The Conundrum of Corporate Governance: Revisiting Legal Origins
Posted: 31 Jul 2005 Last revised: 28 Feb 2012
Date Written: February 28, 2012
This article builds on previous literature looking for predictors of effectiveness of transplanted legal concepts and the implications for corporate governance initiatives and capital market development. The popularity of international standards in the financial sector has been responsible, in part, for the seeming ubiquity of various transplanted legal concepts, as has the influential "legal origins" literature by positing a correlation between "common law" legal systems and developed financial markets.
The conundrum of corporate governance, however, has been that "high quality" imported legal rules often prove relatively ineffective. They do not necessarily produce desired or expected results. In some cases, perversities result from the deliberate adoption of domestically ineffective corporate governance concepts.
Recent analysis may have underestimated the complexity and dynamism of legal systems and misunderstood the significance of "legal origins". In particular, the fundamental nature of the benchmark US system has not been fully appreciated. Its genius, according to some commentators, resides in its combination of elements of both the common law and the civil law traditions.
The article argues for more discernment in introducing new legal concepts, particularly in what are now sometimes referred to as "frontier economies", as well as greater attention being paid to the essential process of indigenization. Form is as important as substance. Legal rules can manifest themselves in a variety of forms, ranging from "legal sensibilities" through various intermediate forms of private and public rule. Different legal systems demonstrate different predilections in terms of effectiveness of legal rules. Indiscriminate mixing and matching of legal rules, such as that occurring in the aftermath of mass privatizations that marked the 1990s, can easily go awry.
As examples, this article looks at three popular corporate governance mechanisms (voluntary codes of corporate governance, cumulative voting and class actions) which have popped up in a surprising number of places. It examines some of the difficulties associated with their operation as transplanted legal concepts. A tentative conclusion is that governance mechanisms introduced in multiple guises may amplify the prospects of effectiveness. Finally, the corporate governance discourse, long set in an Anglo-American frame of reference, may also be changing. New models for markets and regulation are emerging in Europe, models that may be more compatible with the legal systems of much of the non-Commonwealth world.
Keywords: Corporate governance, capital markets development, legal origins, cumulative voting, voluntary codes of corporate governance
JEL Classification: F02, G34
Suggested Citation: Suggested Citation