Political Power and Corporate Control: The New Global Politics of Corporate Governance

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Political Power and Corporate Control: The New Global Politics of Corporate Governance By Peter A. Gourevitch and James Shinn Princeton, N.J.: Princeton University Press, 2005. Pp. 384. $35.00 cloth.

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. The inclusion of worker interests into corporate governance, most prominently represented by the German system of labor codetermination, is often seen as simply an inefficient legislative distortion of the agency problem between shareholders and managers. Gourevitch and Shinn do away with the underlying assumption of complete contracts and point out that workers do care about job security, work conditions, and health and retirement benefits, and that they therefore have a stake in how the firm is run.

The authors develop their analysis around coalition building by managers, owners, and workers, which ultimately determines the structure of the respective corporate-governance system. The main policy outcomes are the minority shareholder protection (MSP) and degrees of coordination (DoC) variables. MSP is probably the predominant issue in current comparative corporate-governance debate. "Law and finance" scholars, led by economists Rafaël La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert W. Vishny (see their article "Law and Finance," Journal of Political Economy 106 [December 1998]: 1113-155), argue that good corporate law is required to prevent managers from shirking and self-dealing. Large shareholders extensively monitor managers in the blockholder system, but if corporate law is effective, they can unwind their inefficient risk position, thus allowing capital markets to flourish and diffusion to set in, which eliminates self-dealing by large shareholders. By contrast, Gourevitch and Shinn argue that the (negative) correlation between minority protection and ownership concentration is too small alone to explain corporate-governance structures. …