Voluntary Firm Practices on Paths to Regulation

Corporate Governance or Corporate Governments? Voluntary Firm Practices on Paths to Regulation

Dennis Bogusz

Submitted in partial fulfillment of the requirements for the degree of Doctor of Philosophy in the Graduate School of Arts and Sciences

COLUMBIA UNIVERSITY

2011

ABSTRACT

Corporate Governance or Corporate Governments? Voluntary Firm Practices on Paths to Regulation

Dennis Bogusz

Recent economic turmoil has ignited fresh debate on regulation of economic activity. Global markets are rife with asymmetries in both informal and formal rules, but previous research has not provided accounts of regulation that bridge these asymmetries. This dissertation redresses that deficiency by analyzing the conditions that explain a regulatory paradox: how voluntary firm practice contributes to formal regulation.

Regulation is considered having legal, political, and economic characteristics, but it is also an inherently social process. The recommendation, adoption, and spread of both firm practices and regulations entail a reflexive and dynamic relationship between organizations and their environments.

The locus of inquiry is corporate governance practices since the 1990s in ten countries with advanced capital markets. Regulatory change in these countries is indeed partially rooted in the prevalence of voluntary disclosures prior to regulation in over 1500 listed companies, in conjunction with additional key factors.

These conditions include other firm behavior, namely corporate governance scandals and cross-listings in a network of global stock exchanges. Historical capital market development and the political makeup of legislatures in their home countries of incorporation are additional, country-level, conditions to regulation.

Further, earlier regulation in some jurisdictions directly impacts the later regulation of the same governance practices in other jurisdictions.

The paths to regulation, though causal, are not uniform across cases.

Countries that are divergent in other accounts of national patterns of corporate governance actually converge along the paths to regulation I discuss. Divergence of countries persists, however, in governance arrangements that follow alternative paths to regulation or remain unregulated entirely. This analysis of comparative regulatory processes avoids both under-socialized accounts of individual firms and over-socialized accounts of countries. Its main contribution is an account of how business shapes regulation through both public and private ordering, implicating theories of regulation and comparative capitalism, as well as policy.

Contents

Chapter 1 Corporations Responsible for Regulation

1.1 The Regulatory Variety of Capitalism 1

1.2 Self-Regulation 7

1.3 From Self-Regulation to Formal Regulation 13

1.4 Corporate Governance as Locus for Regulatory Evolution 27

1.5 Outline of Chapters 36

Chapter 2 Research Design

2.1 Selection of Corporate Governance Practices 38

2.2 Temporal Period 43

2.3 Preliminary Country Selection 44

2.4 Firm Selection and Final Country Selection 48

2.5 Analysis of Regulatory Change in Countries 51

2.5.1 Outcome of Regulation 53

2.5.2 Causal Conditions 60

2.6 Conclusion 94

Chapter 3 Results of Qualitative Comparative Analysis

3.1 Introduction 95

3.2 Regulation of Specialized Board Committees 102

3.3 Regulation of Director Independence 106

3.4 Regulation of Auditor Independence 109

3.5 Summary of Causal Paths 111

Chapter 4 Paths to Regulation Expanded

4.1 Review of Paths to Regulation 114

4.1.1 Regulation of Specialized Board Committees 115

4.1.2 Regulation of Director Independence 123

4.1.3 Regulation of Auditor Independence 141

4.2 Discussion 146

Chapter 5 Conclusion

5.1 Summary of Findings 158

5.2 Significance and Implications 162

5.3 New Regulations, New Paths 168

References 170

Appendix A Coding of Firm Practices 186

Appendix B Coding of Legislatures 193

Appendix C Additional Corporate Governance Practices 228

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List of Tables

2.1 Corporate Governance Practices 42

2.2 Potential Advanced Economies for Analysis 45

2.3 Outcome: Regulations of Corporate Governance Practices 57-59

2.4 Stock Exchange Listing Rules 62-63

2.5 Corporate Governance Scandals 76-78

2.6 Corporate Governance Scandals in Ten Countries, 1989-2008 79

2.7 Companies by Home Country of Incorporation Cross-Listed in at Least One Other Country 86

2.8 Condition 8: Cumulative Regulation of Specialized Board Committees 91

3.1 Recapitulation of Causal Conditions and Outcome in QCA 96

3.2 Scores for Conditions and Regulations: Specialized Board Committees 103

3.3 Paths to Regulation of Specialized Board Committees 104

3.4 Scores for Conditions and Regulations: Director Independence 107

3.5 Paths to Regulation of Director Independence 107

3.6 Scores for Conditions and Regulations: Auditor Independence 109

3.7 Paths to Regulation of Auditor Independence 110

3.8 Select Paths to Regulation from Parsimonious and Intermediate Solutions 113

B.1 List of Legislative Chambers 193

B.2 Political Party Codes 194

B.3 Composition of Legislatures and Scores 195- 227

C.1 Scores for Conditions and Regulations: Executive Base Pay 228

C.2 Paths to Regulation of Executive Base Pay 229

C.3 Scores for Conditions and Regulations: Executive Shareholdings 239

C.4 Paths to Regulation of Executive Shareholdings 240

C.5 Scores for Conditions and Regulations: Executive Stock Options 241

C.6 Paths to Regulation of Executive Stock Options 242

C.7 Sufficiency/Necessity Matrix of Causal Conditions: Audit Fees 250

C.8 Sufficiency/Necessity Matrix of Causal Conditions: Non-Audit Fees 251

C.9 Scores for Conditions and Regulations: General Corporate Governance 252

C.10 Paths to Regulation of General Corporate Governance 253

List of Figures

2.1 Stock Market Metrics in OECD+10 Countries, 1989-2008 47 2.2 Final Ten Countries Ranked by Ascending Means of Shares Traded as % of GDP, 1989-2008 51

2.3 Voluntary Practice Prevalence and Fuzzy Set Scores 71 2.4 Scandal Frequencies and Fuzzy Set Scores 80-81

2.5 Left-Right Composition of Legislatures 84 2.6 Fuzzy Set Scores of Exchange Ties 87 2.7 Fuzzy Set Scores of Highly Developed Capital Markets 89

2.8 Cumulative Regulation of Specialized Board Committees 92 2.9 Cumulative Regulation of Director Independence 93 2.10 Cumulative Regulation of Auditor Independence 93

Acknowledgements

“More and more, as I think about history”, he pondered, “I am convinced that everything that is worth while in the world has been accomplished by the free, inquiring, critical spirit, and that the preservation of this spirit is more important than any social system whatsoever. But the men of ritual and the men of barbarism are capable of shutting up the men of science and of silencing them forever.” Sinclair Lewis It Can’t Happen Here

I am deeply grateful to my committee members David Stark, Bruce Kogut,

Josh Whitford, Katharina Pistor, and Shamus Khan. Their exemplary research has instilled qualities that I have tried to emulate. Other scholars at Columbia

University have also helped shape my research conduct, among them: Peter

Bearman, Heather Haveman, Debra Minkoff, Michael Sobel, and Diane Vaughan. All these individuals have contributed in their own ways to my development as a scholar. Where I cannot meet their excellence, I promise to consistently strive for improvement.

This project benefitted from generous support of the National Science

Foundation, the German Academic Exchange Service, and the French government. I acknowledge the Department of Sociology at Columbia University, the Max Planck

Institute for the Study of Societies, and the Centre de Sociologie des Organisations at

Sciences Po. Scholars and fellow students at these institutions provided helpful

vii

insights and recommendations over the course of my research. I thank especially

Clément Théry and Miriam Goldberg who sparked the idea that the shift from voluntary firm behavior to regulation would make a compelling research project.

Colleagues and friends provided immeasurably good advice and support during my time as a doctoral student, particularly Susan Andrews, Delia Baldassarri,

Liz Cullen, Aurora Fredriksen, Frédéric Godart, Jen Kondo, Elena Krumova, Anna

Mitschele, Olivia Nicol, Natacha Stevanovic, and Michelle Van Noy.

Brandon Kraft deserves a medal for the patience, advice and guidance this dissertation never required of him but that he gave freely.

The opportunity to teach students in the Department of Sociology and at the

School of International and Public Affairs at Columbia has been crucial in my doctoral training as well. Students are a constant reminder that research and teaching are two sides of the same coin. I hope to see the value of this currency appreciate over time.

viii

To my family and friends who provided the necessary and sufficient conditions to help me attain this degree.

ix 1

Chapter 1

Corporations Responsible for Regulation

1.1 The Regulatory Variety of Capitalism

Capitalism is anything but uniform in the organization of economic activity.

The rules of its game are as diverse as its players, providing ample empirical grist to the theoretical grind. Social scientists and legal scholars have been advancing research in comparative capitalism at an accelerating rate in the last decade, yet often in disparate theoretical traditions or without common methods for fruitful comparison. The substantive problem concerning formal rules of capitalism—the evolution of regulation—offers a timely motivation for redressing these deficiencies.

This study builds on a strong foundation for comparative regulatory research, joining disparate theories and advancing a comparative method, to explain a regulatory phenomenon that has been previously overlooked.

A key Polanyian tenet introduces a key perspective on comparative capitalism and its implication for comparing regulations. The organization of distinct market institutions requires that society “be shaped in such a manner as to allow that system to function according to its own laws” (Polanyi 1944: 57). These institutions act as both external and internal constraints on organizations. These earlier institutionalist accounts were skeptical of actor rationality, preferring the influence of external factors, such as culture and politics (Selznick 1969). Later 2 institutional accounts demonstrated that market actors conform to prevailing concepts so as to maximize legitimacy and access to resources, even at the expense of efficiency (Meyer & Rowan 1977). In the institutional isomorphic account particularly, organizations model their behavior on that of others in order to reduce uncertainty and increase legitimacy (Powell and DiMaggio 1991)1. The problem with institutional isomorphism is its lack of links between its variants whereas my inquiry directs attention to the shift from the mimetic, or normative, to the coercive.

Institutional isomorphism also suffers from operationalization problems, which ultimately confound the distinctions of each of its variants (Mizruchi 1999).

Efficiency-maximizing strategies notwithstanding, contemporary research further dispels the assumption that uncertainty needs to be reduced, when it can be deployed as an organization’s resource.

Neoinstitutionalists replaced the earlier institutionalist accounts of external constraints on organizational behavior with meso-level constraints such as internal organizational factors. Organizations are not constrained by culture alone but can use it to shape their strategies (Swidler 1986). They can also deploy symbolic interaction to entice others to act collectively in the design and reproduction of dominant arrangements (Fligstein 2001, Dobbin and Dowd 1997, Dobbin 1994).

Yet despite their attempt at meso-level analysis, neoinstitutionalists tend to either

1 Actors external to the firm initially pressure firms to adopt specific practices, which might then be instance of normative isomorphism. Firms subsequently imitating the early adopters of such practices would then be symptomatic of mimetic isomorphism. Regulatory response to market disturbances or other reasons would simply be instance of coercive isomorphism.

3 account for micro-level change or deduct macro-level change from historical, cultural analyses. Further, the direction of change is usually toward institutionalization, e.g., field creation, but rarely toward deinstitutionalization2.

Organizations could be considered institutional entrepreneurs acting as causal agents in institutional change (Campbell 2004). Moreover, organizations might act as institutions themselves. The question of causality also haunts institutionalism, ignoring specific mechanisms and events that drive institutional change or stability.

This problem of causality is one I resolve in this study’s evolutionary account of regulation.

Polanyi’s suggestion that regulation of economic behavior lie between the extremes of laissez-faire capitalism and reactionary policies of centrist states disenchanted with free markets inspired the Varieties of Capitalism (“VoC”) literature, an extension of institutionalism. VoC attributes coordination of the political economy to firms on a micro-level and, on a macro-level, to clusters of countries in dichotomous institutional typologies: Liberal Market Economies (LME) characterized by arms-length’ rules governing firm behavior and equity finance, and; Central Market Economies (CME) characterized by insider rules and debt finance (Hall & Soskice 2001). Accordingly, LME’s like the United Kingdom consider primarily the objectives of disperse shareholders whose chief interests are short- term returns on capital. CME’s like Germany, conversely, consider the interests of

2 One notable exception is Christine Oliver’s (1992) investigation of delegitimation of established organizational practices when exogenous factors compound legal and regulatory change. 4 parties with concentrated shareholdings, such as families, other large conglomerates, and of states and constituencies like employees and suppliers.

Intra-group comparisons have sprung from this institutional “logic.” Non-liberal economies like Japan and Germany have supposedly less trust in self-regulating markets than LME’s, and prefer instead collective institutions to support social and political objectives through the economy.

Theoretically and methodologically the VoC approach has been problematic.

One problem is a tendency toward structural functionalism that attributes institutional logic to national systems, potentially confounding typology with ideology (Kogut & Ragin 2006, O’Sullivan 2005, Höpner 2005). Accounts of institutional change require a more complex understanding of interdependence between organizations and polities. Institutions can become both exogenous constraints as well as enabling factors for future institutional change or innovation

(Aoki 2007, Thelen 2004).

Empirical examples serve to create ideal-types, which potentially misrepresents some countries and fails to identify those institutional elements that change within and across countries over time (Crouch 2005). Aguilera and Jackson

(2003) prefer to avoid the dichotomy of the LME/CME typologies in lieu of a continuum of various stakeholder factors. Their continuum underscores how countries like France are anomalies in the LME-CME dichotomy and might be so distinct by some factors so as to belong to no typology at all. VoC overlooks, also, the possibility that some countries may change category over time. 5

Further, VoC’s typologies of nations necessarily require the presence of greater inter-group variation than intra-group variation3. This requirement is acceptable for categorizing countries at precise temporal periods, but is problematic over time. A more historically contingent account of institutional change—or stability—requires specification of periodicity to institutional factors. If institutions are dynamic and their determinants of change are multiple, then institutional analysis requires an analysis of the mechanisms of change as much as the institution

(Elster 1989, Campbell 2002). A positive definition of institutions is one as mediations, which are “necessary for an actor to maintain a durable and sustainable substance” (Latour 1999: 307). This definition echoes original sociological positivism as the detection of law-like patterns in the development of social relations (Comte 1907).

The real variety in earlier VoC literature is almost exclusively within Europe, with the exception of Japan, or between the United States and all countries. This limitation assumes sufficient variation among cases at the exclusion of others that now have increasing economic importance such as Brazil, Russia, India and China, among others.

Not only has the variety in capitalism been limited geographically but also politically. Despite their similarities, democratic countries differ in ownership structure and capital market development (Roe 2003). Nor is contemporary

3 Country classification by welfare regimes (interactions among labor markets, households and states) has a parallel logic to the VoC for comparative research on social inequality and globalization (Esping-Andersen 1999, 1990). 6 capitalism limited to democratic regimes, as is evident among the world’s largest economies like China and Saudi Arabia or even Russia, depending on one’s definition of democracy. Comparative capitalism thus ought to consider variation both within and between political systems.

The VoC approach also lacks an analytical framework for understanding transnational economic behavior. The European Union, for example, regulates corporate governance on different scales, occasionally challenging national regulation. International standards and practices including the OECD Principles and stock exchange listing rules add an additional level to governance mechanisms.

Governments may even “loosen or modify domestic rules so that firms can comply with these transnational rules or institutions” (Deeg and Jackson 2007: 155).

This catalog of VoC problems should not outweigh its major contribution, however, which is to explain patterns of firm behavior across countries. These are not just about measures of performance or comparative economic advantage. They are also the patterns of behavior that originate and modify the rules of the capitalist game. One particular behavior, the change from informal rule into formal rule, is the object of this study. I therefore develop a theory in line with original Polanyian concepts by way of proposing this additional variety of capitalism—the regulatory variety—that emphasizes the role of regulation.

1.2 Self-Regulation

Polanyi argues that a self-regulating market “demands nothing less than the institutional separation of society into an economic and political sphere” (Polanyi

1944: 71). Firms join this institutional separation by self-regulating, creating a new form of governance in regulatory capitalism. As the term suggests, self-regulation implies firm-initiated constraints of firm behavior. Synonymous with soft law, self- regulation can achieve greater compliance with public objectives, such as environmental protection, but has limited effectiveness without pressure by formal regulatory bodies (Short and Toffel 2008, Kagan et al. 2003). Variants of self- regulation include enforced self-regulation whereby the state regulates rules crafted by firms, or co-regulation, which refers to a tripartite regulatory process of industry associations and individual firms crafting voluntary standards, which the state oversees (Ayres & Braithwaite 1992). Management-based regulation similarly leaves regulatory innovation and experimentation primarily within the ambit of firms when governments have limited resources or expertise (Coglianese and Lazer

2003).

