Curtis J. Milhaupt

The Dark Side of Private Ordering: An Institutional and Empirical Analysis of Organized Crime

This Article provides theoretical and empirical support for the claim that organized crime competes with the state to provide property rights enforcement and protection services. Drawing on extensive data from Japan, this Article shows that, like firms in regulated environments everywhere, the structure and activities of organized criminal firms are significantly shaped by state-supplied institutions. Careful observation reveals that in Japan, the activities of organized criminal firms closely track inefficiencies in formal legal structures, including both inefficient substantive laws and a state-induced shortage of legal professionals and other rights-enforcement agents. Thus, organized crime in Japan--and, by extension, in other countries where significant gaps exist between formal property rights structures and state enforcement capacities--is the dark side of private ordering. Regression analyses show negative correlations between membership in Japanese organized criminal firms and (a) civil cases, (b) bankruptcies, (c) reported crimes, and (d) loans outstanding. We interpret these data to support considerable anecdotal evidence that members of organized criminal firms in Japan play an active entrepreneurial role in substituting for state-supplied enforcement mechanisms and other public services in such areas as dispute mediation, bankruptcy and debt collection, (unorganized) crime control, and finance. We offer additional empirical evidence indicating that arrests of gang members do not curb the growth of organized criminal firms. These findings may have a significant normative implication for transition economies: efforts to eradicate organized crime should focus on the alteration of institutional incentive structures and the stimulation of competing rights-enforcement agents rather than on traditional crime-control activities.

We are the (National) Champions: Understanding the Mechanisms of State Capitalism in China

RESUMEN: China ahora es el segundo pais que mas empresas Global Fortune 500 tiene en el mundo. Casi todas ellas son empresas estatales (SOEs, acronimo en ingles) organizadas dentro de grandes grupos empresariales, con un organismo central gubernamental denominado SASAC como accionista controlador fi nal. A pesar de la importancia de estos grupos para la economia domestica china y su estrategia de invertir en el exterior, muchas de las particularidades del sector SOE –especialmente su estructura organizacional y las caracteristicas de gobierno corporativo de los distintos grupos empresariales– permanecen en la penumbra. Para salir de esa oscuridad se requiere dejar el analisis habitual basado en los costos de agencia de las empresas que cotizan en bolsa, predominante en la bibliografia sobre gobierno corporativo. Por el contrario, examinamos la ecologia relacional en la que se mueven los grupos SOE, con atencion en los mecanismos institucionalizados que unen los grupos empresariales con otros organos del Estado-partido. Pensamos que a traves de estos enlaces, las elites administradoras de la economia china han ensamblado lo que Mancur Olson llamo una “coalicion englobante total” –una organizacion cuyos miembros deben tanto a la sociedad, lo que hace que tengan grandes incentivos para estar muy pendientes de la productividad del grupo SOE. Exponiendo de esta manera los mecanismos del capitalismo de Estado chino surgen muchas interrogantes para los investigadores y para los responsables de politicas publicas, las que se incrementan a medida que se expande la interaccion global de las empresas chinas. Por ejemplo, ?se explica adecuadamente el ascenso de las SOEs chinas mediante las teorias ordinarias de la bibliografia comparada de gobierno corporativo? ?Como podria transformar la trayec

Property Rights in Firms

This paper presents a property-rights-based approach to comparative corporate governance. Two central claims are advanced. The first is that property rights institutions are the principal source of diversity among national corporate governance systems. More specifically, firms in a given economy are shaped by (1) the extent to which control rights over assets are allocated to politicians and bureaucrats rather than private agents, and (2) the degree to which control rights over assets are legally as opposed to politically or socially enforced. To illustrate, the paper examines cross-country data on such factors as economic freedom, corruption, and political risk to create a property rights spectrum for the United States, Japan, and South Korea that explains observed corporate governance differences among the three countries. The second claim is that convergence of corporate governance systems will be limited, despite the existence of powerful market forces operating at the global level. Property rights analysis is again used to frame the argument. While the efficiency concerns that drive the mechanisms of convergence operate powerfully on firm managers, they act only weakly on the political actors who hold significant control rights over firms in every economy. Thus, convergence will occur only where institutional inertia grounded in politics can be overcome. Even where formal rules converge, differences in enforcement practices linked to distinctive national structures are likely to persist.

