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Until the 1980s, corporate governance was largely the province of lawyers. It was a world of specific rules – more or less precise statutory requirements governing shareholder meetings, the election of directors, notice requirements and the like – that were essentially unrelated to what corporations actually do. From this perspective, the corporation's productive activity was simply a black box onto which standard governance structures were superimposed with little effect on what took place within. Corporate law was "trivial" or, as Bayless Manning so evocatively portrayed it, simply "great empty corporation statutes – towering skyscrapers of rusted girders internally welded together and containing nothing but wind."

The turmoil of the 1980s brought corporate governance out of the shadow of purely legal analysis. Economists became interested in how corporations make decisions, the incentives and utility functions of the decision makers, and the feedback mechanisms by which corporate performance is evaluated and responsively adjusted. The new attention was motivated by the growing perception of a link between corporate governance and corporate performance. According to the hypothesis, better governance yields more efficient production.

Large institutional differences between the corporate governance systems of the three most successful industrial economies made salient the possible link between governance and efficiency. German corporate governance is said to be bank-centered: Universal banks simultaneously serve as lenders, shareholders, investment fund managers, investment bankers and supervisory board members. Those who favor bank-centered corporate governance argue that the bank's multi-dimensional role allows both more efficient lending, because the bank's special position reduces the information asymmetries between the company and the capital market, and more effective monitoring of management, because of the access and incentives that result from the bank's multiple roles. Japanese governance is also said to be bank-centered but with the addition of cross-shareholdings among a group of corporations that, because shareholdings often parallel intra-group product sales, provide an additional monitoring mechanism. And in both Germany and Japan, capital market monitoring through hostile takeovers, characteristic of United States stock market-centered goverance, is virtually absent. Perhaps, analysts thought, differences in economic performance between the countries might be explained by institutional differences in their governance systems.

I want to make clear at the outset that the existence of an important link between corporate governance and corporate performance is not self-evident. Rather, it is a hypothesis, not a revealed truth. One Japanese economist underscored the uncertainty concerning the link's significance with some especially vivid comments at a meeting devoted to comparative corporate governance. After listening patiently to a non-Japanese speaker emphasize the importance of the keiretsu structure to Japan's post-World War II economic development, the economist rejected the notion that Japan's competitive success was based on a corporate governance gimmick. Instead, he argued that the post-war miracle resulted from both the character of the Japanese people and the situation in which Japan found itself. After World War II, Japan had a very well educated, highly motivated, and low-wage work force. The economist argued that these were sufficient conditions for economic success, independent of corporate governance institutions. More generally, one need not entirely disregard corporate governance in order to question the relative magnitude of its importance. For example, how does the impact of corporate governance compare with, say, national savings rates or tax policies?

In this paper, I seek to examine the hypothesized link between corporate governance and economic efficiency through two different lenses that highlight the role of national institutions: path dependency and industrial organization. The point that I want to make is that institutions matter, but only sometimes. The critical task facing theorists is to continue the positive project of identifying when institutional differences influence economic efficiency in aid of the normative project of improving the productivity of national corporate governance systems.


Business Organizations Law | Industrial Organization | Law