Firms can opt in or out of private, self-regulatory institutions (Barnett & King

2008), a key characteristic that I borrow in my reference to voluntary practice. By

“voluntary,” I employ the legal sense of the term whereby firm behavior is not compulsory. Voluntary practices lie at one end of the self-regulation spectrum where monitoring and enforcement by firms is weak; at the other end lie practices monitored by self-regulatory bodies with enforcement powers (Coglianese et al. 8

2004). Short (2008) identifies significant growth over the past decade of voluntary programs among American companies along this spectrum. Schneiberg & Bartley

(2008) survey voluntary disclosures by firms concerning environmental sustainability, labor and human rights. Listed companies voluntarily complied with unregulated corporate governance codes, especially in the United Kingdom

(Aguilera and Cuervo-Cazurra 2004).

The advent of self-regulation was also part of larger globalization processes.

A global economy is especially abetted by deregulation policies, privatization, and the liberalization of trade and capital (Castells 2000). Globalization has been met, paradoxically, with an increase in regulation both of, and by, the state (Levi-Faur

2008, Vogel 1996). “New regulatory regimes are at least partly established through voluntary agreements, without recourse to strong monitoring and enforcement mechanisms and with apparent disregard for values of ‘national sovereignty’”

(Jordana & Levi-Faur 2004: 5). The globalization of business regulation comprises

“norms, standards, principles, and rules that govern commerce and the globalization of their enforcement” (Braithwaite & Drahos 2000: 10). In this way, government is increasingly coordinating functions of self-regulating parties within the economy

(Schepel 2005).

The advent of regulatory capitalism can also be considered the product of

American business culture that emerged during the Progressive era (1890-1913), advanced by the New Deal of the 1930s and culminated in the advancement of social rights in the 1960s. This culture has been rapidly expanding since then despite the 9 push of the neoliberal creed, and its hallmarks, privatization and deregulation, in the

1980s. Although by the 1990s the United States and the United Kingdom deregulated their economies formally, regulation multiplied through other actors.

This phenomenon arose even in countries with a long history of collective capitalism. For example, Japan, like several European countries, has recently given way to industry and trade associations to regulate more economic activity than the state and firm had previously. Developing countries, too, are quickly joining advanced economies in regulatory capitalism (Braithwaite 2008).

Self-regulation cannot be viewed without the backdrop of regulation as enforced by the state. Regulatory agencies, and other para-regulatory organizations, such as shareholder and business associations, impinge on firm behavior by exerting powerful influence in specific areas of firm control, akin to what Selznick refers to as private governments, a refashion of human resources to achieve specific outcomes in spite of predetermined legal rules (Selznick 1969).

This concept of private government is not entirely new, dating back to early 20th century notions of ordering. What is new, however, is the concept of ordering to areas of regulation through both legal and extra-legal norms, such as those described in enforced self-regulation, soft law and voluntary regulatory arrangements.

A traditional account of the origin of legal rules demonstrates that actors innovate laws deliberately to protect or promote their own interests in a new way.

Change in actor behavior determines change in interpretations of the law or in the 10 creation of new law to respond to new lines of behavior (Weber 1978). Changes in social structure, according to Weber, also precipitate changes in law. “More frequent, however, is the injection of a new content into social actions and rational associations as a result of individual invention and its subsequent spread through imitation and selection” (Weber 1978: 755).

For Luhmann, the law is inseparable from society. It is an operationally autonomous system within society continually evolving itself and society overall

(Luhmann 1989). Inspired by use of the term autopoeisis to describe closed networks of molecular production (Maturana and Varela 1980), Luhmann finds that legal systems similarly produce legal norms, which reproduce when they interact

(Luhmann 1985, Teubner 1987). Legal autopoiesis simply negates the primacy of law as a regulatory mechanism, and requires inspection of other social mechanisms in the production of norms. Systems of law are not an amalgam of actors and organizations, rather of legal acts; they are systems of communications capable of changing legal structures.

La Porta et al. (1997, 1998, 2000) advance the claim that the national origins of legal traditions are deterministic in increasing legal protection for investors, particularly company law and securities law on stock market development and firm ownership structure:

“The historical evidence suggests that civil law countries are more likely to address social problems through government ownership and mandates, whereas common law countries are more likely to do so through private contract and litigation. When common law countries regulate, we expect their regulation to support private contracting rather than dictate outcomes” (La Porta et al. 2008: 310). 11

La Porta et al. echo Roe’s argument (2006) that many such legal rules of investor protection are statutory, even in common law countries, where regulation derives from code rather than judicial review. According to this paradigm, common law systems are superior to other legal systems, especially civil law of French origin, and implies that developing countries with a common law transplant would achieve greater economic growth, especially in financial sector development.

Analytical flaws emerge in this account of law’s evolution. Different legal systems can plausibly innovate through experimentation and evolve according to different paths, some placing greater emphasis on shareholder rights than on creditor rights (Pistor et al. 2002). La Porta et al. may have correctly observed that common law countries have traditionally been more open to experimentation with law than civil code countries, namely with the problems associated with the separation of firm ownership and management. This observation does not eliminate, however, another problem with their legal origin theory. Some countries have hybrid legal systems, and not all legal systems’ control mechanisms are compatible. Political phenomena, namely party promises and citizens’ information about political decisions, are more deterministic than legal origin insofar as economic development is concerned (Keefer 2007). Legal origin theory neglects to account sufficiently for this hybridization. Further, the path to economic development has been paved by other legal artifacts, such as legislation in common law countries and judicial innovation in civil law countries, and by extra-legal 12 factors, such as historical path dependence of industrialization (Ahlering & Deakin

2007).

Within categories of legal origin, nuances emerge whereby some forms of law are coercive while others attribute rights and privileges. Law can regulate corporate actors in a constraining manner as well as create channels for the distribution of their power (Armour et al. 2009b, Galligan 2009).

“Regulation is not a precise term, and arguably all law regulates in some sense. If it is confined to more plainly goal-oriented law, law directed at achieving certain social goals, then it is useful in demonstrating a major part of modern law. For regulation then refers to law which seeks to control, re-direct, restrict, and even prohibit activities that are otherwise lawful and legitimate” (Galligan: 100- 101).

Law on the books, or formal law, and law in practice is conceptualized as the intersection of national legal systems characterized by a recursive cycle of lawmaking and global legal norms through key international organizations and standards bodies (Halliday and Carruthers 2007). There is a gap, however, between law on the books and law in practice whereby extensive codes and shareholder protections are not enforced or are interpreted in ways to alter their original meaning (Gourevitch & Shinn 2005).

Polanyi’s separation of institutions into economic and political spheres is parallel to law’s separation of law on the books and law in practice. Self-regulation bridges these parallel separations. Political and institutional factors generally account for growth in regulation, but the role of organizations in the genesis of formal regulation has been largely absent. 13

1.3 From Self-Regulation to Formal Regulation

Joining disparate theoretical traditions, I propose that self-regulation is not only a new variety of capitalism, but also a new form of governance.

Institutionalism accounts for change based on organizational constraints in much the same way that self-regulation accounts for extra-regulatory behavior, given legal or formal constraints.

Political scientists and economic sociologists agree that rules matter but disagree on their origin (Gourevitch 2007). The aforementioned VoC perspective has contributed to a related debate on convergence toward liberal market, or Anglo-

American-style, capitalism (Streeck and Yamamura 2003). Both inter-country and intra-country comparisons provide a context in which to measure specific institutional changes, such as in regulation of voluntary firm practices, the crux of debates pertaining to VoC being corporate governance (Jackson 2003). A more important consequence than convergence or divergence is to locate micro-level behavior into general theories of cross-national capitalist comparison (Hancké et al.

2007).

A similar debate in legal and regulatory literature explores whether law determined ex ante by rule or statute, or ex post by judicial interpretation of standards and norms. If companies can choose jurisdiction in which to incorporate and raise capital, for example, does the lack of ex ante rules lead to greater uncertainty, meaning more judicial interpretation of standards, a.k.a. legal indeterminacy, or a race to the bottom of regulatory standards? “Self-conscious 14 supranational efforts to coordinate the regulation of corporations across jurisdictions are another important source of both distributional and efficiency pressures on corporate law (…) Loosely speaking, those efforts take two different— and largely conflicting forms—harmonization and regulatory competition” (Armour et al. 2009a: 31). Market forces can counter firms’ regulatory arbitrage and prevent a “race to the bottom” of regulatory standards (Braithwaite and Drahos 2000).

Owing to economic integration, the supposed race has occasionally been upwards toward stricter standards across regulatory jurisdictions, leading to some convergence of regulation (Coglianese & Kagan 2007). By comparing corporate law in the United Kingdom and Germany to that in Delaware, Dammann (2009) actually finds an apparent absence of regulatory competition in Germany and the United

Kingdom, both of which rely more heavily on standards than Delaware4.

Despite the expansion of regulatory capitalism and its attendant multiplicity of non-state regulatory actors, there remains an unanswered question as to how regulation evolves. Moreover, what remains unexplained is the outcome that tension between informal and informal rules, or between the variants of regulation, can provide. Moran (2000) even argues that a retreat of self-regulation is underway. This poses an analytical problem. States have not retreated entirely from regulation yet only they have the legitimacy to create and enforce the most

4 Damman’s observations about the environment of American regulatory competition are not entirely comparable to that in Europe since companies can be incorporated as Societas Europea in any of the EU member states. Further, American companies registered in Delaware can still be subject to cross- jurisdictional regulation, depending on their industry and activities in states in which they operate beside Delaware. 15 formal of regulation: law. Non-state actors offer alternate forms and mechanisms of regulation. Although sociologists and anthropologists have long considered the origin of these informal rules, behavioral economists are only recently joining this debate (Piore 2010). Differentiation between informal and formal rules has largely been an exercise in descriptive classification. Conversely, debates about the origin and evolution of formal and informal rules—found in both institutionalist and legal literature—are analytically rich.

If regulation is a coordinative mechanism that interacts with other social forces to exert pressure to achieve an organization’s behavioral outcome (Kagan et al. 2003), it bears a strong resemblance to institutionalism. North (2005, 1990) famously distinguished between formal and informal types of rules:

“Institutions are composed of formal rules, informal constraints, and their enforcement characteristics. Formal rules are constitutions, laws, rules, and regulations; informal constraints are made up of conventions, norms of behavior, and self-imposed constraints on conduct. Enforcement is either first person (self- imposed), second person (retaliation), or third person (ranging from peer pressure to governmental enforcement)” (North 2005: 43).

The dispersion of state-based powers, especially that from law, toward other actors and norms challenges a hierarchical view of political, economic and social control (Scott 2004). Law, in this view, is no longer the ultimate form of regulation because other parties have broken up the state’s monopoly of such control. In light of pervasive market crisis and renewed concerns about economic governance, however, the first decade of the new millennium has brought back into question the 16 validity of neoliberal policies, especially deregulation and regulatory activity by non-state actors.

Recommendations by international organizations obtain legitimacy and authority by their member countries, whose national rules may be mutually reinforcing (Jacobsson and Sahlin-Andersson 2006). Standards also originate in international organizations, as well as in non-profit organizations or influential individuals like management guru, Peter Drucker. Voluntary adoption of standards is not, however, automatic. It requires conviction on behalf of the adopter, and perhaps more widely, of society, not just the initiator of the standard (Brunsson

2004). Nor are all standards created equal: they can arise under situations of both stability and of instability. A third-party is also necessary to mediate between the

“standardizer” and “standardizee” (Dumez 2004). This would imply that regulation includes more than dyadic relationships among market actors. The evaluation of firm behavior occurs both internally and externally. Monitoring processes by non- governmental organizations occurs either in the absence of extant rules or are coupled with formal rules to ensure compliance. It is the failures of such monitoring by way of scandals and crises that afford opportunities to observe regulatory change.

The debate about convergence and divergence in institutional complementarity previously discussed has a counterpart in the legal literature, but with less trivial implications. It both challenges the legal origin theory as well as provides comparative analyses of evolutionary legal systems. By the end of the 20th 17 century, corporate law across Europe and the United States remained largely divergent, but convergence was evident in functionally equivalent securities regulations, either through cross-listings on foreign exchanges or harmonization of governance standards (Coffee 1999). The mergers of exchanges across political borders could possibly accelerate this harmonization process. Divergence in shareholder protection laws and, to a lesser extent, creditor protection laws, was evident until the 1980s, followed by some convergence (Armour et al. 2009). The authors attribute transnational (e.g., European Union) standards and corporate governance codes as a more powerful influence in this two-way development than legal origin (Armour et al. 2009). “[T]he differences between common law and civil law systems are the result of complementarities between legal and economic institutions at the level of national systems” (Armour et al. 2009: 628). Even precise laws, regardless of their origin, require interpretation and are contingent upon social context. Regulatory laws specifically seek to change extant social relations and practices by placing constraints on behavior, potentially conflicting with social spheres.

I have identified several accounts that explain how distinct aspects of regulation evolve, but still necessary is an account of how self-regulation evolves into formal regulation. Population ecology, in the original sense, studies the interactions of organisms and their environments. Population, or organization, ecology in the social sciences similarly studies organizations, which meet specific objectives with public legitimacy and social support (Hannan & Freeman 1984, 18

Hannan & Carroll 1992). Organizations are like other social systems in that they are defined in relational terms. Their specialized functions provide links to larger systems. They are distinct from other social systems, however, by the primacy of specific goal achievement. Such goals are also measurable in terms of output; that of one organization can be the input of another (Parsons 1956). This reflexivity between organizations and systems in the ecological account is partially missing in the recursiveness of law in Luhmann’s account, where law is indivisible from a superordinate social system. Legal autopoeisis lacks, however, a sufficient account of law’s evolution. By identifying mechanisms for change to law as the most formal kind of regulation, we might as well accept that such regulation functions autonomously within social systems once developed. Organizational ecology analogously borrows a Darwinian account of species survival but lacks his account of species origin, or its reproduction (Stark 2009).

An extension of population ecology identifies organizations by signals, or social codes, that are like genetic code providing default traits (Pólós et al. 2002).

The identification of firms by codes or rules, however, does not suffice for an understanding of how organizations in turn shape these rules much less account for the co-existence of rules in different formats. The coding process is as important as the codes and their environments (Thévenot 2007).

When exogenous factors influence organizational behavior, be they industry standards, codes of best practice, as well as formal law, they alter the “DNA” of the organization. The codes by which systems originally classified organizations then 19 assume functional roles beyond identification. Organizations do not survive like biological organisms. Some organizations, particularly firms, do indeed cease operations and are liquidated, but many more are taken apart, recombined, and survive in new form. Population ecology, however, does not permit empirical tests of an organization’s progeny or innovations (Young 1988) or for organizations’ survival from an actor-oriented perspective (Lazega and Favereau 2002).

Population ecology thus originally served to explain the diversity and adaptability of organizations.

The transformation of regulation from informal to formal regulation is accordant with the concept of heterarchy5. Defined by a lateral structure of accountability, heterarchy comprises organizational heterogeneity and diversity of evaluative principles (Stark 2009, 2007). Heterarchy allows a view of both the firm and its regulatory environment in an account of evolution. It also requires an understanding as to how firms and regulators respond to other forces, events, and circumstances with competing values systems. Knight’s distinction between risk and uncertainty partially resolved an economic problem of identifying risk-taking for economic purposes, but avoided risk-taking and its inverse, risk mitigation, as a social phenomenon (Knight 1921). The purpose of regulation is to reduce uncertainty, prevent future crisis, or at least mitigate associated risks. Risk in heterarchy becomes a “‘modular’ organization, networking the individual information-processing units, i.e. linking them up with their respective neighboring

5 For the original concept of the term, see McCulloch (1965). 20 units without the system as a whole imposing an organizational schema” (Luhmann

1993: 185). This approach differs from the institutionalist account of rules or other constraints on the organization as mutually reinforcing, and invites a reflexive and dynamic process of regulatory evolution. Heterarchy frames regulation in terms of risk prevention, the reduction of potential loss or harm from specific behavior.

Uncertainty can be a basic resource to resolve collective action problems.

Formal organizations in particular handle uncertainty according to their own capabilities as well as to their contingencies, the effects of which are occasionally unintended or counter-intuitive (Crozier & Friedberg 1980). Uncertainty can translate into an organization’s or an individual’s power and become an important factor in the regulatory process: “we audit, and we regulate, when we cease to trust”

(Moran 2000: 10). In an experimentalist circumstance, legally enforceable rules and regulations are flexible, adaptable, and co-optive with other more formal, but not rigid, forms of pressure to enforce compliance with standards. “They take diversity as a resource to be fostered rather than reduced via enforcement”

(Schneiberg & Bartley 2008: 49).

Evolutionary approaches are therefore appropriate for explaining precisely how social context matters in the development of regulation. One solution is to grant authority to individuals to develop their own rules as opposed to exogenous forces Ostrom (2000). Polanyi (1944) would agree that a command economy makes for ungovernable states, but reminds us that self-regulated markets have also destroyed society. 21

Law operates in similar fashion to the socio-cognitive construction of truth whereby its worth is dependent upon other law (Simmel 1978). It is determined by balancing subjective interests of individuals with objective values. “Agents do not usually have a single way of calculating, and that coordination is above all a problem of agreement on the way of calculating” (Eymard-Duvernay 2002: 62-63).

