The Transnational Politics of Corporate Governance Regulation

Henk Overbeek, Bastiaan van Apeldoorn, Andreas Nölke

• Publisher: Taylor & Francis
• Year: 2007
• eBook ISBN: 9781134083619
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

This ambitious volume explores the politics of recent changes in corporate governance regulation and the transnational forces driving the process.

Corporate governance has in the 1990s become a catchphrase of the global business community. The Enron collapse and other recent corporate scandals, as well as growing worries in Europe about the rise of Anglo-Saxon finance, have made issues of corporate governance the subject of political controversies and of public debate.

The contributors argue that the regulation of corporate governance is an inherently political affair. Given the context of the deepening globalization of the corporate world, it is also increasingly a transnational phenomenon. In terms of the content of regulation the book shows an increasing reliance on the application of market mechanisms and a tendency for corporations themselves to become commodities. The emerging new mode of regulation is characterized by increasing informalization and by forms of private regulation. These changes in content and mode are driven by transnational actors, first of all the owners of internationally mobile financial capital and their functionaries such as coordination service firms, as well as by key public international agencies such as the European Commission.

The Transnational Politics of Corporate Governance Regulation will be of interest to students and researchers of international political economy, politics, economics and corporate governance.

1 The transnational politics of corporate governance regulation

Introducing key concepts, questions and approaches

Bastiaan van Apeldoorn, Andreas Nölke and Henk Overbeek

Introduction

Who controls the modern corporation, how is it ‘governed’ and for what purpose? These central questions of what is now called corporate governance have been debated since the modern corporation or joint-stock company became the dominant unit of capitalist production. They are also recurrent questions in the ongoing debates on the nature of contemporary capitalism. They came to the fore again, for instance, in the US in the 1980s when a flurry of takeover activity and so called leveraged buy-outs (Jensen 1993) awakened the dormant market for corporate control and strengthened shareholder power (Useem 1993). Questions of corporate governance received even bigger, and worldwide, attention in the wake of the 2001 collapse of US energy giant Enron and other corporate scandals, for example, Ahold, Parmalat. In the European context, we can now observe an emerging transnational debate (somewhat reminiscent of the earlier US debate) on the role of, in particular, hedge funds and private equity funds in taking control over ‘our’ (where ‘we’ is normally defined in national terms) corporations.¹ What is often absent from these debates, however, is sustained attention to the question of what has enabled these apparent shifts in corporate control, or more broadly, corporate governance. The starting point for this book is that a key role here is played by regulation, and that here, long before Enron (cf. Hopt 2002; Lannoo and Khachaturyan 2003; Wouters 2000), a major transformation within different socio-economic settings is taking place. Crucially, these regulatory changes take place not only within various national jurisdictions, but also at different and interacting levels of governance.²

Whereas much of the corporate governance literature derives from and is focused upon the US and the UK, or presents comparative national case studies, this book has a wider scope. Although by and large restricted to the Organization for Economic Co-operation and Development (OECD) area, its geographical scope extends beyond the usual Anglo-Saxon focus well into the whole European arena and beyond. At the same time, the scope of our research extends beyond the (cross-) national by analyzing regulatory change in transnational and global settings.

At the global level, for instance, private bodies such as the International Accounting Standards Board (IASB) set important corporate governance standards (Dewing and Russell 2004, and this volume), and international organizations like the OECD disseminate norms for good corporate governance (OECD 2004). With regard to European governance, the European Union (EU) is paying increasing attention to the area of corporate governance as part and parcel of its ongoing efforts to integrate Europe’s financial markets and to promote the restructuring of European industry as based on market-liberal principles (Bieling and Steinhilber 2002; Bieling 2003). Within the European arena we may note the special position of the Central and East European countries (CEEC) as they have been exposed to multiple transnational pressures by both global institutions and by the EU when developing their corporate governance structures (Grabbe 2003).

Although there is by now an enormous body of academic literature on corporate governance, much of it is either highly normative or focused on corporate governance practices at the level of the firm. This book then, seeks to go beyond this by presenting a number of studies aimed at explaining the current transformation of both the content and mode of corporate governance regulation. We take regulation as our main explanandum as we deem it critical in understanding the practice of corporate governance. Focusing on the regulation of corporate governance, this book thus emphasizes the political nature of corporate governance. Doing so, we believe, takes us beyond much of the current literature on corporate governance, in which many of the changes taking place in corporate governance are rather taken for granted. Instead, this book seeks to explore the political economy of corporate governance regulation by asking how, why and in what form certain regulation has come about.