Economically Benevolent Dictators: Lessons for Developing Democracies

The post-war experience of developing countries leads to two depressing conclusions: only a small number of countries have successfully developed; and development theory has not produced development. In this article we examine one critical fact that might provide insights into the development conundrum: Some autocratic regimes have fundamentally transformed their economies, despite serious deficiencies along a range of other dimensions. Our aim is to understand how growth came about in these regimes, and whether emerging democracies might learn something important from these experiences. Our thesis is that in these economically successful countries, the authoritarian regime managed a critical juncture in the country’s development - entry into global commerce by the transition from small-scale, relational exchange, to exchange where performance is supported by government action, whether based on the potential for formal third party enforcement or by the threat of informal government sanctions. Compared to a weak democracy, a growth-favoring dictator may have an advantage in overcoming political economy obstacles to credibly committing that rent seeking will not dissipate private investment. We explore this hypothesis by examining the successful development experiences of three countries in the late twentieth century: Chile under Augusto Pinochet; South Korea under Park Chung-Hee; and China under Deng Xiaoping and his successors. Although the macroeconomic policies and institutional strategies of the three countries differed significantly, each ruler found ways to credibly commit his regime to growth. Decades of law reform activity by the World Bank, IMF, and other international organizations, along with a vast academic literature, assume that an impartial judiciary is the key to the transition from relational to market exchange. Our study reveals that a variety of alternatives are possible. We then consider a now familiar question raised about contemporary China: Does economic development inexorably lead to political liberalization? The conventional wisdom says yes, drawing support from the experience of Chile and South Korea. We show that the conventional wisdom overlooks important features of the Chilean and Korean historical experiences that bear directly on China. The same incentive structures that have propelled Chinese economic growth are likely slow political liberalization.

Regulatory Failure and the Collapse of Japan’s Home Mortgage Lending Industry: A Legal and Economic Analysis

This article analyzes the dynamics of contemporary cooperation and conflict in Japanese financial regulation through the prism of the “jusen problem,” the collapse of Japan’s home mortgage lending industry in the 1990s. The jusen problem is one of the most striking examples of regulatory failure, strategic interest group bargaining, and large-scale dispute resolution in Japanese history.

Transforming Corporate Governance in East Asia

Introduction: Changes and Challenges in the Transformation of East Asian Corporate Governance Curtis J. Milhaupt Part 1: Japan 1. Corporate Law in Japan and its Competition Hideki Kanda 2. Transformation of the Management Liability Regime in Japan in the Wake of the 1993 Revision Tomotaka Fujita 3. Kenichi Osugi, Games under Uncertainties: The Transformation of M&A Rules in Japan Part 2: Korea 4. The Role of Judges in Corporate Governance: Korean Experience Kon-Sik Kim 5. A Tale of Two Companies: The Emerging Market for Corporate Control in Korea Hwa-Jin Kim 6. Improving Corporate Governance through Litigation: Derivative Suits and Class Actions in Korea Ok-Rial Song Part 3: Greater China (Taiwan and the Mainland) 7. An Analytical Framework for Controlling Minority Shareholders and its Application to Taiwan Wen-Yeu Wang 8. Corporate Regulation in Taiwan: A Political Economy Perspective Lawrence Liu 9. Protection of Minority Shareholders in China: A Task for Both Legislation and Enforcement Xin Tang 10. The Role of Non-Legal Institutions in Chinese Corporate Governance Donald Clarke 11. The Doctrine that Dared not Speak its Name: Anglo-American Fiduciary Duties in Chinas Company Law Nicholas Howson Part 4: Analysis and Commentary 12. Controlling Family Shareholders in Asia: Anchoring Relational Exchange Ronald Gilson 13. The Uncertain Promise of Shareholder Suits in Asian Corporate Governance Michael Klausner

