
overall data associating managerial turnover with big blockholder
interventions (Kaplan 1994; Kaplan and Minton 1994; Kang and Shivdasani
1996).
In any case, economic change and glaring governance failures led to
official and semi-official studies of corporate governance as a possible
determinant of economic performance (Cadbury Report 1992 (UK);
Competitiveness Policy Council 1993 (US); Mlbert 1996 (Germany);
OECD 1997). The possibility that ones own national governance system

Comparative Corporate Governance

performed worse than anothers motivated, sometimes explicitly, sometimes


silently, these studies.
Purposes of Corporate Governance. Corporate governance can be defined
in several ways, a convenient one being the means of decision-making and
power allocation among shareholders, senior managers, and boards of
directors. A central goal for the governance system could be to make firms
operate as well as they can. True, it may well be that competitive capital and
product markets are the critical institutions in making firms react, change,
and be efficient, but governance institutions could still play a role. First, not
all firms face immediately competitive product markets, allowing the firm
and its managers slack. Second, some firms have weighty physical and
organizational capital in place, sunk capital that allows these firms
managers the luxury of reacting slowly to competitive and technological
pressures; such firms do not need immediate access to capital markets.
Third, corporate governance may fine-tune the firms reaction time to
competitive pressures; the firm with better governance may react faster and
better than the firm with mediocre governance.
Although there are some deep world-wide regularities, such as general
use of multi-member boards, the specific means by which firms govern
themselves at the top are many. The most obvious are monitoring by the
board of directors, incentive compensation to align managers with
shareholders, proxy contests, and takeovers. Better boards presumably
monitor and advise better; American analysts have recently tended to view
independent directors and big blocks as useful in priming the board.
However, evidence to support this has been slight; independent directors as
they exist are not associated with better performance (Bhagat and Black
1997) and big blocks do not seem to indicate better performance in either
the United States (Demsetz and Lehn 1985) or Germany (Franks and Mayer
1997). True, an Endogeneity problem may explain the paucity of
evidence supporting the comparative importance of board composition and
ownership structure. Firms that need big blocks or directors of a specific
type may, on average, get them in order to perform at par; those that dont
need them dont get them. Thus, on average, performance of big block or
independent director firms may be about the same, due to endogeneity
(Demsetz and Lehn 1985).
Similarly, particular ownership structures may fit with particular
production technologies and, if different nations have different
technological mixes, then comparing cross-border performance may not tell
us much about the strengths and weaknesses of different ownership
structures because the structures may fit only with their complementary
production institutions (Gilson and Roe 1993, 1997). The data may also be
telling us that the right structure has yet to evolve in the US and

Comparative Corporate Governance

Germany: independent directors in the US may not be independent enough,


in that so-called independent directors in the US may, without a big block
of stock in back of them, lack a base of support and motivation; they may
then easily be captured by management. Conceivably, the lack of support
and motivation may be due to the fact that the American big blocks do not
have a large enough-presence in board rooms, partly for regulatory
concerns, some justified, some not; and partly for fear of lawsuits; and the
German big blocks may not yet be coupled with further governance
mechanisms such as takeovers, incentive compensation, good information
flow to the supervisory boards that would make their governance
structures work best, and may be required by law to be coupled with
governance mechanisms such as codetermination that reduce the incentives
of some corporate players to build a strong supervisory board (Roe 1998b).
This economic-oriented thumbnail sketch already reveals an American
bias that studying comparative corporate governance can alleviate. In other
countries, corporate governance could be seen (1) to involve employees
much more and (2) to be part of the political legitimation of the economic
system. Employees, who sit on codetermined German supervisory boards
and who, in Japan, are said both to have lifetime employment and to
monitor their superiors, are more important in corporate governance abroad
than they are in the US. Moreover, in nations where the distribution 'of
property and authority has been politically charged, political struggles affect
the distribution and strength of property and authority inside the firm as
well as outside it, and the corporate governance forms may more overtly
result from political compromise designed to legitimate the system (Roe
1994, 1998a; Gilson and Roe 1997).
Nations may deliberately determine corporate governance for a few
reasons: One, utilitarian political decision makers may try to maximize the
size of the corporate pie and, believing in, say, contracting failures or
externalities, may mandate a governance result or privilege a particular
stakeholder's participation in the firm. Two, political leaders may seek
national wealth redistributions in favour of their constituents; in doing so
nationally, they may derivatively mandate corporate governance results that
they believe will distribute wealth inside the corporation to their favoured
constituents. These wealth redistributions may be impermanent, because
contracting parties might ratchet down unregulated compensation when
governments ratchet up the regulated compensation, but political leaders
seeking immediate redistribution may be less concerned with long-term
give-backs than with an immediate high profile redistribution to their
favoured constituents. Three, political leaders who fashion broad
programmes of political inclusion may ignore both general utilitarian
maximization and calculative redistribution, and, say, seek simply to
maintain existing jobs or to enhance employee voice as deserving norms for