Regulators, firms, and other market actors have multiple principles of evaluation with which to innovate rules governing firm behavior in various geographic markets. These evaluative criteria manifest especially in situations requiring a justification for action such as in friction, disagreement, or crisis, whereby these actors bring multiple evaluative frameworks instead of universal norms, to determine and co-ordinate action (Boltanksi and Thévenot 1991,

Thévenot 2002). This notion of worth provides an escape from the dichotomy between sociology’s plurality of values and moral universalism by “considering the possibility of a limited plurality of principles of equivalence which can be used in order to support criticisms and agreements” (Boltanski and Thévenot 1999: 365).

Actors make decisions by evaluating other actors and objects according to a presupposed order, transforming uncertainty into risk without eliminating uncertainty entirely. Not all the orders are legitimate in terms of serving common notions about the co-ordination of economic organization; they are instead historically constructed (Thévenot 2002). Consequently, regulation can be expressed as this search process for rules of coordinating the economy. 22

In contrast to both the neoinstitutionalist account of how certain understandings stabilize markets and to a structuralist account of markets as stable, patterned institutions, performativity is primarily interested in what markets do through the production, mobilization and diffusion of technologies to stabilize the world, or “society” around certain understandings (Fourcade 2007). Relevant to this study of voluntary firm practices evolving into legal regulation is that “forms of social regulation, whereby persons and entities (e.g., organizations, nation-states) are governed ‘at a distance’, by calculable agencies that rate, rank, divide them up, and recombine them” (Fourcade 2007: 1026).

Indeed firm practices that were originally voluntary and have since become regulatory may not just be a case of self-fulfilling prophecy of belief in the practice or institutionally prescribed behavior, rather of performativity. As such, the practices-cum-rules in this account would actually perform, shape, and format the economy. It goes beyond agencements6 and leaves open the possibility of outcomes independent of actor cognition (Callon 2007).

Conventions are synonymous with, but not equal to, rules. “Conventions refer to values, rules and representations that influence economic behavior. Structures refer to patterns of interests and relationships, reflecting resource interdependencies among members of any social system” (Favereau and Lazega

2002: 1). This Weberian approach emphasizes interaction and norms to explain

6 The closest English equivalent is “arrangement” or “assemblage” though neither term captures the French connotation of adaptability to different configurations. For instance, a machine has operating instructions for its user, but does not necessarily control or limit how one uses the machine. 23 social change or stability, given dynamic structures. Existing conventions, or embedded norms, must therefore be distinguished from new conventions, or endogenous rules (Favereau and Lazega 2002). Selznick (1957) adopted a similar approach that combined structure and culture to explain regulatory change as the redistribution of resources, requiring the support of members with both power and legitimacy. This echoes a key Weberian contribution to legitimacy as applying to every system of domination and its related administrative structures (Weber 1978).

The question of legitimacy is precisely where the Conventions School intersects with a structural approach (Favereau and Lazega 2002). Certain key actors can use their status and legitimacy in the regulatory process: “Underneath every kind of rule, there is a conventional representation of the collective”

(Favereau and Lazega 2002: 23). Although Burt (2004, 1992) emphasizes structural opportunities for actors to affect changes in relationships, they lack the concept of worth, or multiplicity of evaluative principles, among actors.

A market implies calculative agencies, an organization, and a process in which calculative agencies oppose one another. Calculability, or ranking, requires cognitive psychology and cultural frames to ascertain a course of action and its effects (Callon 1998). Agents’ resistance to calculative rationality—and therefore the market—is also related to embeddedness (Granovetter 1985). Although Piore and Sabel (1984) argue that the network form of organizations is a superior form of organization, White argues they are only interim forms.

“The common idiom in the new institutional economics is building up views of organizations in terms of agency and contract 24

relations. I argue that this confounds coherency in theory by overlooking the contextual and interactive field relations that precede and structure, rather than grow from, agency and contract relations. The litmus test is accounting for the way valuations emerge (…) The main open problem for the social capital school, in my opinion, is supplying some explicit mechanism to account for valuations (…) Valuations should be endogenized” (White 2002: 340-341).

Network structure is capable of promoting variety and coordination of relationships but lacks an authority relationship that forces organizational structure

(Kogut 2000). Norms and institutional factors increase the likelihood of a particular set of rules of cooperation and competition, though not necessarily that of formal rules. As rules generate the structure of a network, “the structure itself influences subsequent behavior” (Kogut 2000: 410), echoing an autopoeitic notion of the evolution of law.

Institutional change and stabilization occurs not just within national systems but, also, in the transnational space between them (Djelic and Quack 2003).

Transnational implies a space of social interaction, both process and structure, across national boundaries involving at least one non-state actor (Apeldorn 2007).

This concept of transnationalization avoids the supposed dissolution of state influence in globalization. Regulation is patently beyond the strict purview of state or political control.

“The idea of regulatory networks points to complex interconnections between a multiplicity of individual and organizational actors— interconnections that can be direct or mediated (…) Finally, with a focus on regulatory networks comes a question about their legitimacy and more generally about the legitimacy of private authority. With a broadening set of rule-makers and institution-builders, the way of authorizing rules and institutional frames is likely to broaden as well” (Djelic and Quack 2008: 308). 25

As they do, conflicts in transnational space are likely to provide a major source of institutional change (Djelic and Quack 2008). This would imply perhaps nested hierarchy despite attempts at heterarchy.

According to Thévenot (2007), standardization and regulation bodies are members of a plurality of cognitive and evaluative frameworks governing economic action. During moments of dispute or crisis, public qualifications of this common good are not restricted to the state. The evaluation must be valid for a third party, made in a language that links actors, giving an official, legitimate quality to the engagement.

To follow a rule is a practice in itself, even though belief in a rule is not the same thing as following it as per Wittgenstein; rules are insufficient to establish practice; they require example. Rules also generally function tacitly. When made explicit, they no longer function as rules but as objects of discourse. They are invented in, and evolve with, practice; as such, rules are inseparable from usage

(Dumez & Suquet 2009, Favereau 2009, Galligan 2009)7.

Firm practices evolve as do the firms interpreting and adopting them.

Further, ideas must materialize in order to move in space and time.

“A practice not stabilized by a technology, be it a linguistic technology, cannot last; it is bound to be ephemeral. A practice or an institution cannot travel; they must be simplified and abstracted into an idea, or at least approximated in a narrative permitting a vicarious experience, and therefore converted into words or images” (Czarniawska and Sevón 2005).

7 Rules also form a system. One arbitrates constantly with a system of rules according to the importance attached to the rules. 26

Imitation is the most basic form of learning and is one method of spreading voluntary practices. If, according to Tarde (1903), what gets imitated is superior to what is not, how do actors evaluate what is better, dominant, or even coercive?

Pure imitation falsely assumes the mimicked practice is static and that no other causes make the imitated object less appealing. Further, imitators differ in their susceptibility to adopt or imitate a practice, but that they can identify more than one translation outcome.

Can one assume that regulation or any organizational constraints remain static as they move from actor to actor, or from one market to another? Bourdieu’s rubgy ball remains the same as it passes from one player’s hand to another. Latour’s scientific objects, however, change as they pass from one scientist to another. The diffusionist account, which would assume that a corporate governance practice spread unchanged from one firm to another, and from one market to another, suffers from three consequences according to Latour. First behavior would seem caused by the object itself. Second, even if ideas, objects, and facts reproduced exactly as they diffused—itself a fallacious claim—originator, or inventor, would take excessive credit. The agent still needs other actors to pass the object around, to carry forward their ideas. Last, and to maintain the first two consequences, the diffusionists would say that if the path of an idea were interrupted, it was because an invented “society” blocked it unless they suddenly accepted it. Not only does the object change in passage, but so do people. 27

“Diffusion implies a central broadcast point and wide reception with rather passive receivers, whereas translation implies a more relational and active process of reception. The concepts of circulation and translation recognize that ideas follow various routes and networks, and emphasize the possibility that ideas may be edited in the process of travel” (Powell et al. 2005: 233).

Path generation occurs even when institutions are already in place and increases with exogeneity (Djelic and Quack 2007). Because path generation is unpredictable ex ante, it is a potentially useful framework for understanding the role of shocks in the capital markets on the spread and local adaptation of corporate governance practices. Paths are also likely to develop qualities unintended by the actors involved (Stark and Bruzst 1998). Path generation is not confined to social structure at a fixed point in time, rather can be considered in a sequence of network positions, allowing firms to mitigate uncertainty and gain legitimacy (Stark and

Vedres 2006). This notion of paths coalesces with the notion of paths that I develop in this study to explain the evolution of self-regulation into formal regulation. It evokes the idea that multiple trajectories to the same end are possible and that the variation is partial to comparative regulatory research. It also indicates a combination of key conditions that lead to the outcome of formal regulation. Next I discuss the area of inquiry in which I model the paths to regulation.

1.4 Corporate Governance as Locus for Regulatory Evolution

Corporate governance is the ideal locus of the evolution of regulation from the informal to the formal. Indeed much of the previous research on regulation has pointed to tensions between self-regulation and legally enforceable regulation of 28 specific, often industry-based, practices. Corporate governance is a practice, it has national and institutional variety, and it is also part of global norm-making.

“Explaining law and regulation is thus central to any account of corporate governance” (Gourevitch & Shinn 2005: xii). Further, “[i]n the era of regulatory capitalism, more of the governance that shapes the daily lives of most citizens is corporate governance than state governance” (Braithwaite 2008: 4). My extension of this line of argument is that corporate governance can be conceptualized as a transformation of state governance in terms of the origination of rules.

Voluntary firm practices include a variety of actions that are unregulated by government. The sources of these practices are both endogenous and exogenous.

Among a library of regulations to analyze, those pertaining to corporate governance offer a timely empirical motivation.

There are many definitions of corporate governance itself. Among those I find useful as I develop its regulatory evolution in this study include the following contributions. “At a fundamental level, corporate governance is concerned with the internal governance mechanisms of corporations, and society’s conception of the scope of corporate accountability” (Deakin & Hughes 1997: 2).

Corporate governance is traditionally concerned with the relationships associated with separated ownership and control of firms (Berle and Means 1933), especially that between publicly traded firms and investors in the capital markets 29

(Useem 1996, Fligstein 2001)8. Corporate governance can be viewed first as a system: “A governance system is defined as the totality of institutional arrangements—including rules and rule-making agents—that regulate transactions inside and across the boundaries of an economic system” (Hollingsworth et al. 1994:

5). In this sense, governance comprises a larger realm of control than “government”

(Braithwaite 2008). This summation of institutional factors limits the requisite reflexivity and dynamism in the development and spread of voluntary corporate governance practices. Aguilera and Jackson (2003) define corporate governance as

“the relationships among stakeholders in the process of decision making and control over firm resources.” “Corporate governance as a practice is, like any social practice, rule-governed (…) If we speak of the regulation of corporate governance we, however, refer to something that is external to the corporation and its governance, yet shapes that governance to a very significant extent” (van Apeldorn 2007: 4-5).

Defining corporate governance both as a system and as a practice (Cornelius and

Kogut 2003), better meets the demands of this dissertation’s empirical analysis.

Corporate governance of problems in the classical agency view considers the firm a nexus of contracts to resolve conflicts over control of the firm (Jensen and

8 In this view, corporate governance is not to be confused with corporate social responsibility. Corporate governance is generally associated with control–the rights and powers of shareholders in publicly traded firms–whereas social responsibility is a broader, normative concept about firms’ relations in society and which includes such issues as corporate philanthropy, sustainable development, and the redistribution of wealth. Because corporate social responsibility is defined by a broader set of stakeholders including employees, suppliers, and habitants in an area affected by a firm’s operations, it lies beyond the scope of this analysis.

Meckling 1976)9. Listed firms join an intricate web of contractual relationships tying firm managers, or agents, who act on behalf of the firm’s shareholder-owners.

Corporate governance in the agency account is functionalist: its underlying assumption is that corporate governance leads to efficiency. Optimal corporate governance structures displace less efficient structures based on transaction costs

(Williamson 1981). Although the law does indeed provide a governance framework, namely binding contracts, Williamson assumes it can sufficiently mitigate future hazards and uncertainties10.

Corporate ownership structures from an efficiency, or agency, perspective resolve the monitoring of market transactions and reduce uncertainty through formal, contractual devices. Suppliers of capital employ such devices to ensure that firm managers do not expropriate or misuse capital (Shleifer and Vishny 1997).

This agential view brings the interests of the capital markets’ chief actors, investors, under the rubric of juridical control of firms (La Porta, Lopez-de-Silanes, Schleifer and Vishny 2000). Corporate law, in such an account, serves primarily as a contractual mechanism to reduce agency and transaction costs associated with the

9 Armour et al. (2009) offer an insightful play on words: “It is perhaps more accurate to describe the firm as a ‘nexus for contracts’, in the sense that a firm serves, fundamentally, as the common counterparty in numerous contracts with suppliers, employees, and customers, coordinating the actions of these multiple persons through exercise of its contractual rights” (7).

10 To be fair, he does provide a conceptual framework that “shows economics as being informed by both law and organization, the three-way product of which is the New Institutional Economics. The object of the latter is to reshape the way economists and other social scientists think about and investigate the purposes served by economic and political institutions” (Williamson 1996: 386). 31 cost of capital, thus contributing to maximization of share value (Easterbrook and

Fischel 1991).

Multiple parties including shareholder representatives, states, stock exchanges, and of course the owners and managers of the firm, search for modes of corporate governance. Markets and hierarchies are primary modes of governance according to one account of economic organization. Corporate hierarchies “are institutions that permit some actors to wield authority over others on the basis of property rights vested in a formal organization to which both categories of actors belong” (Hollingsworth et al. 1994: 5). Firms are accountable to the state, the market (capital markets for traders of shares, plus financial institutions like asset managers holding shares), informal networks (of managers and board members), and associations. Firms are accountable, however, to yet other parties such as shareholder representatives and advocacy groups. “Sociological work on corporate governance provides a useful curative to this functionalist approach, ﬁnding that corporate governance does not work as advertised even in the United States, the prototype case” (Davis 2005: 159). Economic benefits of voluntary practices are patently not the only reason firms adopt them. Nor is there sufficient account of why voluntary practices in one geographic market would apply to another.

Economic institutions are themselves social constructions (Granovetter and

Swedberg 1992) hence the framework for analyzing corporate governance cannot be exclusively economic. 32

An alternative view considers the variability and structure of relationships in corporate governance by including institutional governance mechanisms (Allen and

Gale 2000). Scholars in the institutionalist vein argue that corporate governance does not simply reflect the needs of investors to protect capital and that the tension between ownership and control of publicly traded firms is not easily reduced to an account of agency costs. Like agency accounts institutionalism holds a similar dichotomy of efficiency versus legitimacy. Emphasizing effectiveness of control mechanisms over their efficiency, institutionalists advocate that socially optimal control of the firm depends on equal distribution of ownership and voting rights, which is not evident in many non-Anglo-American firms (Harris and Raviv 1987).

This framework partially remedies the theoretical shortcomings of the classic agency view of corporate governance by considering external parameters of organizational behavior. Although firms do not necessarily select the institutions of their home country or stock exchange, their shareholders may be partial to the various governance mechanisms available across capital markets. This problem creates the need to distinguish institutional variation from firm level variation in corporate governance practices. It also trades a purely functionalist account of corporate governance for a moderate functionalist account, whereby actors are not just constrained by institutions, as they are useful of them, especially under conditions of likely benefit to them.

Roe (2003) argues politics explains cross-national diversity of corporate governance systems more than legal and economic theories. A country’s composite 33 of legal rules governing firms depend on the initial ownership structure of firms prevalent in that country (Bebchuk and Roe 1999-2000). He does not, however, conceptualize dynamism of political ideology within political parties yet such dynamism might partially explain why it was center-left parties that were behind major corporate governance reforms in Europe over the past decade.

Corporate governance in historical perspective leads us back to the United

States. Djelic (2006) attributes several factors with the spread of the free market ideology from the United States to other countries. First, the rise of postwar

American hegemony coupled with the economic crises of the 1970s stretched the limits of Keynesian economics. Many countries increasingly depended on Bretton

Woods institutions that espoused the Chicago school mantra of free markets.

Further, capitalism replaced communism in Central and Eastern Europe. Lastly, an epistemic community mingled with policy makers to homogenize the economics profession on a global scale. Organizations like the World Trade Organization,

International Monetary Fund, and the Organization for Economic Co-operation and

Development were carriers of this economics mantra. So, too, were regulations that occasionally instituted economic action beyond their original context.

