by Peter A. Gourevitch, James Shinn
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Product Description
Why does corporate governance--front page news with the collapse of Enron, WorldCom, and Parmalat--vary so dramatically around the world? This book explains how politics shapes corporate governance--how managers, shareholders, and workers jockey for advantage in setting the rules by which companies are run, and for whom they are run. It combines a clear theoretical model on this political interaction, with statistical evidence from thirty-nine countries of Europe, Asia, Africa, and North and South America and detailed narratives of country cases. This book differs sharply from most treatments by explaining differences in minority shareholder protections and ownership concentration among countries in terms of the interaction of economic preferences and political institutions. It explores in particular the crucial role of pension plans and financial intermediaries in shaping political preferences for different rules of corporate governance. The countries examined sort into two distinct groups: diffuse shareholding by external investors who pick a board that monitors the managers, and concentrated blockholding by insiders who monitor managers directly. Examining the political coalitions that form among or across management, owners, and workers, the authors find that certain coalitions encourage policies that promote diffuse shareholding, while other coalitions yield blockholding-oriented policies. Political institutions influence the probability of one coalition defeating another.
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Average Customer Review:
0 of 0 people found the following review helpful:
Highly Innovative and Enlightening Comparison of Corporate Governance Systems, 2007-08-08
Comparative corporate governance has captured the interest of economists and legal scholars during the past two decades. With intensified economic globalization, it has become apparent that the public corporation, one of the keystones of the modern market economy, has produced very different systems of assigning authority in the firm around the world. In POLITICAL POWER AND CORPORATE CONTROL, Peter A. Gourevitch and James Shinn offer a powerful political explanation that challenges the assumptions of a literature dominated by economic theory.
According to the predominant account, corporate-governance systems can be classified in two groups, the diffuse shareholder model and the concentrated blockholder model. The former is characterized by dispersed ownership of publicly traded firms and developed capital markets, whereas the latter is characterized by companies that have one or several large, core shareholders and capital markets that are somewhat less developed. In a global perspective, diffusion of ownership is rare and essentially confined to the large economies of the United States and the United Kingdom, whereas the blockholder model persists in much of the rest of the world, including the large continental European economies and Japan. Diffusion of ownership is often seen as the endpoint of an evolutionary development because firms belonging to a purportedly superior system should be able to outcompete others in the global marketplace. This view has led Henry Hansmann and Reinier Kraakman to announce the impending "end of history for corporate law" ("The End of History for Corporate Law," GEORGETOWN LAW JOURNAL 89 [2001]: 439-67).
Political scientist Gourevitch and former CEO Shinn propose a more complex picture that incorporates political mechanisms and the interests of other groups besides managers and shareholders, most importantly employees. Much of the economic and legal analysis of comparative corporate governance takes U.S. corporate law as its baseline, which in the popular perception leaves nonshareholder constituencies on the sidelines....
Gourevitch and Shinn share Mark Roe's view that political factors mainly determine corporate governance, but they try to make the analysis more complex. The institutions of corporate governance in a particular country depend on the political coalitions that managers, owners, and employees form and on which coalition wins the political struggle. The authors therefore identify three possible intercoalition cleavages: class conflict (owners and managers versus workers), sectoral conflict (managers and workers versus owners), and property and voice conflicts (owners and workers versus managers)....
All in all, POLITICAL POWER AND CORPORATE CONTROL provides a refreshing view of comparative corporate governance that strongly contrasts with the economic accounts dominating the field. It is a highly innovative and enlightening book that may be recommended to anyone interested in the debate.