Comparative Corporate Governance

their own sake, without either having any pie-maximizing goals or making
any distributive analysis; as a consequence, nations with such norms may
politically and visibly affect corporate governance case-by-case or across
the board. French governmental interventions to prevent layoffs, Germany's
mandated codetermination laws, and Japan's purported lifetime employment
can all be seen as having some amalgam of these politicized motivations.
Natural Experiments and Differing Origins. The basic tasks of corporate
governance are to monitor, motivate and select managers, organize the
financing of the firm, prevent managers, stockholders and debtors from
removing value from the firm, minimize conflict among financial
contributors, and (the issue usually not on the American agenda) help keep
the economic system legitimate. One reason to analyze comparative
corporate governance is to uncover different ways of reaching the same
ends. Although all successful systems must substantially achieve the
minimal goals of corporate governance, and, hence, successful systems may
all have a base of similarities, some systems might not rely as heavily as
does the US on incentive compensation, monitoring boards, takeovers,
proxy fights, and transparent securities market disclosure. Different
governance structures (that rely more heavily on big blocks, crossownership, family ownership, and government ownership) are the most
obvious contrasts with American structures, and their persistence suggests
that mechanisms other than the primary American mechanisms have thus
far done the job satisfactorily. The problem afflicting efforts to go beyond
that basic observation is that cross country comparisons have so much noise
that ascertaining which nations set of institutions works 'best' is hard, or
impossible. Moreover, persistence may indicate a group's positional power
inside the nation to get favorable rules, not the superior efficiency of the
resulting system.
By studying the differing origins of the systems, one can also appreciate
what determines the forms of governance. That is, what institutional
features led to big blockholders prevailing in Germany while securities
market-oriented devices prevailed in the US? For example, strong claims
have been made that differences in national politics explain differences in
corporate ownership structure and allocation of authority better than do
differences in industrial development. One can appreciate a nations
governance structure better by seeing the differences abroad and their
origins.
Political Differences. Rather than seeing, say, American-style securities
markets, with shareholders in the largest firms lacking influential blocks of
stock, as an inevitable evolutionary result, the prevalence of big
stockholding banks abroad causes us to rethink first premises (Roe 1994).