As per Fiss (2008), much of the corporate governance literature from the economics and legal traditions has placed the shareholder at its center whereas the institutional approach considers political processes. His is much more culturally symbolic as well, allowing greater dynamism in corporate governance arrangements and regular interpretation. This also allows a challenge to two aspects of 34 institutionalism: taken-for-granted practice and purposive agency (Fiss 2008: 392).

On the former, even legitimated practices can be challenged or they can require as much effort to maintain as to change. Legal sanctions can have a stabilizing effect, but only for a time. On the latter, agents try to influence the adoption of practices.

“A focus on practices is attractive to the study of corporate governance because the normative claims that inform governance models are not always readily transformed into corresponding practices” (Fiss 2008: 393). Diffusion of practices through political and cultural processes demonstrates local variation in the practices.

Deeg (2009) argues that the shareholder value paradigm, including enhanced legal protections for minority shareholders, is one trend in corporate governance.

Another is the increased role for boards of directors and performance-related pay.

Corporate governance reforms within Europe, according to Deeg, still demonstrate persistent divergence because “countries adopted voluntary corporate governance codes rather than a full regime of mandatory corporate governance rules” (Deeg

2009: 561). Full regime change is not indicative of change underway, precisely if we shift the focus to firm relationships with the state. Deeg further notes that only the largest of listed firms are moving toward an international model of corporate governance institutions and practice.

The nuance between formal and informal control mechanisms of firms, however, points to a significant lack of discussion on corporate governance: understanding regulatory change as a function of informal firm control. Without the 35 voluntary practice, how is firm behavior discernibly different from random or mimetic? More problematic would be monitoring firm behavior prior to adopting an externally recommended practice or regulation. Further, a practice is only meaningful if like firms are actually practicing it whether, as Dumez (2009) would argue, whether they “believe” in the practice or not.

Corporate governance has an historical evolution that varies even within countries (Herrigel 2005). Indeed the increased internationalization of the capital markets is one factor that has contributed to the diversity of corporate governance institutions across countries despite pressures to converge towards an Anglo-

American model (Jackson 2003, O’Sullivan 2003). Shareholder protection laws offer comparative cases of corporate governance agency, although earlier research suffers from the assumption that such laws were static and overly deterministic.

These laws in transition economies, however, demonstrate hybridization of adopted and local legal traditions (Pistor 2000).

Further such laws appear to converge across countries since the turn of this century (Lele and Siems 2006). Some accounts of continued divergence argue that legal traditions are not entirely mutable (Guillén 2000), although capital market activity can otherwise be a useful metric for institutional convergence (Guillén and

O’Sullivan 2004). Neither the diversity of shareholder protection laws nor variability in regulation alone can explain, however, why firms adopt voluntary practices. Both investors and the firms in which they invest create rules by considering their own respective interests (Fligstein 2001). 36

This attention to firm-driven rules is all the more pertinent in advancements in the corporate governance literature precisely because states have become apparently less implicated in the design and enforcement of corporate governance practices (Fligstein and Choo 2005).

Although extant theories supply a variety of approaches to understanding regulatory reform, few, however, neatly account for the transition from informal to formal rule. In other words, what drives government to regulate corporate governance practices, even when firms and other market actors already uphold related standards? What emerging form of governance might this evolution from self-regulation into formal regulation imply?

My framework overcomes the theoretical and methodological problems of earlier approaches by joining disparate theories on regulation from institutionalism and law, while providing for a causal analysis of specific regulatory change. I retain the variety of capitalism without attributing logic to inanimate constructs like polities. Instead I account for particular institutions that can be aggregated nationally and compared internationally. I expect to find that voluntary firm behavior is indeed a prerequisite condition for regulation, and that specific patterns of regulation should arise across various countries.

1.5 Outline of Chapters

The next chapter details the research design. Secondary data stem from various sources that I will adjoin to an original dataset of firm disclosures of 37 corporate governance practices. I present a selection of these practices from international standards and previous corporate governance research.

The third chapter provides an evaluation of firms’ adoption of corporate governance practices in the absence of regulation and other formal rules. I provide the results of Qualitative Comparative Analysis (QCA) to explain the paths to regulation of corporate governance practices among the target set of over 1500 listed firms. These paths include the combination of this voluntary firm behavior with other key causal conditions.

The fourth chapter augments the findings of the QCA with additional qualitative data on the conditions and outcomes particular to the focal practices in every regulating country, supplementing the cross-national comparison with country-specific contexts. I discuss the overall findings of the comparative analysis, limitations and counterfactuals, and their theoretical and policy implications.

I conclude the dissertation by arguing that this analysis offers several advantages to study comparative regulatory processes and identifying key areas of inquiry for future research.

Chapter 2

Research Design

2.1 Selection of Corporate Governance Practices

This unprecedented research requires an eclectic mix of data source and method to test whether voluntary firm practice is a necessary condition for regulation. First, I identify a group of corporate governance practices for comparative analysis, the most salient of which should reflect interests of regulators, firms, and other market actors. Two sources reflect these interests and help identify which governance practices merit further analysis. I select the governance practices that overlap in these two sources.

The OECD’s Principles of Corporate Governance (“OECD Principles”) embody corporate governance on both systemic and firm levels, and are a primary source of corporate governance practices for several reasons. First, their coverage of corporate governance is comprehensive in input from its thirty member countries and runs the gamut from recommended practices at the firm level to country level regulations. The OECD Principles do not form a single set of legally binding, regulatory, or even voluntary measures; rather they are a token of policy coordination among member countries. The OECD Principles correspond to—but do not equate—various regulations, voluntary codes, institutional norms, and firm practices across countries. 39

Second, the OECD Principles take into account diverse sources of policy perspectives, not just of government representatives, but of other stakeholders as well, including those from the private sector, labor, and civil society. Since 2006, the

OECD has been conducting qualitative assessments on the implementation and enforcement of the OECD Principles among its member countries11. Government authorities, accountants, shareholders, ratings agencies, and academics form teams to assess the OECD Principles. Moreover, the OECD Principles implicate not only the thirty member countries of the OECD, but many non-members as well. The World

Bank, IMF, and Financial Stability Forum agreed in 1999 to include the OECD

Principles as one of their Twelve Key Standards for Sound Financial Systems to prevent financial market crises like those in emerging and transition economies that occurred earlier in the decade. These international organizations now use the OECD

Principles in their own country assessment programs 12 . This breadth of stakeholders and representative countries further lends variation to corporate governance on both macro and micro levels.

Third, the OECD Principles provide a current overview of corporate governance practices13. From the latest version of the OECD Principles I can trace

11 See the Methodology For Assessing The Implementation of the OECD Principles On Corporate Governance, December 1, 2006.

12 The World Bank and IMF use the OECD Principles in their Review of Observance of Standards and Codes (ROSC) as part of their Financial Sector Assessment Programs (FSAP), itself a voluntary assessment program.

13 Member countries agreed to the OECD Principles in 1999 and revised them in 2004. The revisions include the recommendations from the 2002 Survey of 40 back the historical development of corporate governance practices, as they move between micro and macro levels over time, from various actors within and across countries. Lastly, the OECD Principles highlight the most salient issues in international corporate governance. They identify corporate governance issues that are observable in both voluntary and regulatory forms, from which I select a group of practices for comparative analysis.

The second source that helps identify which practices to analyze is

Institutional Shareholder Services (“ISS”), which compiles 64 firm-level governance attributes—of which 44 are comparable across countries14. These attributes fall into four broad categories of corporate governance examined in previous research

(Aggarwal et al. 2007)15. The first ISS category includes firm-level attributes of the board of directors such as its composition, election, independence and transparency.

The second category also includes independence and transparency as they relate to

Developments in OECD Countries and relate to the legal framework of the original OECD Principles, including the rights and obligations of shareholders, minority shareholder protection, transparency and disclosure. Although the OECD called for additional policy enhancements in light of the latest economic crisis, it has not yet revised its Principles of Corporate Governance.

14 Institutional Shareholder Services acquired the Investor Responsibility Research Center (IRRC), a rival shareholder advisory service that also compiled guidelines for corporate governance. In January 2007 ISS was acquired by RiskMetrics Group, a for-profit, risk management firm formerly part of JP Morgan until 1998. RiskMetrics in turn was acquired by MSCI, provider of equity indices and risk management advice, in early 2010.

15 This is an extension of research based on the original IRRC index corporate governance provisions in Bebchuk et al. 2005, Gompers et al. 2003, and Rosenbaum 1986, which focus on US firms. Aggarwal et al. 2007 more recently categorize the governance practices, (a.k.a. “provisions” or “attributes”) in broader categories for international comparison and in conjunction with the OECD Principles. 41 the firm’s external auditors, in addition to the fees paid to them and board ratification of their engagement for both auditing and non-auditing services. The third category includes types of executive compensation and its determinants.

I exclude the fourth ISS category, which pertains solely to anti-takeover practices, such as poison pills, supermajority voting, “blank checks” and other anti- takeover devices. These attributes, although under the broad rubric of corporate governance, do not address problems of control in the firm as an ongoing concern, and apply exclusively to hostile takeovers, which are infrequent and especially rare outside the United States. Therefore, I consider anti-takeover attributes in the historical context of corporate governance development rather than as a category of internationally comparable firm practices.

Of the remaining three ISS categories, I consider those attributes that overlap with the OECD Principles specifically on shareholder rights, which target governance practices applying specifically to publicly traded firms. Some ISS attributes, such as separate roles for CEO and Chairman or staggered boards, actually reflect not just firm-level attributes, but institutional ones as well. The immediate objective is to locate the most salient practices among firms in various countries while accounting for variation in the origin, voluntary adoption, and regulation of these practices. The resulting selection of corporate governance practices from the OECD Principles and the ISS attributes totals eight practices in 42 three categories: Board, Executive Compensation, and Auditing16. In a discrete category is a practice whereby the firm discloses participation in a loosely defined scheme under the rubric of corporate governance, which may include the aforementioned practices among others.

Table 2.1 Corporate Governance Practices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16 Although I frequently employ the combined terms “executive compensation,” I occasionally interchange “executive” with “manager” and “compensation” with “remuneration” especially in the contexts as they are likewise used outside the United States. 43

Table 2.1 lists the corporate governance practices by category and my definitions of those practices, along with the associated OECD Principles and ISS attributes. My annotations for each practice draw attention to the various specificities—cultural, industrial, and others—that are likely to arise in the examination of adoption of each practice across firms and countries. Of these select corporate governance practices,

I will present the analysis of the paths to regulation of three—specialized board committees, director independence, and auditor independence—in Chapters 3 and

4, and the others in Appendix C.

2.2 Temporal Period

The 1990s coincides with the global advent of shareholder value and increased financialization that occurred a decade earlier in the United States (Roy

1997, Dore 2000, Fligstein 2001). In Europe, international corporate debt levels as a percentage of GDP rose markedly from the 1990s, as did the dispersion of ownership among large companies (Deeg 2009) and the rise of the regulatory state

(Majone 1997) despite an attendant disappearance of public intervention (Dumez

1998). This period also marks the expansion of the liberal economics in both developed and emerging capital markets (Fourcade and Babb 2002). Even though corporate governance issues date back to separation of ownership and control of the firm since Berle and Means (1933), the discourse of corporate governance and its direct tie to executive compensation occurs since the 1990s (Erturk et al. 2004). 44

The 1990s also begins an era of heightened regulation and increases in national budgets for this purpose (Braithwaite 2008). Globalization does not just refer to the intensification of capital ties between states and markets during this period, but also of regulation (Braithwaite and Drahos 2000). Both the number of companies listing shares on stock exchanges, as well as the relative amounts of their capitalization, accelerates during this time. The added used of securitization as a financial tool, coupled with the expansion of the shareholder value paradigm, also manifest during this time.

The importance of this decade thus identifies the time period with which to open the analysis. I select 1989 as the start year for selection of regulatory regimes for comparative analysis, and include all data available through 2008 inclusive. I use 1989, which precedes by one year the focal time period, for country and company selection. This year also coincides with the first appearance of corporate governance recommendations from IRRC/ISS discussed in the previous section.

2.3 Preliminary Country Selection

The next step in selection turns to the countries that potentially regulate the focal corporate governance practices. The country selection is conducted in two stages: the first to establish a preliminary list of countries based on the size of their capital markets, and a second by identifying listed companies in those markets.

Because the comparative country analysis is partially dependent on firm behavior, I employ an iterative selection of country-cases based on the selection of firms. 45

Large advanced capitalist economies comprise the countries in which I can model my theory of regulation of voluntary corporate governance practice. To develop a list of the largest such economies, I begin with the OECD’s thirty member countries plus its five “Accession Candidate Countries” and five “Enhanced

Engagement Countries” to represent a population of advanced capitalist economies as listed in Table 2.217.

Table 2.2 Potential Advanced Economies for Analysis

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17 Other countries that may be considered advanced economies, but are not affiliated with the OECD, include Singapore and Taiwan. Neither is large enough to supplant the other countries that made the final selection in this analysis. Further, the United Nations backs the People’s Republic of China as having sovereign claim to Taiwan and to Hong Kong, which has a unique status as a Special Administration Region. For this study, however, the selection of China excludes both Taiwan and Hong Kong. 46

Accession Candidate Countries are applicants to membership in the OECD through a lengthy process of policy examination by current members. Their eventual membership is likely, but conditional upon specified, jointly agreed criteria18 .

Enhanced Engagement countries occupy a slightly more ambiguous position in which they participate variably in policy coordination, data sharing, committee meeting participation, and adhesion to the organization’s legal instruments, but are not presently in discussion to become applicants to the OECD. From this initial pool of forty countries, one can expect variation in capital markets regulations as well as size of the capital markets. The World Bank Development Indicators and the World

Federation of Exchanges, an international trade association of 51 stock exchanges, provide two metrics of capital market size—total market capitalization and the total value of stocks traded—that I use to reduce the country selection for feasibility’s sake.

18 All Accession Countries except Russia officially acceded to the OECD in May 2010. 47

Figure 2.1 Stock Market Metrics in OECD+10 Countries, 1989-2008 ln(US$ millions)

35 35 World Bank Development Indicators World Federation of Exchanges

30 30

25 25 Shares Traded Shares 20 20

15 15 15 20 25 30 20 25 30

Market Capitalization

Figure 2.1 plots the values of these yearly metrics in each of the forty countries19. The fitted values lines indicate a clear linear relationship between the two size metrics. The panel data are balanced whereby country-year pairs uniquely identify each observation and little difference between data sources is evident.

These metrics, however, are insufficient for ranking countries by the their capital markets. The total values of shares traded or market capitalization per annum are notional values that are not relative to the size of each country’s economy. I therefore use these same stock market metrics as a percentage of each country’s annual GDP for a more refined comparison of capital markets across this pool of

19 The World Federation of Exchanges data are unavailable for Czech Republic, Estonia, Iceland, the Russian Federation, and the Slovak Republic. 48 forty countries. Because the World Federation of Exchanges data are not adjusted for GDP, I therefore use the World Bank Development Indicators in order to refine my selection of countries for comparative analysis.

Of the two World Bank Indicators, shares traded as a percentage of GDP metric is the preferable metric over market capitalization. The latter accounts for heterogeneity in share price across countries, which could skew country rankings based on the many price determinants that are beyond the scope of comparative regulatory research. Shares traded as a percentage of GDP is a better metric for comparing size of the capital markets in a country for the purpose of ascertaining scale of regulatory purview than when conflated by share prices in the market capitalization metric. The periodic stock market data for the countries do not follow a normal distribution. I use the median instead of the mean as a cutoff point for largest capitalist economies in this population of OECD+10 countries. Their overall median shares traded as a percentage of GDP is 20%. I keep the 23 countries that lie above the median, or in other words in a semi-final list of countries to analyze.

2.4 Firm Selection and Final Country Selection

Next I identify firms incorporated in this semi-final group of 23 countries with advanced capital markets for evidence of adoption of corporate governance practices. The corporate governance practices I survey apply to public firms across all industries. “Public” or “listed” company is defined differently across countries; the working definition I employ is one where companies have at least 50% of the 49 shares traded on a stock exchange. Armour et al. 2009 identify legal characteristics common to corporations across jurisdictions, including: legal personality, limited liability, transferable shares, delegate management under a board structure, and investor ownership. Legal names of the selected public companies vary from

“incorporated” to “company” in English. Their equivalents, such as

“Aktiengesellschaft,” “société anonyme,” and the like, in other countries, are included in the firm selection.

I defined the population as the largest such public firms by home country without prejudice to industry. Thomson ONE Banker provides historic financial data on public companies worldwide. From this database, I selected all companies that were ever listed on the primary stock exchange in each of the 23 countries of my semi-final list during at least five years, not necessarily consecutive, between

1989 and 2008 inclusive.

