Interview: Does English and American-Style Corporate Governance Translate to Emerging Markets?

Corporate Governance Insights Interview Series: Top corporate governance experts report on the latest research in emerging markets.

 

Dr. Prabirjit Sarkar is head of the Economics Department at Jadavpur University in Kolkata and Visiting Fellow at the Centre for Business Research of the University of Cambridge in England. His primary research interest is the connection between national legal systems, corporate governance, and economic performance.


The most interesting piece on corporate governance I read recently was…

… A paper by Valentina Bruno and Stijn Claessens on the risks of over-regulating corporate governance. The paper suggests that too much of a good thing - in this case corporate governance regulations - can in fact turn out to be bad! There should be some basic system with a minimal amount of corporate governance regulations, but if there’s too much, the result will be counterproductive. This finding is particularly interesting in light of the other conclusion the authors make, which is that at the firm level, corporate governance plays an important role in efficient company monitoring and shareholder protection, with a positive impact on valuation. So to put it in simple terms, the takeaway is that when companies themselves take the lead in strengthening their own corporate governance, it can lead to benefits. But when too many regulations are imposed on them from the outside - by the country’s legislative body - this over-regulation can increase the potential for negative business impacts.


Right now, I am working on…

… A study of countries based on their legal systems, their adherence to the rule of law relative to corporate governance, and the economic performance of their public companies.  I am working with a team of lawyers, and we are looking at this in 25 countries across 35 years, from 1970 to 2005. So far, the evidence seems to suggest that it’s not the actual legal system itself that is the differentiator. Instead, it is the efficiency of the legal system and adherence to its rules that’s more important.

These findings are quite interesting because in the early days of corporate governance research, there was some consensus that common law legal systems, such as those in place in the UK and the US, have stronger shareholder protections, compared to civil law systems for corporate governance, which are predominant in developing countries. The conventional wisdom was that stronger shareholder protections translated to better firm valuation, increasing firms’ ability to attract financing and better performance. But our data suggests that in fact in some ways civil systems are more protective of shareholders’ rights.

Our view is that no one system is inherently better than another. Developing countries in particular should focus more on making sure that the legal framework they currently have in place is functioning well. They should be paying more attention to issues such as corruption than whether or not they have enough corporate governance regulation on the books.


I think the most relevant CG research topic for emerging markets now is…

… Whether increased alignment of legal and regulatory systems among nations improves corporate governance and company performance. We are seeing a trend toward legal globalization in the developed world, such as what’s occurring in the European Union. And we are seeing that developing countries are changing their laws so they are more consistent with the Anglo-Saxon approach, because they think uniformity is better. A deeper look at whether this has helped and if so, how and why it has helped will be important information for emerging market countries going forward.

If I had to hypothesize about this, I would probably say that I do not think wholesale changes in the legal system are what lead to better governance and improved performance. Instead, based on the research I’m doing, I would suggest that the key is how well your own legal system functions, within its own context.


So you can’t really say that the common law CG system that many developed countries use is the only viable approach…

… or that it will lead to stronger private sector growth in emerging markets. In fact, data from my earlier research suggest that we shouldn’t be imposing the Anglo-Saxon approach to corporate governance on developing countries, because it might not work. For example, there appeared to be no relationship at all to the changes in India’s corporate governance-related regulations made during the mid -1990s and stock market performance.  The bottom line here is that the system needs to account for the uniqueness of individual country contexts.

 

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