Comparative Corporate Governance

American banks and other financial institutions have been deeply affected
by American politics, from the early nineteenth-century destruction of the
Second Bank of the United States with President Andrew Jacksons ringing
populist veto of its recharter in 1832, to the decision to confine the CivilWar-created national banks to a single physical location, to the McFadden
Acts confirmation of narrow limits on bank-branching, to the limits in the
Bank Holding Company Act of 1956 on banks capacity to own industrial
stock and influence nonbanking businesses. Along the way, law blocked
the major life insurers from owning stock, via the populist Armstrong
investigation of 1906. Investigations such as the Pujo investigation of 1911
and the Pecora investigation of 1933 chilled financiers governance activity
at least for a time, and antitakeover laws of the late 1980s confirmed that
politics in America often tries to dampen financial influence in the
corporation.
Similarly, with an eye on the big blocks abroad, analysts have
reexamined the American ownership structure, and revisionists, looking at
the substance of the Berle-Means announcement of the scattering of
ownership and finding those claims to be overstated, have found pockets of
big blocks (not held by banks, to be sure, and usually for companies smaller
than the Fortune 100 or 200). The evolutionary impulse might thus be, not
as Berle and Means anticipated, inevitable movement toward widespread
scattered stockholding and diversified small holdings, but rather toward
noticeable blockholding, or a mixture of the two.
Comparisons abroad put the American structure into relief. In Germany
and Japan, large banks have historically played a much bigger role in their
economy than do Americas banks. (With fractional reserve banking
declining the world over, the comparative question then becomes whether
large stockholding institutions in todays world, fast-growing mutual
funds and pension funds, perhaps associated with the slow-growing
fractional-reserve banks will play a role abroad. Corporate governance
may once again be an epiphenomenon, derivative of other features of a
national economy, namely how financial institutions, corporate law and
family wealth are organized.) In Germany today, more than 85% of the
large firms have blockholders owning more than 25% of the firm (Franks
and Mayer 1997), a result not present for most large American firms. As for
financial institutions, which own some but far from most of these blocks,
those foreign nations lacked Americas populist history; indeed, they lacked
democracy for much of the relevant period. During the nineteenth century
American politics barred banks from stockownership and, at the beginning
of the twentieth century, barred life insurers as well. Thus when the public
corporation was about to be born, American financial institutions could not
play a mutual stockholding role. And, at historical moments when
American politics, for example, confirmed that banks could only branch

Comparative Corporate Governance

locally, via the McFadden Act of 1927, Japanese authorities consolidated


Japanese banks under a policy of one prefecture, one bank. Similarly,
while America tended to prevent commercial banks from entering into
investment banking via the Glass-Steagall Act of 1933, German rules
tended via transfer taxes on sales made outside of the large banks to channel
securities activities into the large banks themselves. Populism or its
cousin, socialism wasnt absent in Germany, but manifested itself
differently. Rather than inducing a political fragmentation of banking,
German populism led to codetermination laws that require that half of the
board of companies with more than 2000 employees be employees and the
employees representatives.
Britains relevant history is partially consistent and partially inconsistent:
Britains insurance companies never faced the American ban on stock
ownership, and Britains life insurers have held more stock and been more
active in corporate governance than American insurers (Black and Coffee
1994). This difference suggests that historical regulation could yield a
continuing structural difference. But, although British banks have been
comparatively bigger than Americas, they have not played a significant
role in corporate governance. Research is still needed as to whether
informal regulation from the Bank of England was important, whether easy
substitutes - more concentrated ownership, board chairs separated from
CEOs, and active insurers - developed, and whether Britains socialist past
and perhaps even rational expectations of a possible socialist future affected the ownership structure of public firms.
Functional Similarities. Comparisons with foreign governance systems
reveal underlying similarities, some of function, some of political impulse.
In function, a core governance task retiring and replacing the CEO
occurs at roughly the same time in terms of financial results, suggesting that
the fabled ability of foreign systems to avoid the purported short-run effects
of the stock-market is over-rated (Kaplan and Minton 1994; Kaplan 1994).
Deep questions remain, however, making this area a ripe one for research:
Does one governance structure or another better avoid crisis, even if the
CEOs leave at roughly the same time when a crisis comes about? Does one
structure pick better CEOs than another? Does one structure fit better or
worse with a particular production technology? Does one structure innovate
better than another? On the last question, one might ask whether securities
markets are necessary for the venture capital markets that bring forth many
new innovative firms in the US (Gilson and Black 1997). One might also
ask whether, for the large firms already existing, securities markets or
blockholding governance structure are better at smoothing the flow of
proprietary and complex information to owners. If a deep securities market
facilitates innovations from new firms by facilitating the entrepreneurs