3 of 4 people found the following review helpful:
Unveiling the links., 2005-10-11
The way corporates do governance is linked to the political makeup of their home countries, argues Peter Gourevitch and James Shinn in their important new book. Practices can't be imposed successfully from the outside or homogenized to some global standard; they bubble up from politics and pressures on the ground. Gourevitch, a political scientist at the University of California, San Diego and Shinn, ex-CEO of Dialogic and now visiting professor at Georgetown University, uncover complex relationships between key market players. Are workers and investors natural allies, for instance? Well, in markets where job protection laws are widespread, safeguards for investors are weak. On the other hand, global capital moves like a magnet to companies and markets that feature the most minority shareowner protection-thus creating jobs. Read this to find the web of ties to political power that promises global diversity in governance practices for years to come.
4 of 6 people found the following review helpful:
Groundbreaking Guide on the Direction of Corporate Governance and Society, 2005-10-06
According to Gourevitch and Shinn, "corporate governance - the authority structure of a firm - lies at the heart of the most important issues of society"... such as "who has claim to the cash flow of the firm, who has a say in its strategy and its allocation of resources."
The corporate governance framework shapes corporate efficiency, employment stability, retirement security, and the endowments of orphanages, hospitals, and universities. "It creates the temptations for cheating and the rewards for honesty, inside the firm and more generally in the body politic." It "influences social mobility, stability and fluidity... It is no wonder then, that corporate governance provokes conflict. Anything so important will be fought over... like other decisions about authority, corporate governance structures are fundamentally the result of political decisions." If the authors haven't hooked you on the importance of corporate governance by these statements on page 3, you aren't breathing.
I have long argued that creating sustainable wealth and maintaining a free society both require that institutional investors act as mediating structures between the individual and the dominant institutions of our time, the modern corporation. Democratic corporate governance will reduce the corrupting influence of unaccountable power on government and society. At the same time, by transforming corporations into more democratic institutions, institutional investors will instill them with their own values and will unleash the wealth-generating capacity of "human capital."
The model Gourevitch and Shinn set forth in Political Power and Corporate Control: The New Global Politics of Corporate Governance uses corporate governance as the dependent variable. "The arrow of causation flows from preferences to political institutions to corporate governance outcomes."
Whose preferences? Key, are those of owners, managers, and workers. How? "To obtain their preferred corporate governance outcome, they have to win in politics" by mobilizing allies outside the firm in systems the authors categorize as largely majoritarian or consensus. A dynamic feedback loop is thus created: "institutions shape policies that influence preferences. At the same time preferences induce institutional arrangements that increase the chances of preserving the policies desired by the preferences."
Treating the categories of owners, managers, managers and workers as homogeneous blinds us to coalitions. Through an analysis of available datasets, the authors demonstrate that outside owners are more likely to ally with workers to support transparency. Workers seeking to preserve their jobs are more likely to ally with managers; whereas, concern for pension funds motivates transparency and ability to exercise shareholder voice. Firm-centered managers prefer blockholding owners; those seeking maximum pay tend to support minority shareholder protections and vigorous labor markets.
Variation in corporate governance is not necessarily a function of economic stages, technology, or legal framework. Instead, Gourevitch and Shinn provide substantial support for the argument that "corporate governance arises from incentives created by rules and regulations that emerge from a public policy process, reflecting the power of alternative coalitions."
Although most academic writers and the press emphasize minority shareholder protections, Gourevitch and Shinn emphasize the need to also account for "degrees of coordination," which shape incentives to concentrate shareholding or sell down to a more diffuse market. These include product-market competition, price and wage mechanisms, labor relations, and social welfare systems. Each coalition seeks to persuade society-at-large to provide public policies in corporate governance that favor their own interests.
Systems shift when economic conditions change in big way. One of their most interesting discussions concerns their assertion that pension funds, which they define to include all forms of deferred compensation plans, may be most important as the next phase unfolds. "To understand the future politics of corporate governance debates, we will have to track fights about pension reform." "Pension plan regulations may turn out to be the tail that wags the corporate governance dog."
Defined benefit plans held 27% of all U.S. equities in 1989-95 but fell to 21% more recently. Mutual fund ownership, on the other hand, has climbed from 8% in 1990 to 28%. As more defined benefit plans (often jointly administered with employee or union representatives) are dropped, the future of corporate governance reform may lie with mutual funds. That tail, using the above analogy, seems to wag whenever management speaks.