I selected companies that had shares listed during at least five years, though not necessarily consecutive, in the time frame20. This batch includes companies that may have been delisted as a result of acquisition, nationalization or liquidation during the time frame. Private firms and any firms wholly owned by other firms or states in discrete years are excluded. The maximum number of companies per country with at least five year of available capitalization data ranges from 10 to

2295, with an overall mean of 576.9 and median of 276. I am looking for the

20 Thomson ONE may have missing interim years of data. The five non-consecutive year criterion mitigates that risk.

50 countries with the most listed firms; therefore I use the median number of companies per country as a minimum cutoff point21. Countries with at least 276 firms in the Thomson ONE database are included in the final list of ten countries having the largest public companies.

There is still a wide range of capitalization among the companies now in the final list of ten countries. In a final step of firm selection (within the ten countries), I retain all companies with a periodic average market capitalization above their home country’s mean aggregate company market capitalization. In this way, I have selected the ten largest countries and their respective largest companies. Figure 2.2 indicates box plots of the final list of ten countries ranked by their periodic median stock market capitalization, and the maximum potential number of listed companies incorporated in each country, for the comparative regulatory analysis. The box plots in Figure 2.2 indicate the final list of ten countries for analysis, ranked by the periodic mean stock market capitalization of the companies incorporated in their jurisdictions. In parentheses is each country’s final number of companies that I will analyze for evidence of voluntary corporate governance practice. The number of companies from all countries, or the summation of numbers in parentheses, totals

1563.

21 Either median (276) or mean (579.65) would have sufficed as a cutoff point for the ten countries with the largest number of companies. 51

Figure 2.2

Final Ten Countries Ranked by Ascending Medians of Shares Traded as % of GDP, 1989-2008 (Total Listed Firms)

China (158) India (121) Germany (66) Japan (355) Australia (97) France (79) Canada (117) Korea (93) United Kingdom (139) United States (338) 22% of GDP = min. for inclusion 0 100 200 300 400

Sources: World Bank Development Indicators Thomson ONE Banker

2.5 Analysis of Regulatory Change in Countries

To accomplish my task of explaining the causal paths of regulating corporate governance practices across this final list of ten countries, I use fuzzy set Qualitative

Comparative Analysis (fsQCA). QCA broadly compares the different combinations of conditions—configurations—of cases that produce a given outcome (Rihoux and

Ragin 2009, Ragin 2008, Fiss 2007, Kogut and Ragin 2006). Traditional statistical methods would not capture the comparisons between the relatively few countries under analysis. Nor would they allow inclusion of qualitative data in formulating the regulatory outcome on an individual country basis like QCA. The origin of the methodology traces to David Hume and John Stuart Mill, and to tensions between 52 deductive and inductive logic more broadly, and to formalizations of logical reasoning by George Boole and visualizations of such by John Venn. Fuzzy sets can be conceptualized as “grades of membership” between zero and one (Zadeh 1965).

More importantly, the logic of linear relations and multivariate regression differs from that of cases and set membership.

As the title of this dissertation suggests, there are multiple paths, or trajectories, to regulation. Jackson (2005) employs fsQCA in 22 OECD countries to measure the different paths of employee participation in boards, which are conditioned on a combination of political systems and union coordination. Kogut et al. (2004) similarly employ fsQCA to explain multiple paths of corporate strategy diffusing from Japanese manufacturing practices. QCA has made great strides as a method for explaining paths in other areas, such as: social behavior caused by configurations of both genetic and social conditions (Shanahan et al. 2008); natural resource management by various Native American nations (Dolan 2009), and; viability of social movement organizations (Cress and Snow 2004). Though not to provide an exhaustive list of examples, I highlight the diversity of compelling research agendas to which QCA can find a methodological home, especially with dealing with a small N problem and combinatorial logic, both anathema to linear regression. Inspired by its applicability to explaining paths and its logic, I use fsQCA to explain the paths to regulation of select corporate governance practices. This comparative case analysis of regulations in ten countries explains the paths to regulation in countries similar in key capitalistic aspects, yet different in others. 53

2.5.1 Outcome of Regulation

The observed outcome is the regulation of each corporate governance practice in Table 2.1 in all ten of the selected countries. This outcome is predictably uneven whereby some countries might adopt statist approaches to regulating the capital markets, like France and China, while others might adopt a more laissez-faire approach like the United Kingdom and the United States. Although the outcome may appear naturally dichotomous—regulate the focal practice or not—regulation can be measured as more or less in direct government control. Countries might vary in degree of regulation compared to other countries, dependent on their legal framework and functional equivalence to regulation of the focal corporate governance practices. Germany, for instance, now enforces firms to explain any noncompliance with the voluntary provisions of its national corporate governance code. In order to capture national variation in regulation of director independence, therefore, I employ a multi-value scoring mechanism for the regulatory outcome. In fuzzy set QCA parlance, threshold values for set membership are, at the extremes, 1 for full regulation and 0 for full non-regulation. The qualification for a particular score depends on my qualitative assessment of whether a particular practice is regulated. Between non-regulation and ambiguous regulation lies informal control, or a standard that constrains companies without express control by the government or one of its regulatory agencies. Conversely, between ambiguous regulation and full regulation lies formal constraint, which the government or its regulatory agency defers to a non-governmental source to promulgate rules. Membership scores for 54 regulations, therefore, are not based on a measurement of the strength of one regulation over another; rather it is a measurement of the extent to which a government regulates the focal practice among listed companies within its jurisdiction. With ten countries under analysis, a pseudo-continuous scale of set membership is not particularly instructive. Therefore, I assign one of four discrete scores, according to the categories under which each practice in every country falls:

0 if there is no regulation by the last year of analysis, i.e. 2008; 0.25 if the practice is not regulated by the government, but mandated by third parties that the government sanctions; 0.75 if the government specifically requires the practice but allows companies or non-governmental bodies to define criteria and its compliance, or has a “comply or explain” provision whereby companies are not required by law to adopt the particular practice, but are required by law to explain why they do not;

1 if the government defines such criteria and establishes clear government sanctions criteria for non-compliance, hence full regulation of each focal practice22.

I code for fuzzy set membership in regulation outcome similarly to how Schneiberg and Bartley (2008) define “regulation by information” as a form of regulation “that makes securing behavioral change exogenous to the regulation itself—ceding sanctioning to other actors” (Schneiberg and Bartley 2008: 43-44).

22 The score of 0.5 would represent maximum ambiguity: whether the regulation is defined and enforced by the government or not.

Regulations are in the form of statutes of corporate law and securities law, as well as commercial codes, available through Westlaw23. I code each country by year from 1989 to 2008 evidence of regulation for every target governance practice. I do not presuppose that every country regulates every practice, rather that some countries regulate specific practices. Any practice for which no regulation occurs by

2008 in a given country takes the value of 0.

I sourced the Georgetown University Law Center’s Foreign Law Guide, the

WestLaw database, and primary sources of law, e.g. US Code of Federal Regulations.

I search by relevant terms, cross-reference different sub-sections for relevant clauses, e.g. executive compensation in the form of stock options might be appear under more than one category, various terminology for the same item, e.g.

“compensation,” “remuneration” meaning different things in the United States, India and Japan. I also search for evidence of regulatory specification that companies have in developing criteria and disclosure requirement. Table 2.3 indicates these regulations per country and their corresponding fuzzy set scores.

Why not simply dichotomize these values? Visualize regulation as light from a dimmer switch. Half way is a fuzzy view of regulation by the state. Fully on we can clearly see the state regulates this activity. We especially want to capture the nuance within the law because we are talking about evolutionary regulation, namely that which originates in normative behavior. The light switch does not simply go on

23 Statues and codes from some jurisdictions are available directly online while others are sourced through Westlaw. 56 full in all cases; it turns on and once past the point of ambiguity, can build in intensity.

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2.5.2 Causal Conditions

Seven conditions are hypothesized to combine in configurations that lead to the regulatory outcome. These conditions are hypothetically causal, both individually and combinatorially. That combinatory process is described in Chapter

3. The first condition is whether a stock exchange listing rule, in lieu of regulation, establishes specific criteria for the focal practice. The second and third conditions turn to firm behavior. Firms quite plausibly self-regulate according to the same, or nearly same, criteria by which national authorities regulate. When firms essentially adopt these practices before formal regulation occurs, their behavior is an instance of voluntary corporate governance practice. Prevalence of this voluntary behavior, or self-regulation, is the second causal condition. The third is the occurrence of related corporate governance scandal occurs prior to regulation.

Of course firms do not write their own regulatory recipes alone; regulatory authorities need to assist in that task if formal regulation is to follow. The fourth causal condition tests whether legislatures that are majority left-leaning are more likely to accomplish this task than their right-leaning counterparts. The fifth condition measures whether the stock exchange ties via cross-listings in each of the focal countries also lead to regulation in conjunction with the other causal conditions. Likewise, countries that rely more heavily on the capital markets for economic growth have potentially greater stakes in regulation and thus the proportion of capital markets to GDP comprises the sixth causal condition. A final, seventh, condition considers that regulation by other countries in the group of ten 61 will have a cumulative influence regulation in the ones that have not yet regulated a given corporate governance practice. Details of each of these causal conditions follow.

Condition 1: Stock Exchange Listing Rules

The first causal condition is whether a country’s primary stock exchange requires a practice as part of its listing rules. Although stock exchanges and their issuers must comply with government regulations, they also develop their own listing rules for issuers that I consider here as distinct from government regulation.

The coding scheme of the stock exchange listing rule differs somewhat from that in the national regulation. Unlike the national regulations, stock exchange listing rules take the form of crisp (binary) sets as either 0, which reflects complete absence of any stock exchange listing rule related to the target practice or anything but vague notions to the practice but no formal rule, or 1, which refers to explicit requirement to adhere to specific criteria related to the practice for the firm to list its shares on the exchange. Table 2.4 lists the membership scores for each of the stock exchange listing rules.

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Condition 2: Voluntary Adoption of Practices by Firms

The second causal condition is the prevalence of firms’ adoption of the target practices. I consider the adoption voluntary when it is coterminous with absence of regulation in a given year. Once the same practice becomes regulated, adoption implies compliance. Why measure corporate disclosures? “If the purpose of information disclosure is to change the behavior of the firm by making managers more aware of and concerned about their organization’s social outputs, then we would consider information disclosure rules to be elementary forms of management-based [self-]regulation” (Coglianese & Lazer 2003: 695). I assume that the firms voluntarily disclose their practices in response to shareholder demand, although it is plausible that firms disclose their governance practices for other audiences. Lack of data on shareholders for many of the companies precludes an explanation of alternative incentives for voluntarily disclosure prior to regulation.

Annual reports and shareholder proxy statements evince the adoption of the focal corporate governance in the target countries before and after any regulation.

The Mergent database, available online and at the Service and Industry Business

Library branch of the New York Public Library, is a depository of annual reports that provides the requisite company data in all countries save the United States and

Canada. The primary source of evidence of practice adoption for Canadian companies is the proxy circular available online at the Canadian government’s

SEDAR database. The counterpart to the proxy circulars among American companies is the definitive proxy statement (DEF 14A) available online at the SEC’s 65

Edgar service. Proxy statements in Canada and the US provide more information related to corporate governance than annual reports, which are used here only as a secondary data source. Based on the same list of corporate governance practices in

Table 2.1, I research companies’ annual reports and proxy statements for disclosure of adoption of any of the corporate governance practices in each year from the earliest available year to the latest.

The Mergent database, SEDAR and SEC Edgar have overwhelmingly little available data prior to 1997. At least 70.8% of the company’s data is missing in

1996, at least 83.3% in 1995, and at least 84.5% in 1994, depending on the focal practice. This portion of missing data in earlier years increases to 99.0% in 1989.

In 1997, however, the portion of missing data decreases to 43.0%, and to 14.8% by

2008. Therefore I calibrate fuzzy set scores of for every country in each year between 1997 and 2008 inclusive. I turn to issues related to the coding of each focal practice specifically.

Specialized Board Committees

I code the presence of specialized board committees, e.g., remuneration, nomination, audit, etc., when the company’s board has at least one such committee and this presence is explicitly stated in the published reports. The word

“committee” is often used to describe any of specialized, functional groups within

Chinese, Japanese, and Korean companies, including even external parties such as the Corporate Accounting Standards Committee in Japan. These companies often 66 have executive and supervisory committees, which is synonymous with the executive members of the board and directors in companies from other countries.

These are not the specialized committees sought within boards and are therefore not counted as such. What is counted as a specialized committee among Chinese companies are the usual audit (审计, shěnjì) or examination (审核, shěnhé), nomination (提名, tímíng), risk (风险, fēngxiǎn), or remuneration (薪酬, xīnchóu) committees24 . Further, Japanese boards sometimes have what is referred to occasionally as the “director evaluation committee”, which combines functions of the remuneration and nomination committee. The presence of a compliance committee by itself did not constitute a board committee among Japanese companies. As discussed in Chapter 4, Japanese companies also met changes to corporate law in the early half of the decade that allowed them to choose between a traditional corporate structure void of Western style boards with specialized committees and one with such boards.

Director Independence

In all countries, companies may actually have independent directors but unless this fact is clearly stated in the published documents, I do not count them as having independent directors. I also code as 1 those companies that acknowledge that their board members are not independent, or that the majority is not independent, so long as they disclose director independence criteria, and their

24 When remuneration is referred to in accounting items, as opposed to a board committee name, it is often replaced by (报酬, bàochou). 67 compliance or non-compliance with such criteria. The coding is not an assessment of each board’s level of director independence per se, rather a measure of disclosure of whether directors are presented by the board as independent at all.

Corporate practices are possibly identical, or functionally equivalent, to independence criteria, but unless these are disclosed under the specific rubric of director independence, they are not counted. I also count members as independent if they are noted as “outside” or “external” such as in some Korean companies

(externe or unabhängig in German companies) versus “independent” (独立, dúlì in

Chinese companies).

In Korean companies, there are external directors (사외이사 , saoeisa) coded as 0 and independent external directors (독립 사외이사 , dongnip saoeisa) coded as

1. British and Indian boards include executive and non-executive board members, some of which are independent. Chinese companies began following this format as well. In addition to these two types of directors, there are also supervisors from the board’s supervisory committee, which includes executives (typically those just below the level president and vice-president of the company), like those found in the executive committee of the tow-tiered board structures of French and German companies. Canadian companies sometimes have an independent lead director, synonymous with the senior independent director in the United Kingdom.

Often before 2002 in the United States, many companies had shareholder proposals reported in the proxy statements for the adoption of director independence criteria. Unsurprisingly, the boards often recommended against this 68 shareholder proposal. The code is still 0 for a proposal; only once the board actually adopts and discloses director independence criteria does it earn the code of 1. US companies would also be coded as 1 for director independence if even only one specialized committee of the board were composed, entirely or partially, of independent directors. The question for this practice across countries was regardless of majority independent directors, but that independent directors were even present on the boards at all.

Auditor Independence

In Australia, an “Independence Declaration” appears occasionally, which clearly defines companies’ compliance with auditor independence criteria. I also code companies as having an independent auditor even without a similar declaration so long as clear mention of “independent” with reference to the auditor is provided. Some French annual reports’ translations indicate the “independent auditors” (commissaires aux comptes) reports, but in the original French, there is no mention of independence whatsoever, much less a definition of independence or any criteria in either the original French or English translation. More often, however, these were referred to as “statutory” or “external” auditors. In German companies’ reports, these auditors (Abschlussprüfers) are almost always translated as “independent auditors” in English even though no reference is made in the original German to any independence criteria.

Japanese companies include independent auditors among their statutory 69 auditors. These “corporate auditors” attend board meetings and report on more than just accounting matters. The task of auditing in the accounting sense is left to both internal auditors and the external, or “independent” auditors, which are widely labeled as such without any attendant criteria and hence, coded as 0.

In Korea (double check coding): independent, or external, auditor (외부감사 , oebugamsa). In China, occasionally the English versions of annual reports omit reference to auditor independence, in which case the Chinese original prevails. In the United Kingdom, around the year 2000 reference in the auditor’s report of companies’ annual reports mention the following: “Our responsibilities, as independent auditors, are established by statute, the Accounting Practices Board, the Listing Rules of the London Stock Exchange, and by our profession’s ethical guidance.” This mention does earn the auditors “independence” (coded as 1), even though the company does not refer to them as “independent auditors” in that year’s annual report. What does not earn the value of 1 is a self-declaration of an independent opinion in their audit of the firm, with no other mention of the auditor’s independence, for example: “It is our responsibility to form an independent opinion, based on our audit, on those financial statements and to report our opinion to you.” Appendix A contains additional precisions on the data collection and coding process for the aforementioned practices and others.

Once I coded every company’s adopted practices by year, I generated a cumulative total, by country and year, of firms that have adopted each practice.

