Co-Evolution of Politics and Corporate Governance

According to Mark Roe, politics influences corporate governance. The separation between control and ownership is only possible when there is a low “degree of social democracy”. By contrast, systems, characterised by strong employees’ rights, are necessarily balanced by strong and concentrated owners. However, causation may also run in the opposite direction: from strong concentrated ownership to strong employees’ protection. We argue that this form of two-ways cumulative causation may imply the existence of multiple co- evolution paths of Politics, Technology and Corporate Governance. We focus on two stylized alternative co-evolution paths. In the first, the representation of both owners and employees is divided among many agents (“dispersed equilibrium”), while, in the second, their interests are expressed by few concentrated agents (“concentrated equilibrium”). We argue that there is both theoretical and empirical support for the thesis that the direction of causation from politics to corporate governance form is more relevant in a “dispersed equilibrium” while the direction of causation from corporate governance to politics is more relevant in a “concentrated equilibrium”. The paper is structured in three sections. In the first section, we consider the theoretical arguments for which we expect politics to have an important anticipatory role in a “dispersed equilibrium” and a less relevant reactive role in a “concentrated equilibrium”, and we consider some stylized facts concerning American and European Histories that seem to support this view. In the second section, we provide cross-country and dynamic-panel econometric evidence, which is consistent with the arguments developed in the first section. Finally, we argue that each system may have a comparative institutional advantage in particular types of technologies and in certain productive sectors and that, in turn, this specialization may stabilize the related economic and political arrangements. We conclude considering some effects of globalization on the two systems and, in particular, the consequences of the reinforcement of international IPR protection.