Regulating Corporate Governance through the Market: Comparing the Approaches of the United States, Canada and the United Kingdom
Burke, Kerry Shannon, Journal of Corporation Law
The concept of corporate governance is not easy to define or evaluate. In 1992, the Cadbury Committee described corporate governance as "the systems by which companies are directed and controlled."1 Although never proven conclusively, many scholars of corporate governance assert that a company can increase its profitability by aligning the interests of its management and its shareholder-owners.2 Even if effective corporate governance is only one element of a successful business,3 it can be an invaluable asset for a company seeking external financing. Indeed, a recent study revealed that investors are willing to pay eighteen percent more on average for the equity of an American or a British company with strong corporate governance practices than for a company in a similar financial situation with a weak governance structure.4
The listing rules of the New York Stock Exchange (NYSE), the Toronto Stock Exchange (TSE), and the London Stock Exchange (LSE) have significantly affected the corporate governance of large, domestically incorporated, listed companies.5 The NYSE, TSE, and LSE all began as member-owned, self-regulatory organizations (SROs).6 The TSE and the LSE recently demutualized, and the NYSE is planning to convert into a forprofit entity in the near future.7 This change in the TSE and LSE prompted officials to evaluate whether each exchange still would be an appropriate regulator of listed companies. Similar to most other exchanges faced with this dilemma, the TSE implemented several safeguards, but retained its basic SRO attributes as well as control over its listing rules;8 and listed companies arguably have not suffered from this oversight by a for-profit entity. The LSE relinquished its control over the listing process,
including its authority to administer the exchange's corporate governance guidelines, to the Financial Services Authority (FSA), a governmental entity.9
This Article asserts three contentions. First, it argues that stock exchanges with a quasi-self-regulatory structure are the proper regulators of corporate governance in the Anglo-American system. Quasi-SROs, like the NYSE and TSE, possess the flexibility and expertise necessary to respond to corporate governance issues. These exchanges can shift the costs of monitoring listed companies' compliance with corporate governance rules to market participants. The governmental oversight inherent in a quasi-SRO mitigates some common problems with market-based regulation, namely, bias and inadequate enforcement.
Next, this Article examines the social, economic, and cultural framework in the United States, Canada, and the United Kingdom, in which each exchange's corporate governance rules operate. The unique environment in each country has impacted the regulatory choices made by the NYSE, the TSE, the LSE, and now, the FSA. An exchange's ability to account for historical and cultural differences and institutional constraints will contribute to the effectiveness or ineffectiveness of its corporate governance listing rules.10 Furthermore, many inadequacies in a system of market-based regulation are tempered by the presence of other Anglo-American monitors of corporate governance, including governmental agencies, shareholders, and the judiciary.
Finally, this Article concludes that the United Kingdom lost a valuable agent of corporate governance when the FSA usurped the LSE's role as the U.K.'s listing authority after the exchange demutualized. There is no evidence that demutualization impedes a quasi-SRO from effectively regulating the corporate governance of listed companies,II and the U.K.'s markets would be better served if the LSE continued to regulate its own markets, much like the TSE did after it demutualized. Although the
unique social, economic, and cultural conditions in Canada and the United Kingdom are not identical to those in the United States, the experiences of the demutualized TSE and LSE indicate that the NYSE could make minor structural adjustments and remain an important regulator of listed companies' corporate governance. …