These cumulative totals are then recalculated as interval-scale variables before 70 being transformed into fuzzy set scores. For this purpose, I use the “direct method” as described in (Ragin 2008) that calculates the degree of set membership as

" p % log$ ' e #1!p& . The maximum ambiguity point, or crossover point, is calculated by " p % log$ ' 1+ e #1!p& halving the maximum number of firms available in each country and year between

1997 and 2008 inclusive25. In order to establish the threshold values for each full membership and full non-membership, or anchors, for each country’s yearly cumulative total of firm adoptions, I use the 25th and 75th percentiles for the low and high anchors respectively26. The natural cross-over point into set membership is

0.50. Figure 2.3 indicates plots of firms’ cumulative adoption of each practice from

1997 to 2008, aggregated by home country, and their corresponding fuzzy set scores.

25 Firms with non-missing data for governance practices, as a proportion to total listed firms per country, are as follows: Australia 90/97; Canada 116/117; China 33/36; France: 44/48; Germany 65/66; India 84/121; Japan 350/355; Korea 66/93; United Kingdom 137/139; United States 317/338. Cumulative totals of firms adopting each practice, and their corresponding fuzzy set scores, were calculated including the firms with missing practice data.

26 This simple interval-scale method of calibrating fuzzy set scores is preferable to the alternative, “indirect method” for determining set anchors, which would require the intermediary step of categorizing the prevalence of adoption rates by grades of membership. 71

Figure 2.3 Voluntary Practice Prevalence and Fuzzy Set Scores Board-Related Practices 1 1 .8 .8 .6 .6 M e m b e r s h i p i n Se t o f Co u n t r i e s M e m b e r s h i p i n Se t o f Co u n t r i e s .4 .4 where Companies Adopt Practice where Companies Adopt Practice .2 .2 0 0

0 100 200 300 0 100 200 300 Companies with Specialized Board Committees Companies Disclosing Director Independence Criteria

Companies Disclosing Executive Compensation 1 1 1 .8 .8 .8 .6 .6 .6 .4 .4 .4 M e m b e r s h i p i n Se t o f Co u n t r i e s M e m b e r s h i p i n Se t o f Co u n t r i e s M e m b e r s h i p i n Se t o f Co u n t r i e s where Companies Adopt Practice where Companies Adopt Practice where Companies Adopt Practice .2 .2 .2 0 0 0

0 100 200 300 0 100 200 300 0 100 200 300 Base Pay Shareholdings Stocks Options

Companies Disclosing Auditing Practices 1 1 1 .8 .8 .8 .6 .6 .6 .4 .4 .4 M e m b e r s h i p i n Se t o f Co u n t r i e s M e m b e r s h i p i n Se t o f Co u n t r i e s M e m b e r s h i p i n Se t o f Co u n t r i e s where Companies Adopt Practice where Companies Adopt Practice where Companies Adopt Practice .2 .2 .2 0 0 0

0 100 200 300 0 100 200 300 0 100 200 300 Auditor Independence Audit Fees Non-Audit Fees

Korean companies largely represent those points lying along the x-axis with 0 y- values in the plots in Figure 2.4; these are companies that never adopted the respective practices (full non-membership in the set of adoptive companies). The vast majority of companies from other countries fall elsewhere within the plot 72 region; those points producing a flat line near the top represent full membership in the set of companies adopting the respective governance practices.

Condition 3: Corporate Governance Scandals

“Disasters and scandals of one kind or another routinely call forth responses which emphasize more prescriptive rules, more powerful regulatory authorities and related features” (Scott 2004: 166). “Changes in rules often follow the accumulation of ‘deviant’ behavior, with a view to bringing formal rules or legal regimes back into alignment with behavior” (Streeck and Thelen 2005: 15-16). The OECD also analyzes the event of crises in its assessments of the Principles: “Analysis of past crises and corporate collapses/scandals will also be necessary so as to allow the reviewer to understand the realpolitik of companies in a jurisdiction” (OECD 2006:

11).

“Governance scandals in particular provide opportunities when the seams come apart, allowing for regimes to be criticized and changed. As such, the study of such scandals, the ways in which they are managed by corporations and regulators, as well as how they are framed and used for mobilization by various interest groups, such as activist investors, are of particular interest to institutional theory and provide fertile ground for future research. Such an approach might eventually offer a more systematic framework of the conditions that lead to relatively strongly institutionalized versus less strongly institutionalized models of corporate governance” (Fiss 2008: 402).

With these motivations in mind, I develop a third causal condition comprising firm-specific, corporate governance scandals. These scandals are operationalized as cumulative, binary events in the period between 1989 and 2008 73 inclusive. I used two news sources to identify corporate scandals related to the focal practices. In LexisNexis Academic, I searched within the fields “US and major world publications” during the past twenty years for each country using the following search terms: company OR corporat! w/s scandal OR fraud OR scam; and/or each stock w/1 market OR stock w/1 exchange (ASX or Sydney, TSX or Toronto, Shanghai

Securities and/or Stock Exchange, NYSE Euronext Paris and NYSE Euronext New

York, Deutsche Börse/Frankfurter Wertpapierbörse, Bombay Stock Exchange,

Tokyo Stock Eechange, KOSPI and Korea Exchange, London Stock Eexchange).

Search terms also contained the relevant corporate governance practices: board w/s committee; board w/1 independen!; director pre/3 independen!; manager OR executive w/3 compensation OR remuneration; manager OR executive w/s compensation AND share OR equity; manager OR executive AND stock w/1 option!; auditor w/s independen!; auditor w/s fee; corporate w/1 governance.

I also used Factiva using the following search terms: scandal OR fraud OR scam between January 1, 1989 and December 31, 2008 using the following criteria from the database’s pull-down menus of search criteria: all [news] sources, all companies, all industries; subject: Corporate Crime/Legal/Judicial Or Corporate

Actions Or Corporate Governance/Investor Relations Or Executive Pay Or Directors

Dealings Or Ownership Changes Or Regulation/Government Policy. I restrict the search by country (stock exchange restriction for search not available). Foreign language articles are highly limited in Factiva including mostly recent (as of 2008) additions, and did not return any related articles in my search. 74

The purpose of this search is to identify actual companies and the associated scandals as reported by major media. I disregarded news stories that focus only on investigations or probes by regulatory agencies where any corporate malfeasance is speculative. Such speculation, or relinquished accusations or charges, do not constitute actual scandal. Of course, one scandal is dissimilar to the next in terms of damages or severity. For lack of a common metric, I used the number of reported scandals in each country per year related to the focal practices27.

From a preliminary list of 111 corporate scandals, I then returned to

LexisNexis Academic to research the nature of the scandal. Search criteria within this database included Major US and World Publications, Major World Publications- non-English, TV and Radio Broadcast Transcripts, Newswire Services, Web

Publications, and the Company sources file (which has eighteen sources including

Hoover’s, Morningstar, Standard & Poor’s, and Worldscope) during the past twenty years. Search terms included the company name, home country and “scandal” or

“fraud” or “scam” to return the largest possible results without bias to reporting on the term “corporate governance.” This permitted greater scrutiny of each company.

Although I initially conducted the search using terms in English only,

LexisNexis does offer foreign language searches in select foreign languages. A secondary search for scandals in French and German – the only other two languages represented by the selected countries – revealed no additional corporate scandals than those I uncovered in the English-only search. Underreporting of scandals from

27 This does measure, of course, severity of each scandal relative to an individual company or country. 75 other non-Anglophone countries, namely China, Japan and Korea, is a possibility; however, given that the focal companies are among the largest listed companies in the world, many with listings and significant operations beyond their home jurisdictions, and that English is the lingua franca of business, the likelihood of underreporting of corporate governance scandals by the major international and local news sources captured in the LexisNexis search, is reasonably scant. The final list of 97 corporate governance scandals I consider in the analysis as a causal condition for regulation appear in Table 2.528. All countries but Korea have at least one scandal over the time period.

I then calculate the cumulative sum of scandals per practice and country.

Scandals for the outcome of general corporate governance disclosure aggregate all scandals from other practices. Fuzzy set scores are then calculated by first ranking all countries’ cumulative scandals per practice, then standardizing the ranked values. Hence fuzzy set scores per frequency are static across countries as indicated in Table 2.6. In other words, scores for a certain number of scandals are the same in all countries.

28 There are 45 distinct companies, several of which had more than one type of scandal related to the focal governance practices. The total number of all scandals among these companies is 97, as indicated in Table 2.5 76

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Figure 2.4 shows plots of the fuzzy set scores per total number of companies with each type of scandal. The audit fee and non-audit fee practices exhibit clear binary categorization while all other practices exhibit the expected curvilinear relationship between cumulative total scandals and their corresponding fuzzy set scores.

Figure 2.4 Scandal Frequencies and Fuzzy Set Scores

Companies with Board-Related Scandals 1 1 .8 .8 .6 .6 wi t h Co r p o r a t e Sc a n d a l s wi t h Co r p o r a t e Sc a n d l a l s M e m b e r s h i p i n Se t o f Co u n t r i e s M e m b e r s h i p i n Se t o f Co u n t r i e s .4 .4 .2 .2 0 0

0 1 2 3 4 5 0 2 4 6 Specialized Board Committees Director Independence

Companies with Executive Compensation Scandals 1 1 1 .8 .8 .8 .6 .6 .6 wi t h Co r p o r a t e Sc a n d a l s wi t h Co r p o r a t e Sc a n d l a l s wi t h Co r p o r a t e Sc a n d l a l s .4 .4 .4 M e m b e r s h i p i n Se t o f Co u n t r i e s M e m b e r s h i p i n Se t o f Co u n t r i e s M e m b e r s h i p i n Se t o f Co u n t r i e s .2 .2 .2 0 0 0

0 1 2 3 4 0 1 2 3 4 0 1 2 3 4 Base Pay Shareholdings Stock Options

Companies with Auditing-Related Scandals 1 1 1 .8 .8 .8 .6 .6 .6 wi t h Co r p o r a t e Sc a n d a l s wi t h Co r p o r a t e Sc a n d a l s wi t h Co r p o r a t e Sc a n d a l s .4 .4 .4 M e m b e r s h i p i n Se t o f Co u n t r i e s M e m b e r s h i p i n Se t o f Co u n t r i e s M e m b e r s h i p i n Se t o f Co u n t r i e s .2 .2 .2 0 0 0

0 2 4 6 0 .5 1 1.5 2 0 .5 1 1.5 2 Auditor Independence Audit Fees Non-Audit Fees

General Corporate Governance 1 .8 .6 .4 with Corporate Scandals Corporate with Membership in Set of Countries of Set in Membership .2 0 0 10 20 30 40 All Scandals

Condition 4: Left-Leaning Legislatures

Companies and industry associations are not the sole innovators or guarantors of viable voluntary governance arrangements: these occasionally require political conditions for institutional success (Bartley 2007). The fourth causal condition thus tests whether legislatures that are majority left-leaning are more inclined to regulate business activity than right-of-center political parties. Political systems are usually categorical in corporate governance research, with the traits of dispersed firm ownership likely to occur in liberal democracies, and concentrated ownership more likely in social democracies (Roe 2003). By inclusion of China among the cases, use of democracy as a metric in political systems is irrelevant.

I used the IPU PARline database to retrieve distribution of seats by political party for each of the ten countries’ legislatures over the focal temporal period.

Appendix B details the yearly distribution of party seats comprising national legislatures. I cross-referenced these parties with literature using this database and the Manifesto Research Group to code the leanings of each political party according 82 to the following categories: extreme-left; left, center-left, center, center-right, right, extreme-right. Accordingly all parties left-of-center are coded 1 for left and all right of center parties, and center, are coded as 0. This somewhat crude categorization allows testing whether left-leaning legislatures are required to legislate, and by extension, regulate, a given governance practice.

The PARline database provides the number of seats and vacancies by main political parties, independent parties, other (especially regional ones), in initial and final electoral rounds, where applicable. I consider the full year for once the seats are occupied post-election and consider the election year versus year of office. Data limitations preclude accounting for any resignations prior to next elections or appointments. One limitation is to assume that parties vote according to supposed ideology. Although these parties might diverge on their approaches to civil and social policies, the hypothesis is that generally left parties will adopt a more statist, regulatory approach to governing economic activity. Another potential limitation is the comparison of legislatures across different political systems. China is the clear exception to the others in being the sole non-democratic country. For this reason, I include its legislature, code 1 for left-leaning in all years, due to the predominance of the Chinese Communist Party in its legislature. In all countries, I do not consider the influence of the executive for those countries that have these as a separate branch of political power. Heads of state vary widely in function and ability to co-opt regulation. Likewise I do not include the role of the judiciary in a review of the 83 regulation in the coding of this condition. The focus here is the legislature and its likelihood to regulate, political leaning being a hypothetical condition.

Distributions of political parties are calculated as percentages of each chamber of a given legislature. China and Korea have unicameral legislatures. The remaining eight countries have bicameral legislatures, however, not all are equal in political representation or legislative power. Three parliamentary systems, Canada,

India and the United Kingdom follow this pattern. Canada’s House of Commons is the primary legislative chamber whereas its Senate is not directly elected nor deliberates on bills. India’s and Germany’s legislatures follow similar patterns. For these countries, I calculate the percentage of left-leaning political parties from their respective primary chambers only. For all others, i.e. Australia, France, Japan and the United States, I calculate the total of left-leaning parties per chamber and average the two. Appendix B includes these legislatures by their chambers’ official names.

A notable challenge is the comparison of legislatures across different political systems. China is the clear exception to the nine others in being the sole non- democratic country29. I do not consider the influence of an executive branch of government for those countries that have one because such heads of state vary widely in function and ability to influence legislation and to enact regulation unilaterally or authorize regulatory agencies to do so with just the minimum enabling legislation. For similar reasons, I do not consider the role of the judiciary.

29 China is also exceptional whereby its communists might behave as capitalists. I revisit this initial coding scheme for China in subsequent chapters. 84

The focus here is the legislature and its likelihood to regulate, political leaning being a hypothetical condition. See Figure 2.5 for the synopsis of left-right legislatures per country for the years 1990 to 200830.

Figure 2.5

Left-Right Composition of Legislatures

Australia Canada China France Germany

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

India Japan Korea United Kingdom United States

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

0 .25 .5 .75 1 0 .25 .5 .75 1 0 .25 .5 .75 1 0 .25 .5 .75 1 0 .25 .5 .75 1

Left Right

Crisp set scores take the value of 1 when the yearly legislature is majority left, i.e.

>0.50, and 0 otherwise.

30 The year 1989 is not available; time period begins in 1990. Values are then lagged by one year in the QCA as it is implausible that the political leanings of a legislature instantly produce either legislation or enhanced regulation at a government agency. 85

Condition 5: Ties between Countries’ Primary Stock Exchanges

Another condition turns to the network of stock exchanges on which the selected companies are listed and cross-listed. Although much research has already demonstrated the influence of board interlocks and cross-listings, this condition focuses instead on the direct ties between stock exchanges as an influence on regulation. Thomson ONE Banker provides the list of all stock exchanges on which the selected companies are listed; however, the data are not time-series. Although panel data on exactly which exchanges the companies were listed would be ideal, the latest year, i.e. 2008, of data is nevertheless a useful proxy to test for the impact of ties between the exchanges on their home countries’ regulation for the entire time period. I also ensured that only the years for which a firm’s market capitalization data were also available matched the years in which I considered its listing on multiple exchanges.

I tabulate the total number of exchanges on which each company has a share listing, then aggregate the company totals by home country, as indicated in Table

2.7. This aggregate indicates the number of companies listed on at least one of the other exchanges among the focal countries.

$ ! $ (' '* !& !& *# !* !' %$$# $ ! $ (' '* !% !& *" !# !' %$$* $ ! $ (' '* !% !& *" !# !' %$$) $ ! $ (' '* !& !& *" !# !' %$$( $ ! $ (' '* !& !& *" !# !' %$$' $ ! $ (! ') !& !& *" !* !' %$$& $ ! $ '* '( !& !& ** !* !' %$$% $ $ $ '' '( !& !& *( !) !& %$$! $ $ $ '% '% !& !& *( !) !& %$$$ $ $ $ &* &" !& !& *( !& !& !""" $ $ $ &) &# !& !% *' !& !& !""# $ $ $ && &( !& !! *' !% !& !""* F0G19C%H* $ $ $ &! &' !% !! *' !% !& !"") $ $ $ &$ && !% !! *& !% !& !""( $ $ $ %* %" !! !! *& !% !& !""' $ $ $ %) %" !! !! *& !% !& !""& $ $ $ %) %) !! !! *& !% !& !""% $ $ $ %( %) !! !! *& !% !& !""! 3A;?0429-CI0?04 @A/90 B42.95C@24D5A; B42.95CE.0.9- 87

Chinese and Korean companies in the selection do not have listings on any of the other exchanges of the focal countries, although the former typically have dual listings in Hong Kong. Indian companies from this selection are also grossly lacking in cross-listings on the exchanges of the focal countries, or others. Fuzzy scores are calculated using the standardization of the ranked values. Figure 2.6 indicates the plots of the ties between each of the primary stock exchanges and their corresponding fuzzy scores.

