Corporate Governance and Economic Development

Identifying Critical Institutional Reforms

Anna Lanoszka

• Publisher: Routledge
• Year: 2022
• ISBN:
  9780429812125
• Edition: 1
• Topic: Economia
• Subtopic: Economia dello sviluppo

This book explores the links between different corporate governance systems and their impact on economic development. It focuses on how institutional reforms, legislative changes and codified measures have influenced performance at the firm and country level. Drawing on detailed cases from the UK, USA, China, India, Poland, Brazil, Russia and South Africa, this book takes a truly international and comparative approach to understanding the relationship between regulatory frameworks and economic development.

This will be a valuable text for students and researchers of economic development, corporate governance, international political economy, and economic and business history.

1Towards an Effective System of Corporate Governance

DOI: 10.4324/9780429443459-1

I. Beyond a Simplistic View of Corporate Governance

This book examines the evolution of different corporate governance systems and their impact on countries’ economic development. It investigates how distinct state institutions had shaped domestic corporate sectors. The main argument recognizes the pivotal role played by institutionalized good governance rules in influencing economic performance at the firm and country level. Not that long ago, we used to think about corporate governance as something confined to the internal processes of corporations. Such a narrow view of corporate dynamics harmed our ability to understand the broad regulatory space that frames the quality of corporate operations. Gradually that limited view had been expanded. The current approach acknowledges the positive connection between sustainable development and well-governed domestic corporations.

Corporate governance refers to the structures and processes for the direction and control of companies. Corporate governance concerns the relationships among the management, board of directors, controlling shareholders, minority shareholders and other stakeholders. Good corporate governance contributes to sustainable economic development by enhancing the performance of companies and increasing their access to outside capital.¹

This definition is further refined with an understanding that the rules and procedures regulating the managerial and the operational processes of corporations emerge within the institutional expansion of the state. The historical process of building state institutions is complex and unique to every country as constructed within particular political, legal, and social contexts. Corporations are the most influential economic actors today and thus institutionalized rules and processes that determine how firms are formed, governed, and made accountable, shape countries’ long-term developmental prospects.

The global market integration would not be possible without corporations and their relentless drive to innovate, transform, and grow. We distinguish several types of corporate entities, but all are created subject to certain governmental rules and state laws. Voluntary codes had championed good governance principles and had increasingly promoted social responsibility, ethical behavior, and stakeholders’ interests, but the compliance is the key. Such codes risk remaining aspirational if not supported by effective institutions and legal instruments. Codes’ effectiveness is often dependent on whether they are made obligatory by well-regulated stock exchanges. Furthermore, such codes are mostly applicable to listed corporations routinely leaving state-owned and state-invested firms subject to governmental discretion. Corporate governance practices in both private and public sectors matter as most economies include a combination of private, publicly traded, and state-controlled companies. A country’s corporate governance system is the concept that covers a network of regulatory connections – statutory, legal, self-governing – normally enforced by the legal system and organized around different levels of government (federal, state, provincial).

The ability of corporations to undertake and pursue the right objectives within the parameters of best practices and under optimum regulations determines the quality of corporate performance. Socially responsible, economically progressive, and innovation-driven performance of corporate sectors positively impacts the whole economy. The book argues that sustainable economic development is fostered by inclusive state institutions that facilitate good corporate governance standards resulting in fair competition among professionally managed corporations with rules promoting accountability of directors, protections for shareholders, and answerability to stakeholders. It is further argued that economic development is more stable and more equitable in countries where the legislative power of the state is curtailed by institutional checks and balances preventing arbitrary decision-making and policies that favor state-owned and state-invested firms. To be sure: “inclusive economic institutions foster economic activity, productivity growth, and economic prosperity,” while, in contrast, extractive institutions are, “extractive because such institutions are designed to extract incomes and wealth from one subset of society to benefit a different subset.”²

In expanding the concept of corporate governance, the book considers the following as necessary aspects of an optimum regulatory system: 1) state institutions that facilitate independent oversight and work to minimize market concentration, and which deter the state from exercising arbitrary control over the economy in favor of insiders and state-invested firms; 2) a well-functioning legal system that enforces the existing rules fairly, guarantees equal access, offers due process without delay and “at its heart is an exercise in pragmatism … a device not a model”;³ 3) good corporate governance standards that uphold accountability, transparency, managerial professionalism, with measures ensuring that all corporate operations are in good working order.⁴

This echoes the recommendations by the G20/OECD stating that: “The corporate governance framework should promote transparent and fair markets, and the efficient allocation of resources. It should be consistent with the rule of law and support effective supervision and enforcement.”⁵ Regrettably the G20/OECD principles of corporate governance do not apply to state-owned enterprises. The arguments of this book view such estrangement of state-owned and state-invested corporations as unreasonable.