Comparative Corporate Governance

ability to retain control of the business while raising new capital but
blockholding facilitates innovation in old firms, which is more important?
Or can both be combined in the same economy? Casual empiricism
(America has excellent venture capital markets and excellent securities
markets; most other nations except Britain lack both) suggests that
securities markets are useful in putting together a vibrant venture capital
industry. Whether nations without good securities markets can piggy-back
on the securities markets of those that do, by going public abroad, or
whether the truly important option for the innovating entrepreneur is the
exit option (which a good merger market might provide even without a
good securities market) remains to be seen.
A simple normative claim could be derived from the persistence of
differing forms and the uncertainty of where each form might have a
comparative advantage. Policymakers might, rather than evaluate which
form is, net, advantageous, design a set of ground rules that would allow
each form to compete inside a nation. The simple normative claim may well
be best, but the possibility of complementarities at the national level (see
below) complicates this competitive prescription.
Political Similarities. Similarities of political impulse across several
nations are important and at first not obvious. The similarities of impulse
suggest that domestic democratic politics affects all nations corporate
governance systems, but like variation in species, that political influence
differs in different nations. One can see this commonality most easily if one
hypothesizes a general democratic impulse to regularize employment. This
impulse can be seen as part of the basis for American antitakeover laws,
when widespread hostile takeovers in the late 1980s created uncertainty for
American employees. (Whether the uncertainty was justified (Lichtenberg
and Siegel 1990), or media-induced could be debated.) Behind much
takeover legislation was the active participation of labor (see
Pennsylvanias production of an antitakeover law: Roe 1994) or legislators
belief that employee-voters preferred both to dampen the wave of late 1980s
takeovers and to slow down the disassembling of conglomerates. Similarly,
the impulse to regularize the workplace is one force that contributed to
German codetermination, under which employees have half of the seats of
the supervisory board of most large firms. Because the German supervisory
board chooses the CEO and appoints the management board, these
codetermined board seats reduce the chance that the board would elect a
CEO who would want to change the firm rapidly in a way that affected
employment. In America, the political impulse to slow down capitalmarket-induced change led legislators to dampen the takeover wave; in
Germany the political impulse to slow down capital-induced changes led
the German Bundestag to expand codetermination.

Comparative Corporate Governance

Gilson and Roe (1997) hypothesize that in Japan a political impulse to


regularize employment, and for Japanese managers to regain authority to
run their factories in the face of the post-World War II Japanese economic
crises, were more important to the foundation of Japanese lifetime
employment (to stymie potential Socialist electoral victories after World
War II and to beat back unionization attempts) than were more ordinary
labor market goals of efficiency, motivation, and investment in human
capital.
Pitfalls in Comparative Law Scholarship. Comparative law work risks
being snared in several traps. One is to ignore deep-set similarities in
governance systems. Another is selection bias: To find substantial
equivalence in overall bottom-line functionality when examining the
leading industrial nations should be unsurprising. For these nations to be
leading industrial nations, they cannot have had severely debilitating
corporate governance systems. Evolutionary convergence often appears to
be a fact when we look ex post at successful national economies, but
selection bias in looking only at the leading economies means that
convergence may not at all be universal. Have second-tier economies failed
to develop a good governance system for their larger enterprises, and did
these failures seriously impede economic development? If they failed to get
good governance, why did they fail? Moreover, to stop at merely
congratulating the successful and convergent would ignore key questions
such as how each successful nation evolved to satisfactory functionality
given that their forms often started out as initially different, and why
different firms originated and continue to survive among the successful
economies.
Closely related to the pitfall of assuming convergence is the problem of
assuming that globalization must induce convergence, if it hasnt already.
True, the forces for convergence among the advanced nations are powerful
and readily identified, with competitive product and capital markets,
particularly the enhanced competitiveness that globalized markets induces,
being the primary force for convergence and the universal nature of some
economic organization being another. If there is one best practice that
induces corporate productivity, then nations and corporations that fail to
adapt the practice will fall behind. Once a practice becomes identified as
superior, competitive firms will adapt it, or codes of best practice will
recommend it, or, occasionally, rules will mandate it or favor it. Less
successful firms will tend to imitate successful firms. Some of this will
induce up from the firm level, as firms and financiers adapt similar
practices, or arise from regulation. National reports, perhaps induced by
temporary poor economic performance in the nation, will identify practices