Figure 2.6 Fuzzy Set Scores of Stock Exchange Ties

.8 .6 .4 .2 Set Membership in Tied Exchanges Tied in Membership Set 0 0 20 40 60 80 Companies with Cross-Listings 88

Condition 6: Size of Capital Markets in National Economy

Variation in corporate governance practices across countries is a function of capital market development and independent accounting (Blair 2003). The growth of stock market influence on corporate governance arrangements varies across countries, even non-liberal (in the economic sense) ones (O’Sullivan 2003). Capital market development thus forms the seventh causal condition. One metric of such development within countries is to assess the ratio of stock market capitalization to bank deposits (Hall and Soskice 2001). Dispersed ownership of equity versus concentrated ownership is another metric, whereby “’strong’ regulation permits

‘weak’ owners, while ‘weak’ regulation necessitates ‘strong’ owners” (Coffee 1999:

648). The metric of capital market development relative to national economy already features as part of the case selection. The World Bank Development

Indicators provides time-series ratios of stock markets to GDP for all ten countries.

I employ this metric again as a causal condition to test the hypothesis that companies with larger capital markets relative to the rest of the economy are more likely to regulate corporate governance practices31.

I first calculate the cumulative moving average of each country’s ratio of stock markets to GDP starting in 1989. I then transform these values into fuzzy sets, using the previously mentioned standardized rank method. Figure 2.7 displays each

31 This is not analogous to “sampling on the dependent variable.” See Ragin (2009), Ragin (2000), Mahoney and Goertz (2006) for an elaboration on this conundrum in multivariate regression and its inapplicability in set relations and QCA. 89 country’s membership in the set of highly developed capital markets against its cumulative moving average of stock market capitalization to GDP.

Figure 2.7 Fuzzy Set Scores of Highly Developed Capital Markets

Australia Canada China France 1 .5 0

Germany India Japan Korea 1 .5 0

0 1 2 0 1 2

United Kingdom United States Membership in the Set of Set the in Membership 1 Highly Developed Capital Markets Capital Developed Highly .5 0

0 1 2 0 1 2 Cumulative Moving Average of Stock Market Capitalization as % of GDP, 1990-2008 Graphs by c ountry

Condition 7: Cumulative Regulation

The final causal condition tests whether regulators act like other organizations whereby early adopters of a behavior influence others to subsequently adopt similar behavior. In this condition, therefore, I test the effect of cumulative regulation of a given practice whereby those countries regulating a particular practice influence others to regulate the same practice. One method would be to consider cumulative regulation in a wave-like pattern where the influence of several countries on the others is compacted into a particular time 90 frame. Given the short time span, relative to regulatory action, however, I use continuous time in years instead of grouping years into periods. Likewise given the small number of countries, I consider all countries discreetly rather than as grouped by regions, size of their markets, legal types, or other categories. Crisp set scores are created by visualizing the “truth tables”—tables of configurations—of conditions and outcomes for each practice during all available years, and assigning the usual 1 or 0, as well a third value called “do not care.” When the number of all countries regulating the practice is greater than zero in yearj and countryi regulates that practice (outcome>0.5), then the condition equals 1 if the number of countries regulating is greater than zero in yearj-1. In this instance, other countries are regulating the same practice before countryi regulates it. If, however, the number of countries regulating equals zero in yearj-1, then the condition takes the value of zero.

In this instance, other countries indeed regulate the practice, but not prior to countryi. When countryi does not regulate the practice by the year 2008

(outcome≤0.5), then it does not receive a crisp set score and is instead treated as a

“do not care” configuration in the QCA minimization process explained in the next chapter. Table 2.8 presents an example for the first governance practice, specialized board committees, of how the condition is coded according to this scheme.

Table 2.8 0"'*()("'+89+0:-:;%)(<$+=$,:;%)("'+"> .7$3(%;(?$*+@"%#*+0"--())$$/ 0":')#($/+ 0":')#($/+ =$,:;%)"#5+ =$,:;%)"#5+ 0":')#5 B$%# =$,:;%)(',+ 0#(/7+.$)+.3"#$ 0":')#5 B$%# =$,:;%)(',+ 0#(/7+.$)+.3"#$ A:)3"-$ A:)3"-$ C5+B$%#! C5+B$%#! !""# " $ %&'()'*(+,-.% !""# / $ " !""$ " 0 !""$ / 0 " !""0 " 0 !""0 / 0 " !""1 " 1 !""1 / 1 " !""2 " 3 !""2 / 3 " D:/)#%;(% !""3 " 3 E'*(% !""3 / 3 " !""! " ! !""! / ! " !""/ " ! !""/ / ! " !""" " / !""" / / " /444 " / /444 / / " /44# " " /44# " "

!""# "5$1 $ / !""# / $ / !""$ "5$1 0 / !""$ / 0 / !""0 "5$1 0 / !""0 / 0 / !""1 "5$1 1 / !""1 / 1 / !""2 " 3 !""2 / 3 / 0%'%*% !""3 " 3 6%7%' !""3 / 3 / !""! " ! !""! " ! !""/ " ! !""/ " ! !""" " / !""" " / /444 " / /444 " / /44# " " /44# " "

!""# / $ / !""# " $ %&'()'*(+,-.% !""$ / 0 / !""$ " 0 !""0 / 0 / !""0 " 0 !""1 / 1 / !""1 " 1 !""2 " 3 !""2 " 3 01('% !""3 " 3 !"#$% !""3 " 3 !""! " ! !""! " ! !""/ " ! !""/ " ! !""" " / !""" " / /444 " / /444 " / /44# " " /44# " "

!""# / $ / !""# " $ %&'()'*(+,-.% !""$ " 0 !""$ " 0 !""0 " 0 !""0 " 0 !""1 " 1 !""1 " 1 !""2 " 3 !""2 " 3 &'()$*+ 2#%'3$ !""3 " 3 !""3 " 3 !(',*"- !""! " ! !""! " ! !""/ " ! !""/ " ! !""" " / !""" " / /444 " / /444 " / /44# " " /44# " "

!""# "5$1 $ / !""# / $ / !""$ "5$1 0 / !""$ / 0 / !""0 "5$1 0 / !""0 / 0 / !""1 "5$1 1 / !""1 " 1 !""2 "5!1 3 &'()$*+ !""2 " 3 4$#-%'5 !""3 "5!1 3 .)%)$/ !""3 " 3 !""! "5!1 ! !""! " ! !""/ "5!1 ! !""/ " ! !""" " / !""" " / /444 " / /444 " / /44# " " /44# " " !"#$%&'()*+,%$*-,$+,*-'$.//0$*1%$,*-)&,-2$34&54$4*6,$7,-"$6*)8,'$*5-"''$*))$5*','9 92

Shaded regions of the first year of the regulation (outcome) and the cumulative number of countries regulating in the year prior determine the values for the condition as 1, 0, or “do not care.” Outlined in bold are the years of each country’s first regulation, where applicable, and the associated condition’ score.

Figures 2.8-2.14 illustrate the cumulative adoption of each practice, in which the first country to adopt takes the value of 0 for this condition, subsequent adopters take 1, and all non-regulating countries are treated as “do not care” configurations.

Figure 2.8

Cumulative Regulation Specialized Board Committees 10 8

France

United States 6

China Canada 4

Japan 2

Number of Countries Regulating Countries Numberof Germany India 0 1998 2000 2002 2004 2006 2008

Australia, Korea, and the UK do not regulate by 2008.

Figure 2.9

Cumulative Regulation Director Independence 10 8

United Kingdom France 6

Germany United States 4

Canada Japan 2

Number of Countries Regulating Countries Numberof China 0 1998 2000 2002 2004 2006 2008

Australia, India, and Korea do not regulate by 2008.

Figure 2.10

Cumulative Regulation Auditor Independence 10 8 6

United Kingdom 4

Canada

United States 2

Number of Countries Regulating Countries Numberof Germany 0 2000 2002 2004 2006 2008

Australia, China, France, India, Japan, and Korea do not regulate by 2008.

2.6 Conclusion

The selection of conditions to predict the outcome of regulation includes aggregate firm-level behavior, structural attributes of markets, political influence and the influence of other regulating countries on countries yet to regulate the same practice. I hypothesize that these conditions combine in key configuration— paths—to describe the evolution of regulation. In the next chapter, I provide the results of the QCA, which indicate the precise paths to regulation, for each corporate governance practice.

Chapter 3

Results of Qualitative Comparative Analysis

3.1 Introduction

In this chapter, I demonstrate key configurations of causal conditions— paths—related to the regulation of previously voluntary corporate governance practices. I first discuss the combination of conditions, how I handle temporality and sequence of conditions and outcome for each governance practice, and introduce issues of consistency and coverage. Next I present the results of the fsQCA as discussed in Chapter 2, for each focal governance practice. I conclude by presenting a composite view of the causal paths by country-cases and summarize country-level regulation of these practices.

The outcome is the regulation, coded in a multi-value scheme as 0, 0.25, 0.75 or 1, as described in Chapter 2. The conditions used in the fsQCA to determine causal paths to regulation of each of the focal corporate governance practices, as discussed in the previous chapter, are as indicated in Table 3.1. These conditions are per country-case or, for firm-level behavior, i.e. voluntary practice, corporate scandals, and exchange ties, aggregated at the country-level.

!F=3 310#%"+*'( !#?#%"+*@1& .'()*+*'(&"88%*1$Q& '+/15S*$1&L)'&('+& ."51L&T)(.U C#?I15&':&'+/15& !5*$8&:'5&+/'$1& +/1&$"?1&:'."%& 85".+*.1&85*'5&+'& ."$1$&+'&S/*./&+/*$& :'."%&.'#(+56P$& 510#%"+*'(Q&*:&"(6 .'#(+5*1$&510#%"+*(0& 1+&".+*@*+6 ':&"&.'#(+56O$&EG7& "$&815.1(+&':&."8*+"%& ;A,9 D#RR6 ,-./"(01&;*1$ .'?8"(6&.5'$$N 9+'.>&1-./"(01&+*1$& (#?I15&':& %*$+*(0$&'(&8115& I"$1)&'(&+/1& 1-./"(01$ 2,D; !5*$8 21:+&210*$%"+#51 210*$%"+#51$& 85*'5&+'&510#%"+*'( %1"(*(0&8'%*+*."%& ?"M'5*+6&%1:+N .'?8'$1)&':& 8"5+*1$&)#5*(0&61"5& ;"I%1&VKW 9!BC D#RR6 !'58'5"+1&9."()"%$ +/1&:'."%&.'58'5"+1& !'58'5"+1&$."()"%$& 0'@15("(.1& 85".+*.1 51%"+1)&)*51.+%6&+'& 31."8*+#%"+*'(&':&!"#$"%&!'()*+*'($&"()&X#+.'?1&*(&Y!B 73B! D#RR6 4'%#(+"56&75".+*.1 85".+*.1&*:&")'8+1)& 85".+*.1&I6&:*5?$J& 751@"%1(.1&':&+/1& "K>K"K&L@'%#(+"56L& 85*'5&+'&510#%"+*'( 2A9; 3#%1 !5*$8 ,-./"(01&2*$+*(0& %*$+*(0&5#%1&51H#*5*(0& 0'@15("(.1& 9+'.>&1-./"(01& 85".+*.1 +/1&:'."%&.'58'5"+1& 91+&;681 7(1#?'(*. G1$.5*8+*'( !"#$"%&!'()*+*'( 97

Not all seven hypothetical conditions combine in causal paths, or “recipes”, for every practice32. Rather, I select between four and six conditions to run in the first step of the analysis, and three to four in the second step, explained in more detail below. More than six conditions do not yield interpretable solutions for such a small number of cases. A high number of conditions are computationally problematic as well, increasing the number of logical configurations exponentially:

2k rows where two possible outcomes (0 or 1) for k conditions exist for crisp sets; or

2k corners in multidimensional vector space for fuzzy sets, and the outcomes are x and 1-x (where x is the membership score between 0 and 1, while 1-x represents negation) (De Meur & Rihoux 2002, Ragin 1987). Therefore I keep to a maximum of six conditions modeled for the regulation of any one corporate governance practice.

Further, I do not expect identical configurations across the various governance practices to explain the outcome of regulation. Rather, diversity of paths is plausible.

Temporality and sequence of causal conditions is integral to this analysis.

The two concepts, however, are not entirely exchangeable. Sequence implies events concatenate over time leading to outcomes whereas temporality does not necessarily imply such sequence; events can occur in discreet time periods or in singular time. It is possible that a particular order of events is crucial to the outcome (Abbott 2001, 1995) especially when unanticipated changes to causal relationships alter the course of events (Mahoney 2000, Sewell 1996). Yet it is also

32 Paths are synonymous with configurations, or combinations of conditions. 98 possible in policy reform to synthesize shifts in causal configurations over time

(Krook 2006). I handle the temporal dimension by directly including in the fsQCA configurations as they occur in discreet years. The tables in the forthcoming sections display the conditions per country-case in the first year of regulation between 1989 and 2008 where the outcome is non-zero, or those conditions in 2008 if the outcome equals zero, meaning no regulation of the focal practice. With the exception of left-leaning legislatures, the values for which have already been lagged by one year as described in the previous chapter, values for the causal conditions are cotemporaneous with the listed outcomes. The condition, PRAC, is qualified as truly voluntary when companies adopt the practice prior to any regulation

(outcome>0.50). This method captures the fuzzy set scores of all conditions and the outcome at the time of regulation, or until time to regulate “runs out” in 2008. This method also avoids artificially inflating the number of cases year for all configurations, which would ignore the time-specific values of conditions and the outcome.

To handle the sequential dimension, I incorporate an additional causal condition in the QCA minimization process as Ragin and Strand (2008) and Rihoux and Ragin (2009) suggest. I describe this particular condition, which I call cumulative regulation, in Chapter 2. To recapitulate, when the number of all countries regulating a practice is greater than zero in yearj and countryi regulates that practice (outcome>0.50), then the condition equals 1 if the number of countries regulating is greater than zero in yearj-1. In this instance, other countries regulate 99

the same practice before countryi regulates it. If, however, the number of countries regulating equals zero in yearj-1, then the condition takes the value of zero. In this instance, other countries indeed regulate the practice, but not prior to countryi.

When countryi does not regulate the practice by the year 2008 (outcome<0.50), then it does not receive a crisp set score and is instead treated as a “do not care” configuration in the QCA minimization process, which includes it the secondary reduction. The sequential dimension of the analysis rests uniquely in the coding of this condition. “Sequence” is not synonymous with “paths,” which I refer here as the specific combinations of conditions that lead to the outcome of regulation.

The fsQCA is run in Stata 11 using the fuzzy program (Longest and Vaisey

2008). Although this program differs from the program fsQCA program developed by Ragin and Davey (2008), it still provides requisite complex and parsimonious solutions, as well as the intermediate solutions and the ability to conduct additional statistical tests.

The precise combination of conditions run in the minimizations was by trial and error. As a working rule for locating optimal configurations, I target any that produced solution consistency scores in excess of 0.60. Consistency measures the extent to which the conditions, or configurations thereof, are subsets of the membership in the outcome. Coverage scores should be as close to, or equal to, 1, which indicates a strong relationship between the conditions and the outcome.

Ragin (2008, 2006, 2000) suggests a test for the sufficiency of configurations X in 100

!min xi, yi the outcome Y with the inclusion ratio IXY = , where the configurations !xi

of conditions are sufficient for the outcome when IXY > 0.800 and, Xi ! Yi and where

“min” refers to the lower of X and Y. This cutoff point for a configuration’s sufficiency is not a rule itself; lower consistency scores are acceptable but less desirable for interpretation of results. Stryker and Eliason (2009) argue that this particular measure of consistency is somewhat descriptive, and such cut-off points might find typical use among researchers, but they are not entirely based on probabilistic causal relations. Remaining agnostic as to optimal benchmarks for consistency, but convinced of the need for minimal benchmarks, I resort to testing each configuration’s y-consistency at the 0.80 level for the configurations of all practices, and whether these consistencies are significantly greater than their n- consistencies (inclusion in the set 1-y), both at the 0.05 significance level.

After calculating configurations’ consistency with the above formula, it is possible to measure how much coverage of the empirical cases is explained by such configurations by changing the denominator to !yi . Coverage in this sense is a metric of how much a path, or combination of conditions, covers the outcome. A path’s coverage has two components: raw and unique. Raw coverage indicates each path’s proportional membership in the outcome whereas unique coverage is the difference between the total of all paths’ coverage per solution and the raw coverage of the competing paths, to adjust for the paths’ union. Unique coverage merely 101

adjusts the path’s coverage for overlapping paths in the solution. Total consistency

and coverage scores refer to a solution, which can be composed of multiple paths.

