A cautionary note on drawing lessons from comparative corporate law.

• Author: Romano, Roberta
• Position: Response to article by Mark J. Roe in this issue, p. 1927 - Symposium: Economic Competitiveness and the Law

INTRODUCTION

Mark Roe's article comparing German, Japanese, and U.S. corporate governance extends his important research concerning the effect of political constraints on the organization of U.S. corporations.(1) In this latest publication, Roe painstakingly compares governance arrangements, highlighting the variability in business organization that exists across nations, to obtain guidance for reforming U.S. institutions. This is valuable comparative institutional research, but the lesson to be drawn from the mutability of the corporate form is opaque. As Roe suggests, the legal and institutional differences across the three nations make it difficult to ascertain whether one approach to corporate governance is superior to another and whether a superior organizational form could be successfully transplanted into another setting. Yet without a means to make comparative judgments, the likelihood that helpful lessons can be drawn from other nations' experiences for reforming our own institutions is diminished, and the rationale for making the comparisons in the first place becomes problematic.

Roe does suggest that German and Japanese firms have been subject to less debilitating political constraints on their organization than U.S. firms (because banks were permitted to exercise control over industrial corporations), although he indicates that this may be changing as recent political trends in Germany and Japan seem to resemble U.S. politics. But he does not make clear, at least to my satisfaction, why he reaches this comparative political judgment. Why should we view the corporate organizational form produced by a political process that empowers banks as preferable to a process that does not without evidence of the superiority of the former organizational form?

One implication of Roe's thesis that U.S. politics, because it limits the activities of large banks, produces undesirable corporate ownership patterns-patterns that are more politically than economically inspired--compared to that of other nations is that foreign firms' corporate governance arrangements are preferable, and that the United States ought to adjust its laws shaping corporate governance to match those of other nations. Roe expresses considerable ambivalence concerning this implication of his thesis, but he offers two grounds for permitting U.S. firms to adopt non-U.S. institutions: the organization of German and Japanese firms improves decisionmaking and organizational performance, and more choice is better than less.(2) The implication of the former contention is that German and Japanese firms are more competitive than their U.S. counterparts--how else would we be able to make a comparative assessment of their performance or decisionmaking? Given the data on international competitiveness detailed in this Comment, Roe does not embrace this implication, although he does not draw back on the hypothesized organizational benefits. This creates a muddle, as it is exceedingly difficult to get a fix on the analysis, much less to draw any lessons for corporate law reform. The implication of the latter contention is that U.S. firms would choose to adopt this alternative organizational form were it available. While this implication is also a contestable claim, the core notion that investors ought to be permitted the choice, is, at least in my opinion, less so.

My Comment has one principal, quite simple, point: the central lesson to be drawn from Roe's research in comparative corporate governance is that there is no compelling evidence to support a preference for German or Japanese organizational forms and hence for their adaptation to U.S. firms. First, I review the extensive data indicating that the widely held background assumption of the superior competitiveness of German and Japanese firms over U.S. firms is mistaken. Such an assumption is key for drawing particular lessons from comparative corporate law, such as preferring particular institutions; if German and Japanese firms are not more productive and are in fact less productive than U.S. firms then there is no clear cut reason to emulate their corporate governance arrangements. Second, I provide some anecdotes, for that is all we have now, culled from the history of U.S. corporate finance and current relationships between U.S. firms and banks, to suggest that even were we to alter U.S. banking regulation to permit German- and Japanese-style bank control of industrial corporations, the result may be different from what we see abroad. These data make plain that the most important lesson from examining institutions across time and space is that private parties are quite resourceful in adapting their affairs to minimize the adverse effects of regulation. Third, I address more directly the adequacy of the political distinctiveness Roe attributes to the United States in producing ineffective institutions of corporate governance by noting that the German and Japanese political systems have intruded on corporate governance on some dimensions of importance to shareholders far more than the U.S. regime of financial regulation. I conclude with a word about Roe's criticism of agency cost theories of corporate organization, which mistakenly views such theories as predicting uniformity, as opposed to variety in the corporate form.

All of this is not to say that U.S. laws restricting bank ownership of corporate stock or separating investment and commercial banking functions should be retained. I believe that they should be rolled back. But the rationale for such a policy reversal cannot be readily found in the study of comparative institutions; it can be located more easily instead in our own corporate law tradition. Namely, it is the policy most consonant with the competitive and enabling approach of U.S. corporate law, which, by permitting experimentation and innovation in the choice of institutions, tends to maximize firm value.(3)

1. COMPARATIVE PRODUCTIVITY AND DIFFERENCES IN CORPORATE GOVERNANCE

   No comparative empirical study has shown that corporate governance arrangements affect productivity. Since no immediate evidence is available, a preference for German and Japanese organizational forms must hinge upon the significance attributed to the fact that those nations have for some time surpassed the United States on a variety of productivity growth measures. For instance, growth in productivity measured by gross domestic product (GDP) per capita, from 1870 to 1979 was 691% for the United States but 1396% for Germany and 1653% for Japan.(4) As measured by the growth rate in GDP per work-hour from 1970 to 1979, the growth in productivity was 1.92% for the United States, 4.5% for Germany and 5.03% for Japan.(5) The contention of superiority has to focus on these relative growth rates because in terms of absolute productivity, the United States has retained the lead.

   The most comprehensive study of productivity to date, by William Baumol, Sue Anne Batey Blackman, and Edward Wolff, shows that the significance of differences in short-term productivity growth rates has been vastly overstated.(6) In this study the authors make several important points about productivity measures that are critical to understanding their significance. First, productivity growth rates are extremely volatile in the short run and hence are best estimated over long periods. Second, the decline in U.S. productivity growth in recent years is a decline only in comparison to the phenomenal spurt in U.S. productivity in the years following World War II. The current growth rate is, in fact, similar to the United States' historic normal growth rate. The extraordinary increase in U.S. productivity growth in the postwar period equals (and thus can be seen to compensate for) the steep decrease in productivity growth during the Great Depression. Indeed, a growth trendline shows that growth in U.S. productivity has remained constant from 1880 through 1980. Moreover, all industrial nations experienced the same temporal pattern of productivity growth rates, an unusual postwar increase and a slowdown during the 1970's.

   Third, and most important, differences in short-run productivity growth rates are not indicia of economic decline because of the phenomenon of international convergence. When one nation's productivity is superior to that of other nations, those nations that are not too far behind can catch up as they learn from the leader through the transfer of technology, and so performance levels will converge. The laggard countries have more to learn from the leader than the leader does from them, and consequently, "those who were initially behind must advance more rapidly than those who were ahead. Otherwise, the distance between them could not possibly narrow."(7) Baumol, Blackman, and Wolff exhaustively detail the body of evidence supporting the international convergence conjecture.

   More recent works, including an update of productivity measures through 1990 by Baumol and Wolff and a study of productivity in the service sector by McKinsey and Company, reinforce the critical assessment of the significance of comparisons across productivity growth rates in the Baumol, Blackman, and Wolff study and indicate that absolute U.S. productivity has continued to exceed that of Germany and Japan.(8) Baumol and Wolff's latest data on manufacturing performance indicate that the rate of productivity growth in Germany has, in fact, been lower than that of the United States for over a decade (a decline predating the economic difficulties brought on by reunification). The data also indicate that Japan's productivity growth rate has slowed down considerably in recent years and is now not much greater than that of the United States, while the Japanese level of productivity is still far lower than the U.S. level.

   The McKinsey study reviews other studies' findings of superior U.S. productivity in the manufacturing sector and then presents five case...