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CORPORATE GOVERNANCE PATTERNS IN OECD ECONOMIES: IS CONVERGENCE
UNDER WAY?
Stilpon Nestor and John K. Thompson
∗∗∗∗
I. Introduction
Neo-classical economics suggests that a firm which operates in a competitive product market and
meets its capital needs in an efficient capital market should maximise the welfare of its owners (as
they would otherwise not supply it with capital) and that of its customers (by pricing its products at
their marginal cost): the enterprise is thus the proverbial “black box”. But,
“... in the real world things are not that simple...Creditors want to be sure that they will be repaid,
which often means firms taking on less risky projects ... managers would rather maximise benefits to
themselves (by) preferring policies that justify paying them a higher salary, or divert company
resources for their personal benefit or simply refuse to give up their jobs in the face of poor profit
performance .... Large shareholders with a controlling interest in the firm would, if they could,
increase their returns at the expense of ... minority shareholders.” (Prowse 1996)
The list could be longer: employees, suppliers, customers, the community as a whole. There are
substantial costs that result from the divergence of the interests of different agents. Corporate
governance is the outcome of the relationships and interactions between these agents. An optimal
corporate governance structure is the one that would minimise institutional costs resulting from the
clash of these diverging interests.
Costs are the result of two main incidences: the long string of agency relationships that characterise
today’s large firms; and the impossibility to write complete contracts between principals and agents
on the exact tasks of the latter. Hence, in the words of Professor Hart (1995):
“governance structures can be seen as a mechanism for making decisions that have not been specified
by contract”.
But why do these costs matter? Because the performance of the enterprises might be significantly
influenced by their size and the identity of their bearer
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. For example, if too many of these costs are
borne by shareholders, the cost of equity financing will rise and the structure of the capital market will
be seriously tilted towards debt financing and/or direct or indirect state subsidies. Employment and
labour relations might also be shaped by governance structures: where labour has an important role in
defining company strategy there might be losses in the efficient redeployment of resources; on the
contrary, where employees are kept completely outside the information flow and decision making
process within the firm, there may be a lower commitment to the firm’s development and more social
costs may arise down the line.
And if these costs matter to corporations, why do they matter to governments? Everybody would
agree that corporate governance regimes are (and should remain) the product of private, market-based
∗
Directorate for Financial, Fiscal and Enterprise Affairs, OECD. Opinions expressed in this paper are the
authors' own and do not necessarily reflect those of the OECD.
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A substantial amount of literature has focused on the relationship between governance and performance.
Findings are often contradictory, which may be largely due to insufficient data. Millstein and Mac Avoy
(1997) find that good governance at board level has a non-trivial impact on share prices. In a survey of the
literature, Patterson (1998) finds little qualitative evidence to either prove or disprove such a link.
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practices. There are however important policy angles. From an economic policy perspective, rising
institutional and transaction costs in the realm of corporate decision-making and finance impacts on
the competitiveness of economies, on the corporate investment levels and on the allocative efficiency
of capital markets. From an institutional perspective, corporate governance is of direct relevance to
policy makers because laws, institutions and regulations are one of its most important sources (and of
its costs). Company law, securities regulation, prudential regulation of banks, pension funds and
insurance companies, accounting and bankruptcy laws impact on the way corporations make their
decisions and behave in the market -- and towards their different constituents. To come back to
Hart’s aphorism, the legal and institutional framework shapes most of the relationships that are
outside the contractual realm. Policy makers are responsible for striking the best balance between
mandatory law and contract in each jurisdiction thus providing the optimum mix between flexibility
and predictability.
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There is a wide variety of corporate governance regimes in OECD countries. Over the years,
individual economies developed different capital market mechanisms, legal structures, factor markets
and private or public institutions to act as owners or corporate governance principals in the economy.
These arrangements might vary even within the same country according to the sector. They are very
often the result of institutional, political and social traditions. Understanding and accepting this
variety of approaches is a fundamental first step for analysing the impacts of increasing globalisation
on national systems.
Despite different starting points, a trend towards convergence
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of corporate governance regimes has
been developing in recent years. Pressures have been rising on firms to adapt and adjust as a result of
globalisation. Their products are having to compete directly on price and quality with those produced
internationally, which mandates a certain de facto convergence of cost structures and firm
organisation that, in its turn, might spill-over on firm behaviour and decision making. But most
important, convergence might be the result of globalisation in the capital markets: new financial
instruments (such as ADRs and GDRs), deeper integration of markets, stronger, international
competition and the emergence and growth of new financial intermediaries have radically changed the
corporate finance landscape in a global way, at least for the larger enterprises. The latter, along with
the governments of their countries, are increasingly conscious that, in order to tap this large pool of
global financial resources, they need to meet certain governance conditions.
In this paper, we survey the patterns of corporate control, that are found in major OECD countries in
order to arrive at a general taxonomy of governance regimes and trace their evolution through time.
We will start by providing for a stylised description of different patterns of governance (keeping in
mind that every country has ultimately its own unique arrangements). There are those that are
founded on arm’s length, market-based relationships between firms and their investors (who are thus
“outsiders”); and those whose accountability trail leads to specific interests of “insiders”: major
shareholders, banks, workers. We will then provide for an overview of how the role of the various
corporate governance agents has changed over the last couple of decades in different systems. We will
further try to identify why the behaviour and positioning of these agents is changing and whether the
different patterns are converging. Finally, we will provide for some tentative conclusions and contain
some thoughts on the shape of the future policy debate on corporate governance.
2
See Black and Kraakman (1996) and Black (1999).
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Gilson (1998) looks at convergence in terms of function (when existing governance institutions are responsive
to change without a change in the rules), formality (when the legislative framework is adapted) and
contractual (when companies have to adapt contractually as domestic institutions are not flexible enough to
accommodate change and political obstacles will not allow formal convergence). We use the term
convergence in a more generic fashion, which encompasses all of these three aspects.