Principal Investigator: Simon Deakin
Visiting Fellow: Prabirjit Sarkar
Research Associates: John Armour (Oxford), John Buchanan (CBR), Catherine Barnard (Faculty of Law, Cambridge), Nina Cankar (University of Ljubljana), Jodie Kirshner (Faculty of Law, Cambridge), Sue Konzelman (Birkbeck College, London), Viviana Mollica (Queen Mary, University of London), John Paterson (University of Aberdeen), Stephen Pratten (King's College, London), Mathias Siems (UEA), Simon Turner (London School of Hygiene and Tropical Medicine), Frank Wilkinson (CBR)
Project dates: 2005-10
Funding: European Union Sixth Research and Development Framework Programme

Update on progress: November 2010

Aims and Objectives

This five-year Integrated Project funded by the EU's Sixth Research and Development Framework Programme ('FP6') was completed in the spring of 2010. The CBR organised the Corporate Governance subnetwork of REFGOV, as part of which it coordinated the work of research groups in Belgium, France, Hungary, Italy, Portugal and the UK. The CBR also contributed to the Fundamental Rights subnetwork of REFGOV.

The aim of the corporate governance subnetwork within REFGOV was to carry out a programme of empirical research on corporate governance that was comparative in scope, broadly interdisciplinary, and informed by developments in reflexive theories of learning and evolution. The empirical work included legal studies of the development of norms and standards in the corporate governance field at global, European, national and sectoral level; econometric analysis of the impact of corporate governance norms on financial development and managerial practice; and case studies of the operation of corporate governance standards at sector and enterprise level.

Results: Corporate Governance Subnetwork

The starting point for the REFGOV research on corporate governance was a conception of reflexive governance as a set of mechanisms for dealing with coordination failures, in the name of the public interest, in ways which go beyond hierarchical or 'command-and-control' techniques of regulation. The corporate enterprise provides a useful context in which to study reflexive governance, given the coexistence, in this field, of different forms of regulation (legislation, case-law, codes, disclosure regimes, and accounting standards). There has also been a conscious mixing of what might be called 'regulatory' and 'incentive-based approaches'. A good example of this is the 'comply or explain' principle which underlies the corporate governance codes which first emerged in the 1990s.

One of the concrete themes examined concerns the growing influence of the so-called 'shareholder value norm' in policy and practice. A first empirical finding, based on a comprehensive mapping of developments in company legislation and corporate governance codes in a wide range of countries in the EU and overseas, is that corporate governance standards based on the shareholder value approach, in particular norms relating to independent boards and minority shareholder protection in takeover bids, were very widely adopted in many countries during the course of the 1990s and 2000s. The shareholder value model originated in common law/liberal market systems, such as the UK, and then spread to civil law/coordinated market regimes. It was widely diffused in developing and transition countries. However, the empirical work has also established that this convergence on the shareholder value approach has taken place largely at the level of formal laws, and has had a more limited impact on the practice of governance at market or firm level. Thus econometric analysis has shown that formal strengthening of shareholder rights has not, on the whole, been correlated with financial development, in the sense of producing an increase, for example, in stock market capitalization or private credit relative to GDP. These findings call into question some of the core predictions of mainstream corporate governance theory as well as the expectations of policy-makers in this field. Case studies of regulatory change have provided possible explanations for the non-effect of legal reforms, by highlighting the role of path dependencies at national level. Case studies of the Hungarian and Slovenian corporate governance codes have stressed the importance of local path-dependent factors, arising from the transition process, in limiting the degree of convergence with Anglo-American practice. A case study of the operation of the Belgian corporate governance code illustrates the lack of fit between norms designed for the liquid capital markets and dispersed ownership which characterize British and American practice, and the concentrated ownership structures of most Belgian listed companies.

