Alan J. Dignam

Scholars in Estrangement: The Global Debate on the Superiority of Corporate Governance Systems

OUTSIDER SYSTEMS of corporate ownership and control have strong securities markets and dispersed uncommitted shareholders who deal with company managers on an arm’s length basis. In an outsider corporate system there is a significant separation of ownership and control of publicly listed companies,1 as a result of which management behaviour is primarily conditioned by the operation of market forces aligned to maximise profits for the shareholders. In contrast, the principal sources of finance in insider systems of corporate ownership and control are banks, families, non-financial corporations, and the state. Shareholdings are more concentrated and shareholders and creditors are more actively involved in controlling the company.2 There is in effect no separation of ownership from control. Outsider systems are said to be more efficient and flexible. Insider systems are said to be better able to balance stakeholder interests (i.e. the interests of employees, creditors and community) because they are less powerfully affected by market forces; it is also said that they are better adapted to respond to the needs of a wider social market.3 So, for example, it is a common feature of insider systems that employees are represented at board level. Insider and outsider systems are not merely economic and legal alternatives: they are political alternatives as well. In recent decades, a debate on the superiority of corporate systems has emerged. In the 1980s the apparent superiority of the outsider systems in the US and UK was loudly trumpeted. However, by the early 1990s advocates of the inherent superiority of insider systems had a ready audience, as both the major outsider systems (the UK and US) were in recession and Germany (one of the major insider systems) was thriving. Recently, the cyclical nature of this debate seems to have ended as the stock market crash in the US in 2000, the corporate governance scandals which followed (Enron, World com etc), and the subsequent US recession does not seem to have stimulated US scholars to reflect on whether the nature of their outsider system was to blame for this. Partly this may have been because Germany and Japan (the two leading insider systems) also seem to be deeply mired in recession. Partly, too, US writers on corporate governance systems have been emboldened by a wealth of high profile empirical studies dating from the late 1990s which appear to support their cause.4 In an influential set of articles La Porta et al have argued that the level of legal protection given to shareholders in a jurisdiction is the key to determining corporate governance outcomes. Examining a wide range of countries they have found that where there is weak investor protection public companies have concentrated 404 T H E K I N G ’ S C O L L E G E L A W J O U R N A L