Comparative Corporate Governance

10

seen elsewhere as beneficial. Competitive convergence tends to work fastest


in liberalized economies, and the 1990s has been an era of liberalization.
Imitation comes not just to find best practice, but to appear to be modern
or to disarm critics (as economic players position themselves to claim that
they are doing all they can). And modern information flows and
communications mean that few corporate governance secrets remain.
Academic conferences, national inquires, dictionary-style compilations with
corporate governance entries, OECD studies, and similar communications
make the patterns of corporate governance readily understood in all
advanced industrialized nations.
Another force for convergence is that cross-border investors bring their
governance preferences with them and push for practices with which they
are familiar and comfortable. For now, in the late 1990s, this cross-border
investment force tends to make corporate governance converge a bit more
to American patterns than it might otherwise, because the international
investors most active so far in pushing corporate governance initiatives
have been American investors, particularly American public pension funds.
Similar cross-border features allow firms in nations lacking well-developed
securities markets to piggyback on the securities markets of other nations.
So German firms may launch their IPOs in Britain or on NASDAQ, leading
these German firms to adapt to the governance institutions demanded to go
public there, institutions that could either be a necessary part of a public
stock market or that may be the local preference, but which in any case
induce convergence.
Democratic politics can induce convergence, as I discuss elsewhere in
this essay. Democracy fits poorly with concentrated finance and powerful
private institutions. Over time, anyone believing in such a relationship
should predict, democracy should erode powerful visible financial
institutions in nations where they exist and induce these institutions to keep
a low profile in corporate governance, perhaps even inducing them to
disappear from the centre of corporate institutions. Evidence from,
Germany suggests this may be true there.
But although the forces for convergence are powerful, they may be offset
by countervailing forces. First, if comparative advantage implies that
different nations may make different things, and if different governance
forms fit better with different production technologies, then different
governance systems may persist. Second, because best governance is not a
sine qua non -economic issue, weaker or different governance systems may
persist if a nation has other offsetting, stronger economic features. And,
indeed, inferior governance could persist without offsetting strengths, if
other, presumably inelastic inputs like local capital or labor pay for the
weaker, more costly governance system. Some nations clearly make
political choices to slow down change, to foster family-owned medium-

11

Comparative Corporate Governance

sized and small firms, and to subsidize workers whose jobs straight
competition would eliminate; these political impulses are often reflected in
rules that affect corporate governance. As long as political coalitions in
those nations can support those results in the political sector, by assembling
coalitions that beat those in the nation who lose from the political decisions,
then the inferior governance can remain stable. Third, incumbents reap
benefits from their governance systems; when, to improve a system,
incumbents must initiate change that reduces the incumbents benefits,
change will be slow.
Another potential pitfall is to ignore complementarities. When one finds
a difference and attributes, say, some German strength to codetermination
or blockholding, or some American strength to takeovers, one might
mistakenly jump to conclude that other nations should mimic these
strengths. But because these strengths are sometimes embedded with
institutional complementarities, mimicking an isolated institution may be
useless, or even detrimental. (On the general issue of complementaries, see
Milgrom and Roberts 1994.) For example, American-style 1980s takeovers
may have forced firms to adapt, focus, and reduce value-decreasing
diversification, but America's fluid labor markets (with short periods of
unemployment and, usually, easy job availability) made the pain of
takeover-induced transitions smaller in the US than it might have been in
the more rigid labor markets of continental Europe or Japan. Similarly,
German codetermination may enhance employee commitment there, but not
on balance be helpful in the United States because (a) German
codetermined supervisory boards do not have as wide a range of functions
as American boards, and (b) German blockholders historically have played
a bigger role inside the German firm, sometimes as lender and stockholder,
than have American financial institutions, and these blockholders have
informal sources of information and authority, yielding a countervailing
power that would not be present in the United States if the US used
codetermination. A recommendation to enhance, say, the role of labor in
American firms because its role appears (if it appears) to be positive in
German firms in developing the right kind of human capital, may
mistakenly take the German institution out of its context and ignore
complementary institutions, such as the prevalence in Germany of
blockholding, and plant-floor level workers councils, and low labor
mobility. (And vice versa: blockholding may be more politically palatable
in a society that has codetermined large businesses, like Germany, or an
articulated commitment to lifetime employment, like Japan.) Lastly but still
similarly, a recommendation to enhance the possibility of takeovers in
Germany or Japan, if they seemed to enhance productivity, may also require
a change in the foreign labor markets for the takeovers to be palatable.