Legislative initiatives frame institutional development. We habitually think about Common Law and continental Civil Law traditions as providing two distinct pathways for rulemaking. The formative period for Common Law occurred during the reign of King Henry II (1154–1189). The careful appointments of judges by the King followed the advancement of new procedures for civil litigation that eventually transformed the English society.⁶ Case law had been formed by compiling decisions reached by justices in individual cases. Common Law is thus essentially a system of rules based on precedent. Civil Law was adopted throughout the continental Europe within the existing framework of Roman law dated back to the Roman Empire. Slowly but surely individual countries developed their own distinct legal systems influenced by the Code Napoleon, as well as Germanic, Scandinavian, and other homegrown practices. Civil Law countries routinely (but not always) choose the path of codification. Civil Codes are laws enacted by the countries’ legislative bodies that serve to provide sets of concise and unified rules for all citizens. General principles of Civil Law systems originate from abstract concepts that are articulated by scholars and jurists to become divided into substantive rules and procedural rules.⁷ The main difference between these two legal environments is that Civil Law systems, in contrast to Common Law systems, do not rely on or attach a lot of value to precedent. In Civil Law countries legislation is the primary source of law, while case law is rendered secondary. In Common Law countries courts and judges actively participate in law-creating processes by establishing legal precedents. However, Common Law can be overruled by legislative law.

It is observed that the type of legal tradition does not determine the quality of corporate governance systems. In fact, most countries increasingly display some combinations of both traditions.⁸ Furthermore, country-specific traditions and customs continue to influence domestic regulations, especially in countries that had recently adopted western-style laws and standards. No matter what legal tradition guides the domestic regulatory framework, the effectiveness of corporate governance systems depends on the institutions in place. This is why inclusive state institutions are critically important for the good functioning of the economy. They instill accountability and transparency into the system through institutionalized checks and balances supported by the rule of law.

In contrast, countries that have been historically unable to maintain a steady level of economic development are characterized by extractive state institutions. The extractive institutional environment produces a number of legislative veto players who compete over self-interested outcomes resulting in formation of extractive networks of insiders. Extractive institutions support patronage-driven policy decisions that cultivate dysfunctional systems. Although courts and laws exist in an extractive institutional environment, it would be incongruous to talk about the rule of law since laws are championed by the benefiting insiders and applied in an arbitrary way. Extractive state institutions routinely become tools for channeling public money in the form of government contracts to loyal cronies through vast patronage networks. Cumbersome bureaucracy and esoteric regulations hinder processes of incorporating new business ventures. Corporate entities are run by dominant shareholders subject to informal rules and muddled control structures. Lenient regulatory agencies have no incentives to enforce existing rules from the fear of closure. Economic landscape of economically dysfunctional countries is frequently dominated by state-owned corporations and large private groups with concentrated ownership.

II. The Shareholders Versus Stakeholders Dilemma

To understand why different regulatory approaches exist we need to interrogate the very concept of the company. While some argue that corporations are simply economic devices established to make profit, others see corporations as social entities with responsibilities to communities around them. These two polarized positions lead to divergent answers to questions about corporate liability and about the role and purpose of corporate operations. Consider the following questions: “who should have the ultimate decision-making power in the corporate structure?” and “for whose benefit should corporations primary operate?”⁹ These inquiries capture the long-standing dilemma whether it is shareholders and their interests that trump the interests of stakeholders such as employees, customers, suppliers, creditors, tax-collecting governments, or if it is the other way around. Most of those questions had been asked in the context of public corporations, but such queries remain relevant no matter what kind of corporation we have in mind – private, public, or state owned.

There is no consensus how to define the company. In purely descriptive terms: “a corporation is a structure established by law to allow different parties to contribute capital, expertise, and labor for the maximum benefit of all of them.”¹⁰ A corporate entity usually acquires one of the three forms: public, private, or state owned. However, the complexity of investment options and the uncertainty about the status of partially or wholly state-owned companies, including Sovereign Wealth Funds, legitimizes Aron Broches’ inference that: “in today’s world the classical distinction between private and public investment, based on the source of the capital, is no longer meaningful.”¹¹ The definition of “investor” included in most investment treaties refers to “legal persons” or “juridical entities” as established under the laws of a signatory country. As a result, countries acting as investors are not considered explicitly by these treaties. And while some treaties specifically exclude certain legal entities based on their purpose or their legal form, there is no example of an investment treaty that excludes legal entities because of their association with the state or state ownership.¹² To summarize, the ever more blurred lines between private, public, and state-owned investment further problematize attempts to define different forms of corporate entities, especially those engaged in international economic exchanges.

In his classical work about corporate law Robert C. Clark identified four important attributes of the company: 1) limited liability for investors; 2) freely transferable shares; 3) legal personality that can live in perpetuity; 4) centralized mana...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Dedication
• Contents
• List of Abbreviations
• 1 Towards an Effective System of Corporate Governance
• 2 Imperfect System – Lessons From the UK
• 3 Progress Among Crises – Lessons From the US
• 4 It Is Our Way With Western Characteristics – Lessons From China
• 5 The Importance of the Family – Lessons From India
• 6 Escalating Problems – Lessons From Russia, Poland, Brazil, and South Africa
• 7 Conclusion
• Index