Corporate governance in a global environment: the search for the best of all worlds(*).

• Author: Fort, Timothy L.

ABSTRACT

This Article reflects on the various visions of corporate governance. Initially, the Article reviews the contractarian and communitarian theories of the corporation. The communitarian theory views the corporation as a separate entity, with social responsibilities not only to the shareholders but to the firm's other stakeholders and society at large. On the other hand, the contractarian approach considers the firm's shareholders as the primary constituency to whom management is accountable. Voluntary contracting and market forces align the interests of management and shareholders.

The Article next analyzes salient features of corporate governance in the United States, Japan, and Germany. The United States provides an example of a country heavily rooted in a contractarian, shareholder-primacy approach, whereas Japan and Germany traditionally have appeared to be more aligned with communitarian ideals. Recent events suggest that these traditional distinctions are changing, with the resulting entities suggesting a convergence between the two models.

The Authors propose a model that examines business as a mediating institution--that is, as corporate communities that compete in a marketplace as well as support the moral dispositions of their employees and shareholders. The result of this model is an entity that provides the freedom and flexibility of a contractarian model while also being attentive to communitarian sentiments.

The point is that capitalism, albeit on another level and not in such trivial forms, is struggling with the same problems/as communism].... [I]t is well-known, for instance, that enormous private multinational corporations are curiously like socialist states; with industrialization, centralization, specialization, monopolization, and finally with automation and computerization, the elements of depersonalization and the loss of meaning in work become more and more profound everywhere.... IBM certainly works better than the Skoda plant, but that doesn't alter the fact that both companies have long since lost their human dimension and have turned man into a little cog in their machinery, utterly separated from what, and for whom, that machinery is working, and what the impact of its product is on the world.(1) Capitalism has an enviable record of creating wealth, opportunity, and technological advances. No other economic system in human history has produced an equivalent standard of living. Yet apart from the important issues that environmentalists have raised and that the passion of protests in Seattle(2) and Davos(3) has shown, there is an unease associated with capitalism, an unease captured by Vaclev Havel, the President of the Czech Republic, in the opening quote. On the one hand, to compare the dreariness of an Eastern European plant with the clean efficiency of a U.S. technology firm, even one as large as IBM, is absurd. On the other hand, Havel expresses unease about human beings losing a sense of their personhood in the midst of a centralized, controlling, corporate megastructure. Although people in free market capitalism undoubtedly have vastly superior freedom to choose what companies they work for, the logic of efficiency and bureaucracy requires them to adopt roles that can change persons into cogs.

This problem has not gone unnoticed. Indeed, it is a central concern of "communitarianism." Communitarians worry that human beings lose a sense of their social identity in free market economics, a free market where a contractarian approach to business relationships dominates.(4) As a result, a substantial portion of the twentieth century featured debates among American corporate theorists as to whether a corporation should be considered a natural entity with responsibilities for its stakeholders or a web resulting from a nexus of contracts among self-interested individuals who measure the success of the firm through profitability.(5) In addition, the meaning of the purpose of the firm is a question raised in comparative literature, where Japan and Germany are seen as emblematic of countries with communitarian corporate governance structures, in contrast to the United States and the United Kingdom, which feature contractarian models.(6)

This Article explores the divide between communitarian and contractarian corporate governance structures by comparing the governance structures of the United States, Japan, and Germany. Section I briefly reviews the communitarian and contractarian schools of thought. Section II provides the comparative foundation, analyzing salient features of corporate governance in the United States, Japan, and Germany. With this background, Section III then attempts to address the problem Havel raised by engaging in a thought experiment about what a blended model, a model combining features of contractarianism and communitarianism, might look like. The proposed model is one that considers businesses as mediating institutions--that is, as corporate communities that compete in the marketplace as well as support the moral dispositions of their employees and shareholders. Section IV contains concluding remarks.

1. CORPORATE GOVERNANCE: EFFICIENCY AND EQUITY

   Corporate governance can be described as the top management process that manages and mediates value creation for, and value transference among, various corporate claimants in a context that ensures accountability to these claimants.(7) This definition of corporate governance emphasizes the roles of both claimants and accountability. Claimants include shareholders, employees, customers, creditors, suppliers, competitors, and even society at large. Including accountability in the definition of governance reflects the principle that good governance is a two-way street. Just as the corporation is responsible to its stakeholders for governance, governance practices determine how the stakeholders monitor and control the firm. At the heart of good governance, therefore, are methods for dealing with both efficiency and equity.

   The corporate governance models that the United States, Japan, and Germany follow reflect two dichotomous schools of thought regarding the roles and purposes of the corporation in modern society. At one extreme are contractarians, who view the corporation as a nexus of contracts whose sole purpose is to serve the shareholders. At the other extreme are communitarians, who consider the corporation a separate legal entity with responsibilities not only to shareholders, but also to other stakeholders and to society at large. The United States provides an example of a country heavily rooted in a contractarian, shareholder-primacy approach, whereas Japan and Germany traditionally have appeared to be more aligned with communitarian ideals. Upon closer examination, however, shifts in the corporate governance systems of Japan and Germany suggest a trend in these largely communitarian-based countries toward a more shareholder-based approach. At the same time, commentators have recommended that the United States consider the virtues of systems that "encourage, if not command, corporations to take into account the interests of workers and other nonshareholder constituencies when making strategic decisions."(8)

   1. Communitarianism

      The communitarian theory views the corporation as a separate entity, independently capable of doing harm and good.(9) As such, the corporation has social responsibilities not only to shareholders but also to the firm's other stakeholders and to society at large. Under this paradigm, non-shareholder constituencies receive legislative protections. However, difficulty arises when these separate interests begin to conflict, as it becomes difficult, if not impossible, for management to consider the needs of every possible stakeholder, and no clear delineation exists in the social, political, or economic realm to help management make choices.

      One of the most positive features of a more communitarian paradigm is lifetime employment, which gives employees a greater incentive to develop and supply firm-specific human capital and encourages stronger employee loyalty. It may facilitate team efforts, and lifetime employees may be more willing to make concessions in times of financial distress.

      The more concentrated, relatively permanent ownership structure of corporations in communitarian regimes such as Japan and Germany offers additional advantages. Large shareholder involvement means shareholders can intervene quickly when a crisis hits. Block ownership facilitates a great deal of mutual monitoring and could lower the cost of equity capital. Under a communitarian regime, banks may facilitate the governance process because they have a great deal of access to inside information, can lower the cost of debt, and resolve financial distress much more informally than in a contractarian regime.

      Communitarian systems, however, are not without costs. The most serious long-term competitive issue for communitarian countries such as Japan and Germany may be the bias in their systems against start-ups, research and development, and human-capital-intensive industries.(10) The average age of a listed firm in the United States is fourteen years for the NYSE and thirteen for NASDAQ.(11) For the German stock exchange, the average age is about fifty-five years.(12) In the United States, 40% of the companies listed on the stock exchange are less than ten years old; in Japan this figure is 0.7%.(13) The OECD has concluded that compared to the United States, both Japan and Germany have a comparative disadvantage in the high-technology sectors.(14) For example, neither Japan nor Germany has a true U.S.-style venture capital industry.(15)

      The bank-centered nature of businesses in communitarian regimes has related consequences. Banks have a bias against risk that manifests itself in a bias against start-ups.(16) Banks focus on assets that can be collateralized, creating a bias against intangible...