One Boardroom Fits All?

Comparative Labor Law and Policy Journal, Vol. 22, No. 1, Champaign-Urbana

During the 1990s, when the Internet boom seemed unstoppable and the U.S. stock market was at its most bullish, it became fashionable to predict that corporate governance around the world would soon mirror the U.S. model. That is, private executives would receive high-power incentive pay in the form of stock options, and they would be kept in check chiefly by shareholder-friendly laws, lawyers, and institutional investors, as well as by the specter of mergers or takeovers resulting from low stock prices. Conversely, labor unions, major-bank shareholders, and rich-family financiers — key influences in other countries — would be less important.

Some signs supported this convergence view. Managers in other countries looked enviously at the magnitude of the capital flowing through U.S. (and British) financial markets and the easy terms on which funds could be raised. Corporate governance in Europe, Japan, and emerging markets appeared to be shifting in the U.S. direction, as foreign companies that wanted to be listed on U.S. stock exchanges tried to make their systems more appealing to American investors.

For UCLA management professor Sanford Jacoby, this evidence is not compelling. Writing in the quarterly Comparative Labor Law and Policy Journal, Jacoby argues that the basic problems of corporate governance — how to make managers accountable to investors, protect small investors from large ones, provide managers with the right incentives, and manage conflicts of interest — are common, but there is "stunning international variety" in the solutions. Moreover, no one system seems durably and obviously superior, not even that of the United States, as is clear in the wake of the Enron scandal and the alleged rigging of corporate elections by Hewlett-Packard management.

Jacoby describes the flavors of corporate governance. In Germany, two key influences over managers are its union movement — through raw organizational strength and its codetermination laws, which require that unions be represented on large corporations’ boards — and the "universal" banks such as Deutsche Bank. Elsewhere, families play a key role: In Sweden, the Wallenberg family sits atop a pyramid of holding companies that can control an astonishingly large proportion of industry management. In Italy, it is the Agnellis. There are few parallels to these arrangements in the United States.

According to Jacoby, the costs of changing corporate governance structures are high, the likelihood of gains uncertain, and claims of the U.S. system’s macroeconomic advantages are as likely to last as did the claims for the superiority of Japan’s system two decades ago. He concludes that political differences, organizational inertia, and the absence of clear, durable superiority in efficiency will preserve a wide divergence of corporate governance models.

But Jacoby may be overstating his case. Remarkably little is known about how corporate governance structures arose, how well they work, or whether any one of them would work outside its national context. Views on the successes or failures have oscillated wildly over the past two decades, with each model getting its season in the sun. The lack of data on the question has prompted even corporate governance reformers at the Organisation for Economic Co-operation and Development and the World Bank Group to explore creation of a global corporate governance research network.

Jacoby is likely right that diversity in corporate control will persist. But in one aspect — the number of shareholders per firm — convergence is probable. Firms with a broad shareholder base have an easier time tapping pension fund money via the New York and London markets. An aging population, particularly in Europe, and the consequent need to convert at least part of pay-as-you-go pension plans into capitalized systems have helped drive a trend toward a greater role for the stock market.

But even if firms with many shareholders become more prevalent, they need not all be governed alike. Such widely distributed ownership is compatible with dispersed voting rights and contestable board control, as in the United Kingdom. But it is just as compatible with uncontestable board control nominally exercised in the interest of shareholders — as in the United States, with its poison pills and entrenched directors, or as with the Netherlands’ self-appointing boards, with significant employee involvement.

In their ideal world, institutional investors and professors would probably root for convergence with the U.K. model — not the U.S. one. And though there are reasons to believe everybody will be disclosing on which side of the road they are driving under International Accounting and Disclosure Standards, it is unlikely they will all end up driving on the left.