Shifting Influences on Corporate Governance: Capital Market Completeness and Policy Channeling


Publish Date:
October 5, 2020
Working Paper
  • Ronald J. Gilson & Curtis J. Milhaupt, Shifting Influences on Corporate Governance: Capital Market Completeness and Policy Channeling, October 5, 2020 (a European Corporate Governance Institute - Law Working Paper).
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Corporate governance scholarship is typically portrayed as driven by single factor models, for example, shareholder value maximization, director primacy or team production. These governance models are Copernican; one factor is or should be the center of the corporate governance solar system. In this essay, we argue that, as with binary stars, the shape of the governance system is at any time the result of the interaction of two central influences, which we refer to as capital market completeness and policy channeling. In contrast to single factor models, which reflect a stable normative statement of what should drive corporate governance, in our account the relation between these two governance influences is dynamic.

Motivated by Albert Hirschman’s Shifting Involvements, we posit that all corporate governance systems undergo repeated shifts in the relative weights of the two influences on the system. Capital market completeness determines the corporate ownership structure and privileges shareholder governance and value maximization by increasing the capacity to slice risk, return, and control into different equity instruments. The capability to specify shareholder control rights makes the capital market more complete, tailoring the character of influence associated with holding particular equity securities and its reciprocal, the exposure of management to capital market oversight. Policy channeling, the real government’s instrumental use of the corporation for distributional or social ends, pushes the corporate governance gravitational center toward purposes other than maximizing shareholder value.

We show that this pattern is not limited to a particular country, and illustrate our argument by tracing the cyclical reframing of Berle and Means’ thesis in the U.S., Japan’s sluggish shift from policy channeling in its postwar heyday toward capital market completeness under the Abenomics reforms, and the distinctive case of China, where capital market completeness has itself been used as a policy channeling instrument under the pervasive influence of the Chinese Communist Party, creating the world’s most stakeholder-oriented system of corporate governance.

We close by examining the means through which the current shift toward policy channeling in U.S. and U.K. corporate governance is taking place – the “stewardship” movement and the debate over “corporate purpose.” We view both as a reaction to the reduced managerial discretion caused by the reconcentration of ownership in the hands of institutional investors, and analyze factors suggesting that this reform movement, like others before it, is likely destined to result in a disappointment-driven shift in the opposite direction, what we label a shifting influence.