Commonalities and Prescriptions in the Vertical Dimension of Global Corporate Governance

Discussions of comparative corporate governance have renewed the old question of corporate social responsibility, for whose benefit is the corporation to be operated? It is customary to think that US and UK law require that corporations be operated primarily for the benefit of shareholders. It is equally customary to think that German and other continental European law require that corporations be operated for the common good?shareholders, workers, creditors, communities and so on. At a general and abstract level both these customary ways of thinking are correct. But the truth of these general statements does not altogether hold up at the level of particular application. The variety of practices within particular countries and across national borders and the range of interests implicated and protected in different ways in both contexts render it difficult to describe national models except at a fairly high level of generality. Generalized descriptions can of course be very useful, but it is also useful when it is possible to conceive of mechanisms that enable more specific comparisons that transcend borders, whether international or intra-national. To do so requires a framework to distinguish types of governance mechanisms corporations use. Corporate governance mechanisms can be divided into three categories, two internal and one external. Internal governance mechanisms that address the relationship between those in control of the corporation on the one hand and all other constituents on the other (including shareholders, workers, lenders and communities) can be called vertical. Internal governance mechanisms that regulate directly the relationship between these various constituencies inter se can be called horizontal. External governance mechanisms are those rules and regulations imposed upon the corporate entity to address concerns beyond the penumbra of interests the corporation impacts directly, and include rules about competition and antitrust, national trade and security and so on. External and horizontal governance mechanisms tend to pose the most striking and specific distinguishing features of comparative corporate governance, while vertical governance mechanisms tend to be more universal and general. All these mechanisms are undergoing change and convergence around the world. Yet sufficient differences remain to enable presentation of generalized pictures of comparative corporate governance. This piece starts off with such pictures, describing in Part I a typical way of thinking about comparative corporate governance. It is a statement of the main characteristics of dominant models of corporate governance and finance: the market model (chiefly US and UK), the European bank model (chiefly Germany and France), and (more briefly) the Japanese bank model. These characteristics are increasingly blurring, however, and many differences have been overdrawn, as the descriptive and theoretical evidence presented in Part II suggests. Governance mechanisms from these models are converging or have been overlapping and market, structural and regulatory forces have contributed to these phenomena. A key insight is that problems of vertical corporate governance?the relation between those in control and others?and the mechanisms to address them transcend much of the underlying differences posed or created by the differing external and horizontal mechanisms of corporate governance. That insight suggests that there is reason to worry around the world as much or more about vertical corporate governance mechanisms than external or horizontal ones. Accordingly, Part III moves to a prescriptive identification and evaluation of key vertical governance issues of importance across borders. These include some of the central topics of corporate governance generally and ones most likely to pose increasing difficulties as globalization proceeds (executive selection and compensation; acquisition policies; and capital allocation and dividend policy) with an emphasis on the role boards of directors must and can play in addressing them. Among the chief mechanisms available to enhance such board action are rules governing or affecting director liability, constituency voice and unimpaired markets. The thesis, in short, is that signposts on the road to global corporate governance must mark such vertical governance issues and the pavement must be laid with such sensible vertical mechanisms to address the common problems facing corporate constituencies worldwide.