Recent Literature on Corporate Governance

Corporate law scholarship has come a long way since Bayless Manning some four decades ago famously pronounced it dead. Not only has doctrinal scholarship continued its project of critique and rationalization, but empirical and economic approaches have injected new life into the field. 

Recent years have seen the rise of comparative corporate governance (CCG) as an increasingly mainstream approach within the world of corporate governance studies. This is a function partly of an increasing international orientation on the part of legal scholars and partly of an increasingly empirical turn in corporate law scholarship generally. Different practices in other jurisdictions present at least the possibility of natural experiments that attempt to find causal relationships between particular features of a corporate governance regime and real-world outcomes. This body of research has become particular relevant as we enter the second decade of the twenty-first century. The financial crisis has called into question many of our traditional ways of thinking about corporate governance and the relationship between business enterprises and the state. Are there other countries that do it better?

This article discusses what is unique about CCG as an approach to corporate governance studies. It begins by examining the concepts of corporate governance and comparative corporate governance, making the point that comparative corporate governance has in general been focused on agency problems between shareholders and managers but need not be so. It then looks at methodological issues in comparative corporate governance, critiquing in particular economic Darwinist theories and the failure of theories of international competition in corporate governance to incorporate the notion of comparative advantage. Finally, it reviews major lessons learned from this body of work and suggests direction for future research. Among other things, it calls for more comparative research into alternative business entities dubbed “uncorporations” by Larry Ribstein and into corporate governance in increasingly important economies such as China and India.

Interestingly, the paper focuses on the need for greater research on China and India as part of the comparative corporate governance movement. He notes the special characteristics present in these economies:

As the previous point suggests, [comparative corporate governance] would benefit by moving to newer and more exotic—but still very important—jurisdictions and truly taking account of foreignness. This means countries like India and China. The challenge is that they are going to look in some respects very familiar, with familiar forms. But in other respects they are quite different, especially China, since at least India shares a common legal tradition with the United States (and, more directly, England). Even that, however, can be misleading. How well can India fit into theories of legal governance designed for the United States or Europe when simple cases can drag on for decades? Both of these countries are going to challenge legal scholars to think about how corporate governance can work when it cannot rely on a reasonably efficient court system. Can gatekeepers and reputation effects do all the work? And if so, does this suggest that a sound court system, even in countries where it exists, is not as important as we might have thought?

From this paper, it becomes clear that the trajectory of comparative corporate governance scholarship tends to track the economic development in various countries. For example, the 1980s witnessed a focus of scholarship on governance issues pertaining to countries such as Japan and Germany, which were enjoying great economic success. In the 1990s, the focus was on the US model and a substantial part of that literature argued that the superiority of that model meant the rest of the world would follow suit. However, in the last decade or so, the focus has clearly shifted to other economies, notably China and India, which have been witnessing economic growth. This is evident from the interest generated by these economies in legal academic literature, much of which we have been following on this Blog.

As far as India is concerned, a recent paper Corporate Governance in India: Towards a More Holistic Approach by Hari Bhardwaj builds upon existing literature to provide a more nuanced understanding of corporate governance problems in India and suggests measures address them. The abstract is as follows:

In this paper, we offer a ‘holistic’ approach to the development of corporate governance solutions in India that takes into account the unique economic, political and structural problems affecting the country. Based on a review of the patterns of ownership and control of its firms, we identify that the ‘core’ economic problem affecting corporate governance in this country today is not the threat that managers act opportunistically against owners, as is prevalent in the Anglo-American world, but the threat that majority shareholders act opportunistically against minority shareholders, thus calling for a new approach to address the Indian context. In developing this approach, we are mindful of the ‘transplant’ effect that recognizes that solutions adopted from ‘outsider’ jurisdictions are unlikely to be effective in ‘insider’ jurisdictions such as India since they address a different agency problem. We then identify limitations in the institutions of public enforcement in India and draw upon the ‘political’ approach to corporate law to conclude that these structural constraints are likely to continue in the short term, thus limiting the effectiveness of purely ‘legalistic’ solutions in the country. We thereafter develop criteria that enable us to arrive at potential market-based ‘self-enforcing’ solutions to our ‘core’ corporate governance problem.

 At a broader level, a radical but interesting paper Beyond the Board of Directors by Kelli Alces calls for the eventual elimination of the board of directors as an institution of corporate governance. The gist of her argument is:

The law of corporate governance places the board of directors at the top of the corporate decisionmaking structure. So, accountability for corporate decisions rests primarily on the shoulders of part-time employees who lack the time and thorough knowledge of the firm necessary to perform the board’s duties effectively. Corporate governance scholarship is similarly preoccupied with the board of directors. Scholars have debated whether to enhance or diminish the board’s authority within the firm, but all accept that a board of directors should preside over corporate decisionmaking. This Article argues that scholars on both sides of the debate have missed the mark. The modern board of directors is ineffective to achieve its purposes. The time has come to envision a world beyond the board of directors.

In the modern public corporation, the board has been marginalized in favor of the powers exercised by the firm’s investors and senior officers. That reality is the product of market choices and is part of the natural evolution of corporate governance. Modern regulatory responses to various corporate scandals stand in the way of that sensible evolution toward more effective corporate governance. While the board structure we have now may be the product of prior market choices, it is the law, not the market, that preserves the vestigial board of directors’ role at the top of the corporate hierarchy. This Article argues that obstacles to the evolution of corporate governance should be removed and sketches a path that evolution may take leading to the eventual elimination of the board of directors. Eliminating the board of directors would mark a fundamental shift in the understanding of corporate governance, but, at the same time, would realign the law of corporate governance with the natural evolution the market has already initiated.

 While it is understandable that a huge (and undue) burden is imposed on corporate boards that often contain part-time directors such that they are unable to solve problems of governance, it is perhaps too early to suggest the elimination of corporate boards in the absence of a suitable alternative mechanism. It is true that there is too much optimism regarding the roles that boards can perform. This is similar to the debate regarding the value that independent directors can bring to bear on corporate boards in enhancing governance. However, it is not clear if the solution lies in doing away with these institutions as much as enhancing their efficacy or at least moderating expectations regarding the extent to which they are able to act as monitors of corporate activity. Part of the concern is also that the board as an institution of corporate governance has been so well entrenched in the discourse for at least over a century that it might be a hard task to destabilize it.