Political Determinants of Corporate Governance

Citation

Mesure, H. (2009), "Political Determinants of Corporate Governance", Society and Business Review, Vol. 4 No. 2, pp. 161-163. https://doi.org/10.1108/17465680910977217

Mark J. Roe is a Berg Professor Law at the Harvard Law School. He has previously held positions at Columbia University School of Law; University of Pennsylvania School of Law; and Rutgers University School of Law. His publications include Corporate Reorganization and Bankruptcy: Legal and Financial Materials (Foundation Press, 2000) and Strong Managers, Weak Owners: The Political Roots of American Corporate Finance (Princeton University Press, 1994). Roe is one of the most important scholars of the “politics schools” of the corporate governance.

Why do corporate governance systems differ quite substantially around the world? The author thesis is that that the large firm's ownership structure is too often analyzed as one arising solely from organizational imperatives and technical foundations. The political and social predicates that make the large firm possible and that shape its form can deeply affect which firms, which ownership structures, and which governance arrangements survive and prosper, and which do not. Therefore, through the use of statistical and qualitative analysis, Roe explores the relationships between (social) history, politics and the corporate governance institutions of seven occidental countries.

To do this, the authors divided his book into seven essentials parts. Part I: “Political conflict and the corporation” gives the opportunity to affirm that social peace precedes production and those political forces within a country (or politics) as well as history shape the corporate governance of the firms. The author also the core differences in corporate governance throughout the world. The American model supervises managers through a board representing a diffuse mass of external shareholders whose rights are defended by a variety of institutional rules (such as those governing insider trading, antitrust, and an open market for corporate control) and by watchdog “reputational intermediaries” (such as accountants, securities analysts and bond‐rating agencies). The claims of employers, suppliers and buyers are subordinated to shareholder rights. The German model, in contrast, supervises managers by concentrating ownership in block holders, permitting insider relationships, allowing substantial horizontal coordination among producers and accepting a variety of “stakeholder” claims on the firm besides those of the shareholders. Japan, as well as Sweden, Austria, and other continental European countries, resembles the German model to varying degrees, while the UK, Canada, Australia, Ireland and New Zealand bear closer resemblance to the American system. Just why, these differences exist has been the object of vigorous debate both in the legal academy (1) and across many other fields. In Part II, the author develops a theory according which the social democracy and the diffusely owned firms are in tension. He licks a nation's political orientation to the microstructure of the firms by showing how social democracy press managers to coalesce with employees not with distant shareholders and how the means that strongly tie managers to shareholders in American public firms fray a strong social democracies. Owner must consequently seek for other means to control managers and the best alternative is close ownership or block ownership of the equity. Part III tests this political hypothesis with a simple statistical enquiry: if we array nations on a left‐to‐right political scale, and then order them highly concentrated to highly diffuse ownership scale, the two scales correlate strongly. The statistical evidence allows the political explanation to compete the traditional ones especially the explanation by the state of corporate law. Part IV presents the relationship between social politics, history and corporate governance in seven countries that are: France, Germany, Italy, Japan, Sweden, the UK and the USA. Those constitute the “Gotha” of the corporate governance throughout the world. Part V, deepen the inquiry by examining the direction of the causality. In Part I, the author takes the politics as given and examines its consequences for the governance of the firm. In Part V, he examines how corporate and economic structures can frame politics. According the authors some corporate structures can affect the stability of the political system in which they are, pushing the firms to bend to survive or to disappear. In Part V, Roe also links political story to product markets (or “industries”). Corporate governance, political context and the severity of competition within industries appears to be statistically linked. In Part VI, Roe discusses the corporate law as the foundation for securities markets, the shareholders protection and separation between control and ownership. Corporate law can deal against rapacity or self dealing but not against managerial mistake. The quality and the pertinence of corporate law can a lot to promote prosperous corporations and industries but it cans not everything. Above all, data evidences are sometime discordant to the consensual theory. The question of the role of international agencies that are promoting one model of corporate governance within third world and transition nations is also discusses in that six part. Part VII unifies to political theories about corporate governance. A democratic policy does not easily accept powerful pro‐shareholders institutions. The historical approach shows that the corporate institutions at a given period of time are always the fruit of a social compromise.

By stressing the influence of the historical and the political contexts, specially the social democracy one, Roe invites us to avoid a too economical or juridical approach of the corporate governance institutions. Those are first the fruit of the society. One can even consider that this book is an invitation to a political theory of the corporate governance to complete the dominant business and law theories. This serious, easily readable and rich book can be recommended to all scholars of corporate governance and anybody else interested in the origins of corporate governance systems.