Corporate Governance and Capital Flows in a Global Economy.

Author:Ostas, Daniel T.
Position:Book Review

Corporate Governance and Capital Flows in a Global Economy, edited by Peter K. Cornelius and Bruce Kogut. New York: Oxford University Press. 2003. Paper, ISBN 0195161718, $32.50. 506 pages.

This work, edited by Peter K. Cornelius (World Economic Forum) and Bruce Kogut (Wharton School), collects and presents twenty-four essays on the topic of corporate governance. The contributing authors are quite diverse. About half come from academia: nine from business schools, three from law, and four from economics. The remaining contributors hail from both government and the private sector, offering expertise in consulting, banking, and regulatory affairs. About half of the thirty-six authors work and reside in Europe or Asia.

The contributions are organized and presented in three parts. Part 1, entitled "Current and Emerging Challenges," outlines the governance issues brought to light by Enron and the recent wave of corporate scandals. Part 2 then examines the effects that alternative corporate governance institutions have on international capital flows. Part 3, entitled "Investors' and Practitioners' Perspectives," begins with insights into the governance risks faced by minority shareholders, reflects on recent Chinese, Russian, and Polish governance reforms, and concludes with three essays addressing the ethical issues surrounding governance practices.

Notwithstanding the diversity of authors and subtopics, the book holds together as a coherent whole. The central theme is that a loss in confidence in the fairness and justice of corporate governance practices can lead to huge financial losses and dramatic reallocations of capital flows. Reallocations away from developing countries can be particularly harmful as these countries need foreign direct investment and international monetary support to spur growth. Reallocations can also harm developed economies. The editors note that the recent wave of governance scandals contributed to a $1.5 trillion decline in the New York Stock Exchange (NYSE). In fact, between October 31, 2001, and October 31, 2002, the NYSE declined 13 percent, the NASDAQ composite dropped 21 percent, and the S&P 500 lost 16 percent of its market capitalization. These losses were directly related to a loss of investor confidence brought on by governance scandals. A similar loss of confidence in 1997-1998 occurred in Southeast Asia, with market capitalization losses of $600 billion directly related to governance scandals involving...

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