A dynamic tension has emerged in the field of corporate governance. Markets for capital, products, and managerial talent are expanding rapidly across national borders, yet domestic laws and practices have never had greater impact on corporate structures and cross-border transactions. This dynamic tension between global markets and domestic institutions fuels the debate on corporate governance reform now raging in virtually every region in the world. And this tension was the subject of a year-long, multi-author comparative corporate governance project I directed at Columbia Law School. The resulting volume will be published by Columbia University Press in 2003 as Global Markets, Domestic Institutions: Corporate Law and Governance in a New Era of Cross-Border Deals.
In this column, I would like to share two major insights emerging from that study. First, "globalization" and "global markets" are misleading terms, because they mask the local nature of much of the corporate activity occurring within these rubrics. Many of the contributors to my project, discussing systems as diverse as Italy, Korea, and Eastern Europe, suggest the enormous complexity of meaningful corporate governance reform-complexities linked to the deep roots of corporate activity in domestic political economies. Paradoxically, global markets have enhanced the importance of "getting the institutions right" at the domestic level.
What does "getting the institutions right" mean in the corporate governance context? While the precise importance of corporate law to corporate governance is hotly debated in the literature, the role of the courts seems undisputable. Many scholars in the Columbia project and numerous individuals whom I have interviewed over the past several years in East Asia (including in highly developed Japan) lament the lack of training, experience or even interest in corporate finance and governance among judges in their home countries. This situation is simultaneously cause for alarm and a bit of optimism. On one hand, courts will never contribute meaningfully to good corporate governance if judges remain ignorant of such basics as the valuation of assets and enterprises, a concept central to the sound resolution of virtually every dispute between corporate insiders and minority shareholders. On the bright side, quantifying (and maximizing) the value of the corporate enterprise is a concept that transcends national and cultural boundaries. If judges can be taught to detect self-dealing and other forms of expropriation, and to import universally accepted notions of financial valuation into their decisions, one important corporate governance tool-judicial review-would be enhanced. The prospect of judicial improvements along these lines does not seem farfetched, and I hope to develop a training program at Columbia Law School for judges in transitional economies to address this problem concretely.
The second major insight emerging from the project relates to the uncertain nature of corporate law development. We still have only a fragmentary knowledge of the conditions under which a given country's corporate and securities laws, often borrowed piecemeal from other systems over a period of decades or even centuries, come to engage productively with other economic and legal institutions. An apt example can be drawn from fiduciary duties, the very core of U.S. corporate law. The fiduciary duty of loyalty is a vague standard that essentially prevents "selfish" conduct by corporate managers. This duty ranges over vast areas of U.S. corporate law, and has played a major role in the ongoing evolution of corporate law development in that country, as judges use this residual concept to cover new factual situations that no one has foreseen. It also bears noting that even in the United States, commentators disagree about the wisdom of using fiduciary duty as the central organizing principle of corporate governance. And the duty of loyalty was plainly not so highly internalized by U.S. corporate boards as to prevent the Enron and WorldCom debacles.
The three major economies of East Asia-Japan, Korea, and Taiwan-have all transplanted the U.S. fiduciary duty of loyalty into their commercial codes in an attempt to improve corporate governance. Japan did so under U.S. military occupation in 1950, Korea did so at the height of the Asian financial crisis. Taiwan transplanted the duty of loyalty just last year, after a wave of domestic corporate and securities scandals shattered the illusion that Taiwan was immune from the problems that engulfed the region during the financial crisis. Yet thus far, only the courts of Japan have applied this principle to address various forms of "stealing" by corporate directors. And even in Japan, it took almost forty years for the courts to begin actively applying the duty of loyalty to address new and previously uncategorized factual situations. (The reasons for this can be traced in part to the predilection of Japanese and other civil law judges to apply specific provisions of the code-such as those in the Commercial Code regulating director conflicts of interest-in favor of broad legal standards.) In all three systems, active enforcement of the principle is hindered by host of obstacles, including sluggish court systems, lack of civil discovery mechanisms to produce information necessary to prove a case, high courts costs, and the absence of attorney incentives to locate worthy plaintiffs and file suit.
Legal transplants of the type just discussed are the major way that law develops everywhere. Yet a famous assertion in the legal literature that "transplanting legal rules is socially easy" rests on several major assumptions. First, legal transplants may operate differently in the host than in the home country without great difficulty. Second, law often has little impact on individual conduct. Third, that creating law for a particular society is often far less important than having a set of rules in place. These assumptions may hold in some countries, for certain types of legal transplants, some of the time. But they do not appear to hold for corporate law in a new era of cross-border deals. As the experience of Japan, Korea and Taiwan with the duty of loyalty indicates, enacting "high quality" legal rules is indeed relatively simple. But making them work, and understanding their true significance for corporate organization and behavior, are tasks big enough to occupy many good minds for a long time.
The dynamic tension in corporate governance is not primarily a horse race between different varieties of capitalism. It is, above all, an opportunity for every country to re-evaluate the strength and flexibility of its economic institutions.
November 29,2002