The point-of-departure for this book has thus been that shifts in corporate governance are to a significant extent shaped by shifts in political governance, that is, by shifts in the regulation of corporate governance set within a broader politico-economic and politico-ideological context. As different regimes of corporate governance (regulation) serve different social constituencies, that is, have a different social purpose, a central question we must thus pose in analyzing the current transformation of corporate governance regulation is whether we can observe a clear shift in terms of who benefits from changes in the way corporate governance is regulated. Indeed, the cui bono question is a central concern of this book and informs our analysis of the politics of changing corporate governance regulation. This then expresses a concern with the changing content of corporate governance regulation. In this respect this book draws upon, and seeks to contribute to, the long-standing debate within comparative and international political economy on to what extent globalization (and regionalization, for example, Europeanization) leads to a convergence of (national) models of capitalism (see, for example, Berger and Dore 1996; Drache and Boyer 1996; Crouch and Streeck 1997; Garret 1998; Hall and Soskice 2001a; Ryner 2002; Hay 2004; Crouch 2005). We seek, however, to go beyond most of this vast body of literature in two ways. First, rather than adopting a cross-national comparative perspective describing patterns of convergence or divergence within national corporate governance regimes, this book adopts a transnational and multilevel perspective emphasizing the common elements of structural changes (as they emanate from common origins at different levels of governance) taking place across national varieties, even when recognizing the nationally diverse ways in which this process of transnational transformation manifests itself. Second, rather than merely describing these changes, and assessing to what extent they reveal convergence, we seek to explain these changes.

Another major focus of this book concerns the form or mode of regulation. Indeed, a critical point of departure for our analysis is the observation that in particular the last 15 years or so have witnessed a profound transnationalization of corporate governance regulation inasmuch as some elements of regulation have shifted upward to the regional and global levels (partly in the form of private governance) whereas other elements remain at the national level yet are to a large extent transformed by what is taking place on these other scales of governance. In other words, whereas the regulation of corporate governance used to be a distinctly national affair, it is now increasingly an area subject to both public and private (self-) regulation in multiple arenas. In highlighting the interplay of global, European, and national governance arenas, we build upon, but at the same time move beyond, the various (global, European, multilevel) governance bodies of literature (Held and McGrew 2002; Hewson and Sinclair 1999; Hooghe and Marks 2001). Generally speaking, most of this literature concentrates on the mode of governance, i.e. on the various interlinked levels at which governance occurs (often outside or beyond the sphere of the state and intergovernmental bodies); on the nature of the actors involved in the governance process (concretely, often highlighting the enhanced role of non-governmental actors in governance), and finally on the informality and networked nature of these new forms of governance. What is mostly lacking in these newer governance studies is an awareness of and sustained attention for the idea that form and content are highly interrelated. In our view, the new modes of governance cannot be understood properly unless they are linked integrally to the content, the social purpose, of governance. Form and content, mode and social purpose are intricately interlinked, interdependent and mutually constitutive. A central argument of this book, and one that we will return to explicitly in the concluding chapter, is that both the content and the form of current corporate governance regulation reflect a strengthening of market principles, promoting the mobility of capital.

The remainder of this introductory chapter is organized as follows. The next section clarifies the key concepts that make up the focus of this book. We then briefly review the relevant literature on corporate governance regulation, indicating its limits with respect to the purposes of this book. Building upon that, the third section then presents the core questions and approaches of our own research agenda. The final section outlines how the central research questions will be addressed through the four main parts of the book.

Corporate governance regulation in multiple arenas: defining key concepts

Corporate governance can be broadly defined as the way the modern capitalist corporation is ‘governed’, that is, by whom (the issue of corporate control) and for whom, to which purpose. As such, it refers to the institutionalized practices that are both the medium and outcome of the power relations between the various actors that have a stake in the modern corporation: shareholders (or more broadly, capital, which may also include creditors) managers, and workers (cf. Aguilera and Jackson 2003: 450; Cioffi 2005: 4; Hopt et al. 1999: 5). In other words, corporate governance is a set of practices constituted by underlying power relations within the firm while the latter are at the same time also reproduced by these practices.³