They are required by law, as fiduciaries, to represent the interests of the investors whose money they oversee, not their own business interests, which may including landing contracts to administer 401(k) plans. Recently, Vanguard, Putnam, and Fidelity voted against shareholder proposals that would require directors standing for election to stay on only if a majority of votes are ''yes.'' Clearly, these funds were not voting in the best interest of owners. Mutual funds used to turn over 17% of their portfolio each year (1950-1965) but averaged 91% per year in 1990-2005, prompting John Bogle to remark the "rent-a-stock industry has little reason to care" about good corporate governance.
Gourevitch and Shinn find that "as worker-citizens acquire assets, they develop preferences for shareholder protections, thus adding pressure to the potential for a transparency coalition" and "assets in the hands of institutions that are accountable to their owners are likely to pay more attention to governance than are assets in the hands of autonomous managers." Perhaps an actual power shift will follow as mutual fund investors demand a role in mutual fund governance and those funds begin to represent their true preferences with corporations. If that happens, we might see a book that looks in reverse, tracing the effects of corporate governance outcomes on political institutions. "Socially responsible investment" will then take on new meaning and dimension.
In the meantime, Gourevitch and Shinn, note enough interesting correlations and observations to make the book must reading for any corporate governance policy analyst, especially those with global concerns. Here is a small sample:
-Blockholding and minority shareholder protections are negatively correlated.
-Minority shareholder protections and share price are positively correlated.
-Blockholding dips after increased minority shareholder protections are likely the result of sales by "new money" entrepreneurs, rather than old money blockholders (who may fear the tax collector).
-Blockholding may be preferred when uncertainty is high.
-State-owned enterprises are the most aggressive users of ADRs.
-Money flows toward firms and countries that provide shareholder protections. "No other group can have quite this direct an effect on the economy...the economic vote of investors counts greatly against the mass of votes in elections."
-Where job security is strong, diffusion is weak, and minority shareholder protections are weak.
-Weak intermediate institutions of finance, investment, pensions and stockmarkets are correlated with little voice for shareholder rights.
-"The U.S. Securities regulation system assumes that institutional investors and reputational intermediaries are the agents of investors." "Yet it has become increasingly clear to many observers that these private actors have multiple, complex incentives..."
-"As much as 10 percent of the total ownership of U.S. public firms was transferred from the existing stockholders to senior managers through stock option grants between 1990 and 2000."
Their treatment of the definition of corporate governance from various perspectives is also an eye opener. Here's a flavor of that discussion:
-Where the political scene is capital versus labor, "the investor coalition defined corporate governance in terms of 'meeting the challenge of financial globalization,' adherence to the OECD Principles, fulfilling 'international standards of governance in the global competition for capital.'"
-From a labor power position, "blockholders and foreign portfolio investors were castigated as selfish oligarch in league with the heartless IMF and the faceless gnomes of Zurich."
-Those favoring the corporatist compromise made much of managers and workers "being in the 'same boat' together, of corporate governance choices that ensured that firms 'served the nation' in a 'stable' economy - with owners dismissed as oligarchs or 'speculators.'"
-Countries shifting transparency coalitions and managerism alignment "witnessed predictable invocations of corporate governance that protected 'the little guy, ' the individual investor,' the widow and orphans," such as speeches by U.S. SEC commissioners.
-"Meanwhile across the alignment divide, managers compete to hijack the notion of corporate governance for their own purpose...'building shareholder value."
Shareholder value is partly about efficiency. But Gourevitch and Shinn raise serious issues of distribution, job security, income inequality, social welfare. Will firms of the future be efficient at creating a healthy environment and general prosperity or efficient at putting money into the pockets of CEOs? Political Power and Corporate Control provides a groundbreaking guide, based on empirical evidence, for anyone concerned with the direction of corporate governance and society.
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