[Note: A transcript of this meeting is unavailable. The discussion is summarized below.]
Dear Roundtable Colleagues:
Thanks for your interest in the Corporate Governance Roundtable. Attached are a few nuggets of wisdom from the October 11th meeting that Peter and I culled from the discussion, some unanswered questions that loom over our effort, and a call for your opinion to be listed on the Roundtable website.
1. Key Points from Session 1
- The phrase Anglo-American system is a misnomer; minority shareholder protections is more accurate. Not only are the UK and the US systems different in many respects, but the real underlying issue is how much minority shareholders are protected from agency and expropriation costs as universal a notion as Ohms Law.
- The U.S. institutions of corporate governance are far from perfect, particularly in areas such as executive compensation and takeover policy. If convergence on a global standard of good governance takes place, the U.S. may have to change, too.
- Good corporate governance rests on a broad set of broader institutions such as rule of law, property rights enforcement, and sound regulatory practice, and is (using Stephen Davis phrase) just one element of civil economy. It is not clear which way the arrow of causation works, although economic civil society may be the precondition for good governance, nor what is the optimum sequence of institutional reform.
- Corporate governance only applies to listed firms, which constitute a relatively small amount of total economic activity. So lets keep this in perspective, including the prospective economic effects of good versus bad corporate governance.
- Good corporate governance appears to have some important positive effects on economic growth and sustained prosperity. It is possible, however, to have unrealistic expectations about the positive economic effects of good corporate governance.
- Governance reform appears to be largely endogenous, and requires a domestic empowering event in order to make much progress. It is not clear whether exogenous price or political pressures can have the same effect. These events can take a long time (i.e. decades) to produce real change.
- The withdrawal of the state from many aspects of economic activity in the last two decades has led to a stronger role by corporations and thus highlighted the impact of corporate governance practices by these firms.
- The corporate governance rules of the game can have profound distributional consequences. Corporate governance practices are embedded in strongly held political and social understandings around the world. These may be very resistant to change. Some of them are overtly hostile to the premises of the Anglo-American model.
- Many governments and firms pay lip service to concepts such as good governance and shareholder value while ignoring these principles in practice. It is important to distinguish rhetoric from actual practice.
2. Some Unanswered Questions
- What different forms of the shareholder model are there? Does the label minority shareholder protections do justice to the variety of institutional combinations out there? What is the difference between models with dispersed fragmented shareholders (such as the US, UK, and Japan) and those with concentrated private blockholders (such as Germany, France, and Korea?)
- What is the stakeholder model? Who has it? Does it provide some functional usefulness? Are there problems it solves?
- Can the minority shareholder model work where effective regulatory systems on the SEC model do not exist?
- What are the strengths and weakness of the concentrated private blockholder model? Are there things it can do, things it cant? For example, is it good at textiles or manufacturing of standardized things, not so good at efficient high capital activities, or product development?
- What are the strengths (if any) of the stakeholder model? How are these measured?
- Can different systems co exist in the same country? Could you have some sectors or firms which run with the fragmented shareholder model, some with private blockholders, and some with a stakeholder (or other insider governance) model? What happens when they interact commercially and financially?
- How do investors vary in their need for minority shareholder protections? Who will invest without it? In what kinds of activities? Is this an issue of a risk premium? Some pension funds have become active in supervision while others are not. Why? Is it the result of their constituents (public employees), the culture of their directors, aspects of the law?
- What is the sequencing of governance changes that can be effective? Are some of them reform-generating? What are the risks involved in a sequence of change for example, the United States S & L crisis is often said to involve deregulation without the placement of adequate supervisory structures. Is the Japanese case another example?
- What are the political requirements of a regulatory process? If there are effective codes, will they be enforced? Can good rules work in authoritarian systems?
3. Call for Your Wisdom
We are setting up a website on the CFR for this Roundtable to which we will post useful papers and other preparatory materials, as well as various iterations of the Shinn/Gourevitch summary report. We would also appreciate it if participants would send in summaries of your opinion on the various questions, as you see fit, commenting in particular on areas where you have special insights, have done your own research, or simply feel strongly about.
Please try to keep these memos relatively short, and append a short (1 paragraph) bio to these submissions, which we will also post, for the benefit of the other Roundtable participants. If you have longer works you would like us to add to the background documentation, by all means send them as well, to the attention of Robert Knake (firstname.lastname@example.org) at the Studies Department, who will be administering the site.