Enforcement and Corporate Governance

49 Pages Posted: 20 Apr 2016

See all articles by Erik Berglöf

Erik Berglöf

Institute of Global Affairs, London School of Economics and Political Science

Stijn Claessens

Bank for International Settlements (BIS)

Date Written: September 2004


Enforcement more than regulations, laws-on-the-books, or voluntary codes is key to effective corporate governance, at least in transition and developing countries. Corporate governance and enforcement mechanisms are intimately linked as they affect firms' ability to commit to their stakeholders, in particular to external investors. Berglof and Claessens provide a framework for understanding these links and how they are shaped by countries' institutional contexts. When the general enforcement environment is weak and specific enforcement mechanisms function poorly, as in many developing and transition countries, few of the traditional corporate governance mechanisms are effective. The principal consequence in these countries is a large blockholder, but there are important potential costs to this mechanism. A range of private and public enforcement "tools" can help reduce these costs and reinforce other supplementary corporate governance mechanisms. The limited empirical evidence suggests that private tools are more effective than public forms of enforcement in the typical environment of most developing and transition countries. However, public enforcement is necessary regardless, and private enforcement mechanisms often require public laws to function. Furthermore, in some countries at least, bottom-up, private-led tools preceded and even shaped public laws. Political economy constraints resulting from the intermingling of business and politics, however, often prevent improvements in the general enforcement environment, and adoption and implementation of public laws in these countries.

This paper - a product of the Global Corporate Governance Forum, Corporate Governance Department - is part of a larger effort in the department to help improve the understanding of corporate governance reform in developing countries.

Suggested Citation

Berglöf, Erik and Claessens, Stijn, Enforcement and Corporate Governance (September 2004). Available at SSRN: https://ssrn.com/abstract=625286

Erik Berglöf (Contact Author)

Institute of Global Affairs, London School of Economics and Political Science ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Stijn Claessens

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
CH-4002 Basel

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