Law as Bedrock: The Foundations of an Economy Dominated by Widely Held Public Companies
53 Pages Posted: 15 Aug 2001
Date Written: August 2001
In the field of comparative corporate governance, a thesis that currently is influential is that the law "matters". The thinking is that laws which allow investors to feel confident about owning a tiny percentage of shares in a firm constitute the crucial "bedrock" that underpins a US-style economy where widely held public dominate. The "law matters" thesis has potentially significant normative implications. With respect to countries where the widely held company does not currently play a central role, it can be used to justify reforms designed to protect outside investors. Still, the underlying reasoning should not simply be accepted at face value. Instead, in both the United States and the United Kingdom companies having widely dispersed share ownership moved to the forefront without great assistance from the legal system.
The manner in which corporate governance evolved in the US and the UK does not foreclose the possibility that the law could play a significant role in other countries. Instead, offering new legal protection to outside investors theoretically could foster a move towards an economy where widely held companies dominate. It cannot be taken for granted, however, that reform of this type will be politically feasible since influential interest groups may lobby in favour of the status quo. Events taking place in the US and the UK shed light on the dynamics that are likely to affect the pace of legislative change. The experience in these two countries indicates that a significant growth in the number of people investing in shares can provide a suitable platform for the introduction of reforms designed to assist minority shareholders.
JEL Classification: G30, G32, G38, K22, N22, N24, N82, N84
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