TABLE OF CONTENTS
I. THE COMPARATIVE CORPORATE GOVERNANCE DEBATE:
DOES LAW MATTER?
A. Law Matters
B. Transplanting U.S. Corporate Law
II. THE U.S. CORPORATE GOVERNANCE SYSTEM
A. The Formal Rules of the Game
B. Why Do Shareholders Still Invest?
C. Overall Coherence and "System Logic"
III. Is THE U.S. CORPORATE GOVERNANCE
A. Complementarities Critique
B. Private Ordering Critique
C. Nonshareholder Primacy Critique
D. Capital Structure Critique
IV. LESSONS FOR DEVELOPING COUNTRIES: A FRAMEWORK FOR
CORPORATE GOVERNANCE REFORM
A. When Law Really Matters
B. "Ground-Level" Benefits of Mandatory Corporate Law
C. Some Proposals to Consider
The task is daunting: Spur economic growth in developing countries. Much attention has focused on bringing economic prosperity to transitional economies, including Russia and other former Soviet bloc countries, such as Hungary, Poland, and Czechoslovakia. Developing countries in Asia, Latin America, and Africa have also been the subject of reform programs, many of which have been controversial, designed to promote economic growth through privatization, political change, and other means. Today, all eyes are on Iraq and Afghanistan. A recent article in the Wall Street Journal, titled Taking Iraq Private, summed up what many view as central to promoting economic growth in Iraq and elsewhere: Create property rights, the rule of law, and other institutions that will encourage private investment and foster free markets. (1) While I agree with the article's premise, its title is a misnomer. The goal is less about taking developing countries private than it is about taking them public.
One solution for spurring economic growth in the developing world is to promote securities markets. An established body of empirical studies shows, as one might suspect, a link between the development of capital markets and economic growth. (2) The basic intuition is straightforward: Robust capital markets allow businesses and entrepreneurs to tap into the financial resources needed to increase output, invest in new technologies, fund research and development, build new factories, hire more workers, and exploit business opportunities domestically and abroad. The question, then, becomes: What policies best promote securities markets as a means of economic prosperity in developing countries?
When it comes to promoting equity markets, the question is often rephrased to ask: What accounts for the Anglo-American pattern of finance, characterized by dispersed share ownership and the separation of ownership and control in the United States and the United Kingdom, and how can developing countries replicate this achievement? Suggesting the difficulties of achieving broad and deep stock markets in which shareholders are willing to hold minority stakes in companies, concentrated ownership structures are more typical around the globe. (3)
The "law matters" thesis claims that the law has a central role to play in the development of equity markets. In short, the law is essential to securing the property rights of shareholders. Strong legal protections shield shareholders, especially minority shareholders, from having their investments expropriated by insiders, including directors, officers, entrepreneurs, and controlling shareholders. Unless shareholders are protected from agency problems, such as excessive executive compensation, insider trading, self-dealing transactions, and shirking, they will be discouraged from investing. Those who do invest will pay a discount for shares in order to compensate them for the risk of opportunism they are otherwise forced to shoulder. By protecting shareholders from insider abuses, the law can instill in shareholders the confidence needed to invest, thereby leading to thicker and more highly valued equity markets. The "law matters" thesis is supported by an extensive body of empirical studies, led by the work of La Porta, Lopez-de-Silanes, Shleifer, and Vishny. …