Comparative Corporate Governance

12

The embeddedness and complementarities argument can be made from


another perspective: Large shareholders may be helpful when legal
protections are weak; law and shareholding size may be complementary (La
Porta et al. 1997). Or, when corporate law is weak, family-owned firms may
control agency costs better than securities markets, or banks may control
their agents (inside the bank and in bank-influenced industrial firms) better
than diffuse securities-markets would control their agents on corporate
boards in the weak corporate law setting.
Future research here could use game theory to compare corporate
governance systems. One example follows: game theorists describe settings
where theres no equilibrium. In one such game, two players prefer a
package of results, but each player prefers a different package. Game
theorys dating game once called the battle of the sexes has two players
try to coordinate dinner plans. One player buys the wine, the other the meal,
with one player preferring beef and red wine to chicken and white wine, and
the other preferring the chicken and white to the beef with red. Both players
prefer a package, although each prefers a different package. The wine
buyer, if forced to take a package (chicken has already been chosen),
wouldnt buy red, even though he preferred red wine and red meat to the
already chosen chicken and chickens complement, white wine. Ex ante,
there might be multiple equilibria, but once the package is chosen (and
sometimes once part of the package is chosen), the package might persist
because both players prefer some package to no package (see Young 1996),
and the coordination costs of switching the entire package may be too high
(see Roe 1996).
One could imagine this game as yielding complementary governance
packages in several ways, many already obvious: fluid labor markets,
diffuse ownership, and few long-term bankable commitments might be one
package that contrasts with lifetime employment, concentrated ownership,
and serious commitments by the firm to employees. Each of these packages
may have productive complementaries and political complementarities. The
productive complementarities are clear; the political complementarities are
less clear, but each package can be seen as having one populist benefit and
one populist cost. A system that brought both political costs together might
be especially unstable politically.
A last pitfall in comparing corporate governance systems is the potential
for explanations to be ad hoc, with little in the way of theoretical
predictions. Ad hoc descriptions have value, in better understanding how
systems are put together and in laying the foundations on which to build
hypotheses, but the strongest scientific comparisons will predict and test,
say, what combinations of institutions will survive together when
complementarities are important or which industries will survive if
financing is done, through one means instead of another. Such well-

13

Comparative Corporate Governance

specified studies are beginning to appear in the mid-1990s (Kaplan 1994;


Kaplan and Minton 1994; La Porta et al. 1997).
Broadening of the Research Agenda: Basic Data, Role of Labor and the
Functions of Corporate Governance. Comparative study of corporate
governance can broaden the domestic American research agenda. Above, I
mentioned the reexamination of American ownership structures and the
fraying of the purity of the Berle-Means model as a perfectly accurate
description of American ownership structure. The agenda has broadened in
other ways. American work on comparative corporate governance has
focused on the triangular relationships among the shareholders, the board of
directors, and senior management. Other basic elements of commerce
suppliers, customers, and employees have been viewed as outside the core
institutions of governance. These others have typically been seen as part of
the study of contracting or of labor law and economics. But employees play
a more formal role in some foreign systems and this suggests that the
American agenda can be broadened, if only to ascertain why American
employees rarely play a role in the core governance institutions.
Similarly, Gilson and Roe (1993) and Berglof and Perotti (1994),
looking at cross-ownership between some Japanese suppliers and customers
(and main bank ownership of some stock in both suppliers and customers),
hypothesized how contractual governance might fit with corporate
governance. Relational contracts cannot be well specified among all
suppliers and customers. When complementary investments have to be
made, often vertical integration results. But this vertical integration
exacerbates large-firm agency costs. Gilson and Roe hypothesize that partial
cross- and main bank ownership can at times be the best tradeoff between
pure contract and complete vertical integration: the cross-ownership can
sometimes make contractual reneging harder, because cross-ownership
gives the parties sanctions. But the incomplete integration may avoid the
higher agency costs of a large vertically integrated firm. (For empirical
confirmation for Japan, see Flath 1996; Ramseyer 1997.) Regardless of how
far the model goes in describing key features of Japanese cross-ownership,
uniting production contracts with corporate governance is potentially useful
in the United States.
The comparative agenda can profitably be further broadened: by seeking
regularities in developed governance systems, we may learn what is
essential and what is not. And, to date, the comparative study has been
principally of the US, Britain, Germany, and Japan. Deep comparisons with
France, Italy, and the Benelux nations need to be made, inquiries as to
whether developing nations failure to develop good corporate governance
institutions is important could be revealing, and the efforts by Russia and