Sectoral and firm-level case studies show how, in a number of contexts, the influence of the shareholder-value norm has been mediated by institutional and organisational practices which reflect a stakeholder-orientated or communitarian logic. Econometric analysis of the relationship between corporate governance forms and HRM practices at workplace level in Britain and France identified growing financial pressures on firms in both countries, but also evidence of 'negotiated shareholder value' or rent-sharing between workers and shareholders, in particular in the French case. The use of contractual devices for risk-sharing and deliberation between stakeholders was highlighted by a study of the construction of the Heathrow Terminal 5 building. This work suggested that, even in the context of the strongly shareholder-orientated UK system, utility regulation and contractual governance could play a role in lengthening time horizons, thereby mitigating short-term financial pressures, and embedding a learning-based approach to problem solving. A study of hedge fund activism demonstrated the limits of the shareholder value approach in continental Europe and Japan, against the background of a communitarian ethic within firms and a relational approach to investment practice from institutional shareholders. The analysis of network relations in the wine producing sector stressed the endogeneity of practices with regard to local conditions, which led to different forms of network relations emerging across the different countries studied, but also within them, as different regions exhibited divergent tendencies. This work also shows that transnational norms governing SMEs and network forms may play a role in removing barriers to the emergence of effective forms of inter-firm contracting.

A further goal of the work of the corporate governance subnetwork has been to integrate empirical research within the broader theoretical framework of reflexive law theory. In particular, reflexive insights were applied to analysis of the recent financial crisis. The perverse effects of bonus regimes and executive payment systems, and the ineffectiveness of internal audit mechanisms and external shareholder monitoring, highlight the limited effectiveness of incentive systems based on new-institutionalist approaches to governance.

Another of the concrete themes explored by the subnetwork relates to corporate social responsibility ('CSR'). Because corporate reputation has an economic value, firms are incentivised to respond to demands from shareholder activists and the wider public to minimize the harms they displace on to third parties. However, our empirical research suggests that CSR often misses its targets. Investors with a 'socially responsible' agenda are deterred from seeing it through, because these activities involve high costs to them, whereas the benefits flow to other investors, or to 'society' generally. From a reflexive point of view, what is missing is the kind of learning process which would embed CSR in organisational practices.

Results: Fundamental Rights Subnetwork

The CBR organised a Work Package within the Fundamental Rights subnetwork with three aims: to identify the existing forms of new modes of reflexive governance in the area of fundamental social rights; to locate their strengths and weaknesses; and to explore ways through which a more developed open method of coordinating member states' policies could produce beneficial effects, or what risks it could entail. The research has focused on the implications for reflexive governance and social rights of the decisions of the European Court of Justice in Viking and Laval, and in subsequent case law interpreting Laval (Rüffert and Luxembourg). At the workshop held in Cambridge in September 2008 these decisions were explored in detail with a group consisting of academics, legal practitioners, senior judicial officials, and employee representatives (employer representatives were invited but were unable to attend). A number of hypotheses concerning the impact of the Court's case law on the balance between social rights and freedom of movement and regulatory competition were presented. An American perspective stressed a limited interpretation of Laval, seeing it as giving expression to a compromise between the position of high?cost and low?cost member states which was implicit in the Posted Workers' Directive, and noting the sense in which that Directive could be seen as offering a resolution to the issue of how to coordinate the different approaches of the member states to conflicts of laws in the social policy field. The impact of Viking and Laval on the practical operation of the right to strike in member states was discussed, with particular reference to case law arising in the British context. Other contributions focused on the relationship between economic and social rights after Laval; the implications for the UK law on the posting of workers; the likely impact on UK industrial relations and trade unions; the impact on German industrial relations; and the implications for low pay and labour migration. After the workshop the main presentations were published in the Cambridge Yearbook of European Legal Studies and further work was carried out on a comparative analysis of federalism and pre?emption rules in the US and European contexts.

The research from this Work Package shows that, in the current state of the law and practice, social rights (at both national and Community level) are not an effective counterweight to pressures for market integration, and are not playing an effective role in channelling regulatory competition. The Court's expansionary approach to free movement jurisprudence, coupled with its pre?emptive reading of social policy directives, threatens to undermine member state autonomy and diversity in the labour law field, putting into question the conditions for effective regulatory learning.