A Comparative Analysis of Hostile Takeover Regimes in the US, UK and Japan (with Implications for Emerging Markets)

In each of the three largest economies with dispersed ownership of public companies - the United States, the United Kingdom, and Japan - hostile takeovers emerged under a common set of circumstances. Yet the national regulatory responses to these new market developments diverged substantially. In the United States, the Delaware judiciary became the principal source and enforcer of rules on hostile takeovers. These rules give substantial discretion to target company boards in responding to unsolicited bids. In the UK, by contrast, a private body consisting of market professionals was formed to adopt and enforce the rules on hostile bids and defenses. In contrast to those of the US, the UK rules give the shareholders primary decision making authority in responding to hostile takeover attempts. The hostile takeover regime in Japan, which developed recently and is still evolving, combines substantive rules with elements drawn from both the US (Delaware) and the UK, while adding distinctive elements, including an independent enforcement role for Japan’s stock exchange. This Article provides an analytical framework for business law development to explain the diversity in hostile takeover regimes in these three countries. The framework focuses on the universal supply and demand dynamics that drive the evolution of business law in response to new market developments. It emphasizes the common role of subordinate lawmakers in filling the vacuum left by legislative inaction, and it highlights the prevalence of “preemptive lawmaking” to avoid legislation that may be contrary to the interests of important corporate governance players. Extrapolating from the analysis of developed economies, the framework also illuminates the current state and future trajectory of hostile takeover regulation in the important emerging markets of China, India, and Brazil, where corporate ownership structures may be changing. An important pattern revealed by the analysis is the ostensible adoption - and adaptation - of “best practices” for hostile takeover regulation derived from Delaware and the UK in ways that protect important interests within each emerging market’s national corporate governance system.

LOS GRANDES GRUPOS EMPRESARIALES CHINOS: ENTENDIENDO LOS MECANISMOS DEL CAPITALISMO DE ESTADO EN CHINA

Resumen es: China ahora es el segundo pais que mas empresas Global Fortune 500 tiene en el mundo. Casi todas ellas son empresas estatales (SOEs, acronimo en ingles) ...

Evaluating Abe's Third Arrow: How Significant are Japan's Recent Corporate Governance Reforms?

Structural reform, the “third arrow” of the Abe administration’s policy for revitalizing the Japanese economy, centers on corporate governance reform. In recent years, Japan has adopted a Stewardship Code in the hopes of invigorating institutional investor engagement, a Corporate Governance Code recommending that Japanese firms have at least two independent directors, and amendments to the Companies Act to create a new board structure option, the so-called Company with an Audit and Supervisory Committee. In this essay, I take preliminary, impressionistic stock of these reforms. First, I comment on the voluntary “comply or explain” and menu-driven approaches adopted in these reforms. While this approach is politically expedient and avoids one-size-fits-all solutions, it has a status-quo bias, particularly if market forces are insufficient to compel Japanese firms to adopt efficient governance structures. Substantively, I suggest that board composition and enhancement of the “monitoring board” – focal points of the reform effort – are not well suited to address the problems of low profitability, cash hoarding, and loss of global market leadership afflicting Japanese firms. While the recent reform package is well intentioned and may produce some improvements at the margins, transformative change will require more fundamental changes to Japanese capitalist institutions, including most prominently the employment system, the labor market, and incentive structures within firms. Corporate governance reflects, rather than determines, a country’s variety of capitalism. Rather than focusing on details such as the number of independent directors a company should have, a bold revitalization policy would address larger questions about what type of corporate capitalism Japan needs and finds acceptable for the twenty-first century.