Comparative Corporate Governance

14

eastern Europe to build wholesale a new system of governance and


financing are rich fields for comparative corporate governance analysis.
For Palgrave Dictionary of Law and Economics
BIBLIOGRAPHY
Allen, F. and Gale, D. 1995. A welfare comparison of intermediaries and financial markets
in Germany and the US. European Economic Review 39: 179-209.
Aoki, M. 1984. The Economic Analysis of the Japanese Firm. New York: North-Holland.
Berglof, E. and Perotti, E. 1994. The governance structure of the Japanese financial
keiretsu. Journal of Financial Economics 36: 259-84.
Berle, A. and Means, G. 1932. The Modern Corporation and Private Property. New York:
Harcourt, Brace & World; repr. 1967.
Bhagat, S. and Black, B. 1997. Do independent directors matter? Columbia Law School
Working Paper.
Black, B. and Coffee, J. 1994. Hail, Britannia?: institutional investor behavior under
limited regulation. Michigan Law Review 92: 1997-2087.
Cable, J. 1985. Capital market information and industrial performance: the role of West
German banks. Economic Journal 95: 118-32.
Cadbury Report. 1992. Report of the Committee of the Financial Aspects of Corporate
Governance. London: Burgess Science Press.
Coffee, J. 1991. Liquidity versus control: the institutional investor as corporate monitor.
Columbia Law Review 91: 1277-1368.
Competitiveness Policy Council. 1993. Reports of the Subcouncils. Washington, DC.
Demsetz, H. and Lehn, K. 1985. The structure of corporate ownership: causes and
consequences. Journal of Political Economy 93; 1155-77.
Eckstein, W. 1980. The role of the banks in corporate concentration in West
Germany.Zeitschrift fur die gesamte Staatswissenschaft 136: 465-82.
Flath, D. 1996. The keiretsu puzzle. Journal of Japanese and International Economies 10:
101-121.
Franks, J. and Mayer, C. 1990. Capital requirements and investor protection: an
international perspective. National Westminster Bank Quarterly Review (August):
69-86.
Franks, J. and Mayer, C. 1997. Ownership, control and the performance of German
corporations. London Business School Working Paper.
Gilson, R.J. and Black, B. 1997. Venture capital and the structure of capital markets: banks
versus stock markets. Journal of Financial Economics (forthcoming).
Gilson, R.J. and Kraakman, R. 1993. Investment companies as guardian shareholders: the
place of the MSIC in the corporate governance debate. Stanford Law Review 45: 9851010.
Gilson, R.J. and Roe, M.J. 1993. Understanding the Japanese keiretsu: overlaps between
corporate governance and industrial organization. Yale Law Journal 102: 871-906.
Gilson, R.J. and Roe, M.J. 1997. Lifetime employment: labor peace and the evolution of
Japanese corporate governance. Columbia Law School Working Paper.
Hansmann, H. 1996: The Ownership of Enterprise. Cambridge, MA: Harvard University
Press.