Although the discourse of corporate governance has only become popular since the 1990s (cf. Erturk et al. 2004), corporate governance issues, as referring to prevailing power configurations within the firm, are as old as the modern corporation, or joint-stock company, itself, that is, what has come to be the dominant unit of capitalist production since the end of the nineteenth century (Roy 1997). It is with the advent of the modern corporation, and therefore with the potential separation of ownership and control (Berle and Means (1991 [1932]), or at least of ownership and management, that, that what is now called corporate governance has come to be regarded by many as a ‘problem’ requiring certain regulatory and technical solutions. The problem here, at least since the 1970s, has often been defined primarily in terms of how shareholders could safeguard their investment, i.e. prevent management from ‘squandering’ it, and the solution advocated has thus been that of strengthening ‘internal’ and above all ‘external’ shareholder control (see, for example, Fama and Jensen 1983b). Although we reject this neoclassical definition of the problem (see below), and its proposed solution, we share the notion that it is the struggle over control (see, for example, Becht et al. 2002; O’Sullivan 2000b; Berle and Means 1991 [1932]) that is at the heart of corporate governance, and that this struggle within capitalism has been primarily a struggle between (different groups of) owners and managers. Hence, in this respect we may deem the shareholder-management relation as central, even if in some regimes of corporate governance labour also exercises real, if limited, control over the strategic decision making within a corporation, and even if, regardless of any institutionalized role of labour, the social relations between both management and workers on the one hand, and shareholders (owners) and workers on the other, are a critical constituent part of the relationship between management and shareholders.

Corporate governance as a practice is, like any social practice, rule-governed. Yet the rules of corporate governance in this sense can be seen as internal to the corporation. Thus there might be certain internal rules that constitute a certain division of power between the executive and supervisory directors. Another internal rule maybe one that sets certain targets with regard to the return on capital (part of what is nowadays referred to as ‘shareholder value’, see on this Höpner 2003a). If we speak of the regulation of corporate governance we, however, refer to something that is external to the corporation and its governance, yet shapes that governance to a very significant extent. Thus we refer to the regulation of corporate governance practice.

Regulation we here define broadly as all forms of formal and informal rule making pertaining to some collective (nations, groups, sectors) where those rules are either binding to the members of that collective or at least significantly constrain their behaviour. This involves both public and private (self-) regulation, the latter reflecting the rise of what has been dubbed private authority in the global political economy (Cutler 1999; Hall and Biersteker 2002a). With regard to public regulation it includes ‘softer’ (in the sense of not legally binding) forms of regulation such as policy co-ordination and benchmarking, as practiced most notably by the EU, but also by for example the OECD. Regulation defined this way shapes the framework in which corporate governance takes place. It defines the legal, institutional and discursive parameters, both constraining and enabling the agency of those actors (shareholders, managers, creditors, employees, etc.) that ultimately shape the governance of a particular firm.

In order to clarify the distinction between corporate governance practice and corporate governance regulation, and how the latter affects the former, Table 1.1 below lists a number of examples (most of which are discussed in this book) of regulation of corporate governance and concomitant corporate governance practices. Within the domain of public law, we may include securities (or capital market) law, company law and labour law as the main domains in which regulation directly affects corporate governance. In addition, we may identify different forms of self-regulation. We must note that although these distinctions, such as between public and private (self-) regulation, have some analytical value, the lines between them get, and arguably increasingly so, blurred in practice. Similarly, many forms of regulation extend across several of the domains of public law or are difficult to classify in any one of them. For instance, the European takeover directive, which used to be seen as primarily an instance of (harmonization of) company law, has increasingly been framed as part and parcel of European financial market integration, and thus has also been regarded as an instance of securities or capital market law (see the contribution by Van Apeldoorn and Horn to this book).

Table 1.1 The relationship between corporate governance regulation and practice

As indicated, the regulation of corporate governance takes place in multiple arenas. Here we may distinguish between the global, the regional and the national arena. In all of these arenas we can find examples of corporate governance regulation made by both public and private actors. This is illustrated in Table 1.2 below with some examples taken from the present book. Looking at some of these examples we can indeed see how both the different arenas as well as the public and private modes of regulation are interrelated. Take for instance the case of International Financial Reporting Standards (IFRS). Whereas these standards have, as we have just seen, been set at the global level by a private body (the IASB), they have subsequently been adopted by the public authorities of the EU at the regional level based on the recommendation of again a private committee, the European Financial Reporting Advisory Group (EFRAG), replacing different national accounting standards. Starting at the bottom end, the Sarbanes-Oxley act is an example of purely national regulation with global repercussions (see contributions by Rebérioux and Dewing and Russell to this book).

