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

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

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

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


Corporate governance has become front page news in the United States and Europe with the collapse of companies such as Enron, WorldCom, and Parmalat. Once the sleepy preserve of corporate lawyers and accountants, the way corporations are run is increasingly the subject of government intervention and public scrutiny. In this book, Peter Gourevitch and James Shinn take a major step beyond standard accounts by explaining 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. They combine a clear theoretical model on this political interaction, with statistical evidence from thirty-nine countries of Europe, Asia, Africa, and North and South America-collectively 99.5% of the global stock market by value-and with detailed narratives of specific country cases. Political Power and Corporate Control differs sharply from most treatments by explaining differences among countries in terms of the interaction of economic preferences and political institutions. It explores in particular the crucial role of interest groups, pension plans, and financial intermediaries in shaping political preferences for different rules about minority shareholder practice and other variables that influence ownership concentration. The countries examined sort into two distinct clusters of practice: 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 meanwhile influence the probability of one coalition defeating another.


The limited liability company is approaching its four hundredth birthday. Its creation provided a powerful engine for economic growth by mobilizing capital and rewarding risk-taking. Economies with deep capital markets and healthy corporate structures grow faster than those with weak financial and corporate structures. At the same time, corporations are vulnerable to problems of accountability and responsibility. Recent scandals (Enron, Parmalat, Adelphia, Ahold, etc.) are repeats of events familiar to historians of the corporation.

Looking at corporate structures around the world would fascinate Darwin. There is no single form, but many. the United States has strict rules on insider trading, hostile takeovers, the composition of boards, the process of proxy voting; it ranks high on most indicators of “shareholder protection.” Japan, by contrast, has substantial cross-shareholding across firms, so that there is no effective market for control. in Germany, firms are supervised by institutionalized blockholders. in many parts of the world, external shareholders have few protections, while most firms are supervised by closely knit owners, linked by family, ethnicity, religion, or community.

The U.S. pattern is not the typical one. If we measure the concentration of shareholding within firms, or the regulations on shareholder protection, or the rules on board organization, the United States lies at one end of the scale. This was not always the case. in the late nineteenth century, U.S. corporations resembled those of continental Europe. Then policy forced change. the U.S. political system enacted laws against monopolies and concentrated financial institutions and created institutions for the regulation of securities. Other countries did not pass such laws.

This book seeks to explain that divergence. It focuses on the politics of law and regulation concerning corporate structure. There are certainly variables in technology and competition that work regardless of the formal laws, and private bonding or trust mechanisms are quite real. But some important element of what drives the behavior of firms lies in the incentives that law and regulation structure. Explaining law and regulation is thus central to any account of corporate governance.

in March 1602 the Netherlands Republic chartered the United East India Company (Vereenigde Oost-Indische Compagnie, or VOC) as a limited liability joint stock company, the prototype of the listed multinational trading enterprise. Renaissance merchants in Florence and Genoa had experimented with joint stock arrangements before this date, but with a limited term and a “complete contract” between the investors and managers. the voc, in contrast, raised 6.45 million guilders (over a billion dollars in current terms) from more than a thousand investors, on the basis of an ambitious corporate charter with uncertain return and (initially) a 10-year operating horizon. Arguments among owners, shareholders, and employees regarding the governance of the voc fill its corporate archives for the 300 years until its demise. See Paul Frentrop, Corporate Governance, 1602–2002 (Amsterdam: Prometheus, 2002) chap. 2.

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