Does Culture Matter for Corporate Governance? A Case Study of Brazil

Abstract

The Brazilian capital markets are insufficient to provide companies with adequate financing. A 2001 reform in the Brazilian Corporate Law sought to strengthen Brazil's capital markets by providing stronger investor protection. Many of these latest reforms, however, turn out to be merely palliative, because controlling shareholders were able to capture the legislation in its crucial aspects. In this paper I argue that public choice theory does not offer a comprehensive explanation of the legal reform outcome in the face of the particulars of the Brazilian institutional environment. The objective of the research is to develop an alternative approach to the public choice model by building upon Douglass North's work. In this approach, culture is incorporated into the economic model to account for divergent outcomes of similar proposed legal reforms. I demonstrate how culture can either reinforce or attenuate rent-seeking interests. In the Brazilian case, I analyze how rent-seeking interests combine with cultural values to hinder institutional change. The aim of the paper is to examine the economic impact of incentives on the Brazilian Corporate Law Reform, and to explore how culture can constrain corporate governance and economic performance.