15

Comparative Corporate Governance

Hohi, T., Kashyap, A. and Scharfstein, D. 1990. The role of banks in reducing the costs of
financial distress in Japan. Journal of Financial Economics 27: 67-88.
Jensen, M. 1989. Eclipse of the public corporation. Harvard Business Review 67: 61-74.
Kang, J. and Shivdasani, A. 1996. Does the Japanese governance system enhance
shareholder wealth? - evidence from the stock price effects of top management
turnover. Review of Financial Studies 9: 1061-95.
Kaplan, S.N. 1994. Top executives, turnover and firm performance in Germany. Journal of
Law, Economics, and Organization 10: 142-59.
Kaplan, S.N. and Minton, B.A. 1994. Appointments of outsiders to Japanese boards:
determinants and implications for managers. Journal of Financial Economics 36: 22558.
La Porta, R., Lopez-de-Silanes, F., Shleifer, A., and Vishny, R.W. 1997. Legal
determinants of external finance. Journal of Finance 52: 1131-50.
Leuz, C., Deller, D. and Stubenrath, M. 1977. An international comparison of accountingbased payout restrictions in the United States, United Kingdom and Germany.
Department of Business and Economics. Johann Wolfgang Goethe-Universitt,
Frankfurt am Main. Working Paper.
Lichtenberg, F .R. and Siegel, D. 1990. The effects, of leveraged buyouts on productivity
and related aspects of firm behavior. Journal of Financial Economics 27: 165-94.
Macey, J. and Miller, G. 1995. Corporate governance and commercial banking: a
comparative examination of Germany, Japan, and the United States. Stanford Law
Review 48: 73-112.
Milgrom, P. and Roberts,J. 1994. Complementarities and systems: understanding japanese
economic organization. Estudios Economicos 9: 3-42.
Morck, R. and Nakamura, M. 1992. Banks and corporate control in Japan. University of
Alberta, Faculty of Business, Institute for Financial Research, Working Paper No. 6-92.
Mulbert, P. 1996. Empfehlen sich gesetzliche Regelungen zur Einschrankung des
Einflusses der Kreitinstitute auf Aktiengesellschaften? Deutschen Juristentag,
Verhandlungen des Einundsechzigsten Deuteschen Juristentages, Band 1 gutachten.
Munchen: C.H. Bech'sche Verlagsbuchhandlung.
Organization for Economic Cooperation and Development. 1997. Business Sector
Advisory Group on Corporate Governance, Institutional modernisation for effective
and adaptive Corporate governance: challenges and responses. Paris: OECD.
Porter, M. 1992. Capital disadvantage: Americas failing capital investment system.
Harvard Business Review 70: 65-82.
Prowse, S.D. 1990. Institutional investment patterns and corporate financial behavior in the
United States and Japan. Journal of Financial Economics 27: 43-66.
Ramseyer, M. 1997. Does corporate governance converge? The a-Contextual logic to the
Japanese keiretsu. University of Chicago Law School Working Paper.
Riesser, J. 19l1. The German Great Banks and Their Concentration. Washington, DC:
Government Printing Office. Morris Jacobson, trans.
Roe, M.J. 1990. Political and legal restraints on ownership and control of public
companies. Journal of Financial Economics 27: 7-41.
Roe, M.J. 1994. Strong Managers, Weak Owners: The Political Roots of American
Corporate Finance. Princeton: Princeton University Press.
Roe, M.J. 1996. Chaos and evolution in law and economics. Harvard Law Review 109:
641-668.
Roe, M.J. 1998a. Backlash. Columbia Law Review (forthcoming).

Comparative Corporate Governance

16

Roe, M.J. 1998b. German codetermination and German securities markets. Columbia
Business Law Review (forthcoming).
Romano, R. 1987. The political economy of takeover statutes. Virginia Law Review 73:
111-199.
Sabel, C. 1996. Ungoverned production. Columbia Law School Working Paper.
Sheard, P. 1989. The main bank system and corporate monitoring and control in Japan.
Journal of Economic Behavior and Organization 11: 399-422.
Teranishi, J. 1990. Financial system and industrialization of Japan: 1900-1970. Banca
Nazionale del Lavoro Quarterly Review: 43(17): 309-41.
Tilly, R.H. 1986. German banking, 1850-1914: development assistance for the strong.
Journal of European Economic History 15: 113-52.
Tilly, R.H. 1989. Banking institutions in historical and comparative perspective: Germany,
Great Britain and the United States in the nineteenth and early twentieth century.
Zeitschrift fur die Gesamte Staatswissenschaft (Journal of Institutional & Theoretical
Economics) 145: 189-209.
Windolf, P. 1993. Codetermination and the market for corporate control In the European
Community. Economy and Society 22: 137-58.
Young, H.P. 1996. The economics of convention. Journal of Economic Perspectives
10:105-22.