As indicated, in our view it is ‘the transnational’ that accounts for how the different levels and arenas are interrelated and interconnected. Thus we argue that in order to capture the multilevel phenomenon of changing corporate governance regulation, we have to move beyond national case studies or crossnational comparisons and adopt instead an integrated transnational approach in which we examine how corporate governance regulation is changing across interacting arenas of governance. What, then, do we mean by transnational? In the context of this book, our understanding of ‘transnational’ is of a dual nature. In the first instance, building upon the well-known work on transnational politics of the 1970s (see Keohane and Nye 1971), transnational relations are defined as ‘regular interactions across national boundaries when at least one actor is a non-state agent or does not operate on behalf of a national government or of an intergovernmental organization’ (Risse-Kappen 1995: 3; for an elaboration see Nölke 2004a). This definition focuses primarily on the actors involved in transnational politics. Alternatively, we may also define ‘transnational’ by focusing primarily on political processes and structures: in this view these are constituted in a social space transcending national borders, i.e. their dynamics are not fundamentally defined by the existence of national boundaries, and occur simultaneously in sub-national, national and international arenas. As such, ‘the transnational’ can be viewed as transcending, different (territorial) ‘levels’; it is a multilevel phenomenon by definition. In these conditions, the ‘national’ no longer provides the primary constitutive dimension of politics (for an elaboration see Overbeek 2000, 2003; van Apeldoorn 2004a). In the remainder of this book, both the agency of transnational actors and the salience of transnational processes and structures provide a reference point for the different contributions, albeit in quite different forms, and with different degrees of centrality. Although some of the individual chapters may focus on a particular ‘level’ rather than integrating those ‘levels’, the book as a whole seeks to show how corporate governance regulation indeed takes place at different levels, or as we prefer to call it, within multiple and interrelated arenas.

Table 1.2 Multiple arenas of corporate governance regulation

Taking politics seriously: a critique of the corporate governance literature

Within the continuously expanding corporate governance body of literature, we may distinguish two strands of literature that have a direct relevance for the analysis of the regulation of corporate governance. First, we can identify a body of literature, deriving mainly from law and economics, with a highly normative and prescriptive (implicit or explicit) orientation. Rather than seeking to explain (changing) corporate governance regulation, this body of literature seeks to identify the ‘best’ regulation. In contrast, a second body of literature, extending into various disciplines of the social sciences, adopts a more explanatory perspective, underlining the political underpinnings of corporate governance. Although growing, research of the second type is still relatively scarce, especially research that takes corporate governance regulation as its main explanandum. Even scarcer, we argue, is research that not only offers an empirically grounded explanation of the regulation of corporate governance, but also seeks to extend its analysis across various levels of governance. We will now have a closer critical look at each of these bodies of literature in turn.

Law and economics: Legitimating the ‘standard model’

The literature within legal studies is usually the most explicit in its normative and prescriptive agenda. Some authors argue in favour of giving more voice to stakeholders (for example, Blair 1995; Ireland 1996; Deakin 2002). Others, indeed an overwhelming majority, focus on the question of how to (legally) enhance the (property) rights of shareholders (see, for example, Black 2001; Baums and Scott 2003), especially so-called minority shareholders such as institutional investors (see, for example, Black 1992; Baums and Buxbaum 1994; Coffee 1991). A clear illustration of this normative perspective may be found in an often quoted paper that (notwithstanding the weight of divergent legal traditions) predicts the convergence of corporate law on the basis of a strong ideological consensus in favour of (absolute) shareholder primacy. The authors claim that, in the context of growing global competition, this ‘standard model’ normatively speaking has ‘no important competitors’ left (Hansmann and Kraakman 2001: 50).⁴ On the basis of this normative superiority, then, we will witness the inevitable and at the same time desirable ‘end of history for corporate law’ (Hansmann and Kraakman 2001; cf. Coffee 1999a; Gordon and Roe 2004).

We may also note that, although some of this literature is comparative, most of it is focused on the US, reflecting that country’s longer history of shareholder activism, and, recently, the impact of Enron and the legal reforms (especially the Sarbanes-Oxley Ac) that have been undertaken in response (for example, Coffee 2003). Furthermore, inasmuch as what Gourevitch calls the ‘law-andeconomics’ tradition (see his contribution to this book; and Gourevitch 2003) puts forward any explanatory claims (see especially La Porta et al. 1998), it treats existing differences in the legal and regulatory framework as rather exogen...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Illustrations
• Contributors
• Series Editors’ Preface
• Acknowledgements
• Abbreviations
• 1 The Transnational Politics of Corporate Governance Regulation
• Part I Themes and Approaches
• Part II European Corporate Governance Regulation and the Politics of Marketization
• Part III The Role of Private Authority in Corporate Governance Regulation
• Part IV Integrating Emerging Market Economies
• Part IV Conclusion
• Bibliography