I provide the resulting configurations first as “complex solutions” along with

those reduced according to the Quine-McCluskey algorithm described in Ragin

(1987), and briefly restated here in an example. When the configurations a• B •C

and a•b•C are both sufficient to produce the outcome Y, they can be reduced to ! a•C . This follows Boolean logic that neither the presence nor absence of condition ! B, when combined with the absence of A and the presence of C, alters the outcome33. ! The first part of the minimization yields a “complex” solution, the second a

“parsimonious” solution. The remainders, logically possible configurations of

conditions lacking in empirical cases, are excluded from the minimization process

for the complex solution, but included as “do not cares” in the reduction to produce

the parsimonious solution. Added to the “do not care” configurations are those that

I identify in the condition CUMR for those cases to which the condition does not

apply. These cases have the condition noted as “dnc”, where applicable, in the

following tables. Each configuration’s y-consistency scores (inclusion in the

outcome, Y) from the parsimonious and intermediate solutions are further tested

against their inclusion in their “not-y” consistency scores (1-y, or negation) for

statistical difference at the 5% level.

33 Configurations of conditions are identified by several symbols. “•” is synonymous with “*”, the mathematical symbol for multiplication. In QCA, however, “•” actually refers to “and” meaning set intersection, or the minimum of a case’s membership score across a configuration of conditions. Paradoxically “+” in Boolean algebra does not refer to “and”, rather to “or” meaning set union, the maximum of a case’s membership scores across a configuration of conditions. 102

Another note on the terminology: the results in the following tables display the condition pneumonics from Table 3.1 in either uppercase or lowercase.

Uppercase refers to the presence of a condition whereas lowercase refers to the absence of a condition in a particular path. The ordering of the conditions listed in a given path is irrelevant. What matters are which conditions appear, and whether they are included in the causal configuration, or path to regulation, as present or absent. The term “solution” refers to the level at which a path is reduced in the QCA, from complex to parsimonious, and intermediate. A solution can therefore comprise more than one path to regulation.

3.2 Regulation of Specialized Board Committees

Table 3.2 presents the scores of the causal conditions and the outcome for each country-case as per the regulation of specialized board committees. These scores represent the values of conditions corresponding to the year of regulation in each country, or 2008 if there is no regulation. These scores can be considered as inputs for the minimization procedure in QCA to identify sufficient configurations of conditions leading to the outcome. Although each of these conditions demonstrates sufficiency and necessity through respective scores of at least 0.569, which configurations of these conditions produce the outcome of regulation?

103

Table 3.2 Scores for Conditions and Regulations: Specialized Board Committees

!*#4*,-!"$30%0"$4 !"#$%&' ()*& +",#$%*&'- !"&1"&*%)- 5067-!*10%*,- !#:#,*%0;)- =#%/":) .&*/%0/) 2/*$3*,4 8*&9)%4 <)6#,*%0"$ >#4%&*,0* ?@@A @BCCDE @BFF?G @BAA?H 3$/ @ !*$*3* ?@@G @BCCCA D @BFGH@ D @BFG !70$* ?@@G @BCCCH @BC@GI @BEC@H D D J&*$/) ?@@A @BCGDD @BFF?G @BAFDF D D K)&:*$' ?@@D @ @ @BE?I? D @BFG L$30* DCCC @ @ @BDI@H @ D M*1*$ ?@@E @ @ @BHDHH D D N"&)* ?@@A @ @ @BCI?I 3$/ @ O$0%)3-N0$63": ?@@A D @ @BCIFC 3$/ @ O$0%)3-2%*%)4 ?@@I D D @BCACE D D

The first, complex solution retains all logical remainders from the primary reduction. The logical remainders are so called because, even though the particular combinations of conditions are logically possible, they do not match any empirical cases. After the primary reduction in this complex solution, one path remains that includes the presence of all four conditions in Table 3.2 and leads to regulation of specialized board committees. This complex solution’s consistency score of 0.999 supports the configuration PRAC•SCAN•HIGH•CUMR as being a subset of the outcome, regulation. Further, the solution’s raw coverage score of 0.446 explains nearly half the outcome34. Table 3.3 indicates these results.

34 Raw coverage equals total coverage when only one path is returned in the solution. 104

Table 3.3 9/+M6(+"(.&3*%/+,"-("N()$&7,/%,O&H(P"/2H(!"##,++&&6 ./0( 4-,5*&( )"%*+,"-( !"#$%&'()"%*+,"- !"1&2/3& !"1&2/3& !"-6,6+&-78 !"*-+2,&6 9.:!;)!:<;=>?=;!4@. ABCCD ABCCD ABEEE !/-/H/K(L2/-7&K( 4): 9/26,#"-,"*6()"%*+,"- =>?=;!4@. ABFGD ABFGD ABEEE !/-/H/K(L2/-7&K( 4): >-+&2#&H,/+&()"%*+,"- 9.:!;=>?=;[email protected] ABCDJ ABCDJ ABEEE !/-/H/K(L2/-7&K( )!:<;=>?=;!4@. ABCCD ABCCD ABEEE 4):

In the complex solution, no counterfactuals (logical remainders) are allowed in the reduction. The parsimonious solution, however, includes all counterfactuals in a secondary reduction, which identifies the essential prime implicants of the solution. In this secondary reduction, regulation of specialized board committees is determined by the configuration, HIGH•CUMR, the presence of highly developed capital markets coupled with regulation by other countries in previous years.

Between these complex and parsimonious solutions lies an intermediate solution, which relies on knowledge about the two conditions eliminated in the parsimonious solution, i.e. the prevalence of voluntary practice and related committee scandals. The intermediate solution not only avoids the pitfalls of extremes in comparative case studies, namely between complexity and parsimony, but also forces a return to basic assumptions about the conditions and whether we can justify their hypothetically causal relationships with the outcome (Ragin 2008,

Kogut and Ragin 2006). In the selection of causal conditions to re-run in the intermediate solutions, I note that PRAC and SCAN are mutually sufficient and 105 necessary (their coincidence score is 1.0). Thus either one of these conditions could be excluded from the intermediate solution, but not both. To derive an intermediate solution, I run two models separately, both with the two conditions from the parsimonious solution, HIGH and CUMR, and each with either PRAC or SCAN.

In the first, the conditions PRAC, HIGH, and CUMR are all returned in the intermediate solution. This path, PRAC•HIGH•CUMR, has a consistency score of

0.999 and a coverage score of 0.462. In the second, the conditions SCAN, HIGH, and

CUMR are likewise all returned in the intermediate solution. This path,

SCAN•HIGH•CUMR, also has a consistency score of 0.999 but a lower coverage score of 0.446. Both paths are subsets of the parsimonious solution HIGH•CUMR. The parsimonious solution, however, has the same consistency score but higher coverage than either path in the intermediate solution, explaining more of the outcome with one fewer condition. Because the addition of PRAC or SCAN in the intermediate solution actually lowers coverage, the parsimonious solution,

HIGH•CUMR, is more indicative of causality of regulation. This combination of causal determinants in all three solutions is specific to Canada, France, and the

United States.

Because only one configuration is true in each solution, total coverage equals unique coverage and total consistency equals solution consistency. In the analysis of subsequent practices, multiple solutions appear per complex, parsimonious and intermediate, and total consistency and coverage of solutions will differ from the raw and unique values of each of their paths. 106

The results in Table 3.3 indicate that for the path to regulation of specialized board committees, voluntary practice by firms in countries with highly developed capital markets combines with the presence of two or more related corporate scandals and the influence of other countries’ prior regulation of the same practice.

India was first among its peers to regulate this practice, followed by Germany, but did not have a prevalence of specialized board committees among its firms prior to regulation, nor was considered highly developed in terms of capital markets at the time of their respective regulation. India’s regulation was, however, influential on the remaining three countries that subsequently regulated board committees, which

I elaborate in Chapter 4.

These two conditions, voluntary practice and corporate governance scandals related to specialized board committees, should be viewed as “supplemental” to the causal path because neither provides more explanatory coverage for the same three cases. Ultimately the shorter path of having highly developed capital markets and following other countries regulating board committees – regardless of their paths to regulation – explains the majority of this particular outcome.

3.3 Regulation of Director Independence

Table 3.4 presents the scores of the six causal conditions and the outcome for each country-case as per the regulation of director independence. Once again, these values are like inputs whereas the results of the minimization procedures are displayed in the subsequent table, Table 3.5. 107

Table 3.4 Scores for Conditions and Regulations: Director Independence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

The complex solution in Table 3.5 indicates two paths in the complex solution. One path is returned in the complex solution,

LIST•PRAC•SCAN•TIES•HIGH•CUMR, and applies to Canada, the United Kingdom and the United States. The parsimonious solution yields two paths, both of which display acceptable consistency and coverage, and both apply to the same three countries. This demonstrates more than one path to regulation is possible for the same cases, although the difference between these paths is not statistically significant.

Table 3.5 =/+Q6(+"(.&3*%/+,"-("R(S,2&7+"2(;-P&$&-P&-7& ./0( 4-,5*&( )"%*+,"-( 9"+/%( 9"+/%( !"#$%&'()"%*+,"- !"1&2/3& !"1&2/3& !"-6,6+&-78 !"*-+2,&6 !"1&2/3& !"-6,6+&-78 :;)9<=.>!<)!>?<9;@) =/26,#"-,"*6()"%*+,"- =.>!<9;@)

;-+&2#&P,/+&()"%*+,"- :;)9<=.>!<9;@)

" !!! !#$%&'%!(!)*)+,!-$."/0&!(!1*2)3 108

Scandals clearly play a diminished role from the complex to the parsimonious solution, so I eliminate this condition from consideration for an intermediate solution. Similarly, membership in the set of most highly developed capital markets was not part of the parsimonious solution, and is easily eliminated. The presence of the four remaining conditions yielded an intermediate solution with coverage of

0.319 and consistency of 0.954 for the same countries. At the time of regulation of board director independence, the three countries had listing rules among their respective stock exchanges that established criteria for director independence.

They also had a prevalence of voluntary director independence criteria among companies domiciled in their jurisdictions, were in the set of countries with highly developed capital markets, and followed the lead of China. This last point might seem counterintuitive, but recall that China regulated this practice for other reasons than the ones hypothesized here. It was not considered in the set of countries with highly developed capital markets nor was influenced by its peers in the regulation of this governance practice. Although Germany and Japan also come to regulate this practice following China, they have no voluntary adoption of the practice prior to regulation nor are as clearly in the set of highly developed capital markets as their peers in their respective years of regulation.

A more intriguing point for the regulating countries, Canada, the United

Kingdom, and the United States, was that presence, not absence, of listing rules on their exchanges, that were part of the causal configurations. This potentially exacerbates the notion of voluntary firm practices, whereby stock exchanges 109 similarly require what the countries eventually regulated. These points will be explored more fully in Chapter 4.

3.4 Regulation of Auditor Independence

Table 3.6 presents the scores of the causal conditions and the outcome for each country-case as per the regulation of auditor independence. The resulting complex solution includes two paths, one of which has low coverage despite high consistency: prac•scan•ties•LEFT•high, which applies only to Germany.

Table 3.6 Scores for Conditions and Regulations: Auditor Independence !*#4*,-!"$30%0"$4 !"#$%&' ()*& +",#$%*&'- !"&1"&*%)- 56/7*$8)- :);%- <087-!*10%*,- ?#%/"@) .&*/%0/) 2/*$3*,4 90)4 :)804,*%#&) =*&>)%4 A#4%&*,0* BCCD CEFFGH CEDGIF CEDDHC C CEDDBJ C !*$*3* BCCK CEFFJC CEFKIG CEDJKC G CEIKJC CEIK !70$* BCCD G CEDGIF C G CEIIKJ C L&*$/) BCCD C C CEJMID C CEDIGI C N)&@*$' BCCG C C CEJMID G CEHBMB CEIK O$30* BCCD C CEKBKC CEGIKJ C CEDGCB C P*1*$ BCCD G C CEFDBK C CEDMGC C Q"&)* BCCD C C C C CEFMBM C R$0%)3-Q0$83"@ BCCM G CEDGIF CEMKBC G CEFHHB G R$0%)3-2%*%)4 BCCH G G CEKFCM C CEFIHH G

The path with considerably higher coverage, PRAC•SCAN•TIES•LEFT•HIGH, is specific to Canada and the United Kingdom. The path in the parsimonious solution likewise applies to these two countries. Table 3.7 indicates the complex, parsimonious, and intermediate solutions.

110

Table 3.7 G/+>6(+"(.&3*%/+,"-("S(H*O,+"2(J-O&$&-O&-7& ./0( 4-,5*&( )"%*+,"-( 9"+/%( 9"+/%( !"#$%&'()"%*+,"- !"1&2/3& !"1&2/3& !"-6,6+&-78 !"*-+2,&6 !"1&2/3& !"-6,6+&-78 $2/7:67/-:+,&6:;<=9:>,3>? @ABCD @ABCE BA@@@ F&2#/-8 @ACCL @AMMR G.H!:)!HI:9J<):;<=9:KJFK @AD@B @ALMM @AMMN !/-/O/P(4Q

G/26,#"-,"*6()"%*+,"- 9J<):;<=9 @ACLD @ACLD @AMCE !/-/O/P(4Q @ACLD @AMCE

J-+&2#&O,/+&()"%*+,"- $2/7:+,&6:;<=9? @ABCD @ABCE BA@@@ / F&2#/-8 @ACCL @AMCL G.H!:9J<):;<=9 @AD@B @ALMM @AMLN / !/-/O/P(4Q

!!!"!#$%&'%!(!)*+,-.!/$0"12&!(!-*345

In considering the conditions for the intermediate solution, I noted that highly developed capital markets had a low sufficiency score of 0.366, making it a seemingly easy choice for exclusion. Neither of the other two conditions, PRAC or

SCAN, was as easy to eliminate outright: their presence is equally plausible as their absence as a causal condition, whereas HIGH is generally hypothesized to be present in countries that regulate. A bit of trial and error on including these two terms resulted in retaining PRAC, but eliminating SCAN, from the intermediate solution.

Stock exchange ties and left-leaning legislatures were clearly subset of the parsimonious solution, and so remained. Two paths of unequal importance result in the intermediate solution. Again Germany followed the path of high consistency but low coverage, whereas Canada and the United Kingdom again have the better path in terms of consistency and coverage. The presence of voluntary disclosure of executive stock options, combined with membership in the set of tied exchanges and left-leaning legislatures, account for over 40% of the produced regulation. In 111

Chapter 4, I elaborate on the British and Canadian cases in the regulation of executive stock options.

Repeating the thought experiment describe in the aforementioned section on executive stock option disclosure, I recode China’s legislature and found that in the disclosure of auditor independence, some modifications occur. The change occurs, however only when I recode China as 0, meaning 100% right-leaning in its legislature. Specifically, the complex and intermediate solutions exclude the path to regulation for Germany, but the paths in both solutions for Canada and the United

Kingdom remain and with the same coverage and consistency scores. An additional path in the parsimonious solution occurs, LEFT•HIGH, for Canada and the United

Kingdom again. The path to regulating the disclosure of auditor independence in this scenario, assuming China has an entirely right-leaning legislature, is when the left-leaning legislatures of Canada and the United Kingdom combine either with their stock exchanges being tied to others or when they have highly developed capital markets. The difference between the causal paths is not statistically significant, however, implying that regardless of the political leanings of China’s legislature, the paths to regulation of auditor independence in both Canada and the

United Kingdom are essentially the same as per the original QCA.

3.5 Summary of Causal Paths

Table 3.18 recapitulates the findings of the fsQCA, namely the causal paths to regulation from the better of the intermediate and parsimonious solutions (or both) 112 in the preceding sections. Prevalence of voluntary practice prior to regulation is a pervasive condition. This condition must be present in the paths for specialized board committees, director independence, and auditor independence. For specialized board committees and auditor independence, however, the parsimonious solutions exclude PRAC yet their remaining configurations,

HIGH•CUMR and TIES•LEFT respectively, display slightly higher coverage scores for their same respective countries.

Like the prevalence of the voluntary practice among companies, stock exchange listing rules are integral to the regulation of director independence when present for three countries. Scandals related to board committees among US- incorporated countries also play an integral part of the path to regulation.

Membership in highly developed capital markets is necessary for the path to regulation of specialized board committees. Likewise, ties between stock exchanges run parallel in the path to regulation of auditor independence regulation. For the same countries, such ties are also integral to regulation of director independence.

Lastly, the cumulative effect of regulation in some countries plays a causal role to the regulation of two practices in four countries. This condition is especially noteworthy for its cause among even those countries following divergent paths to regulation with similar effect among others countries. The role of these conditions in their respective paths will be explored more fully in the next chapter.

113

Table 3.8 -$.$(+)*'+03)+")7$5/.'+,"&)S%"R)*'%3,R"&,"/3)'&D)6&+$%R$D,'+$)-"./+,"&3

!"#$%&'&($)*%'(+,($ -"./+,"& *'+01'23 4"#$%'5$ 4"&3,3+$&(2 4"/&+%,$3 6 *7849:6!:94;<7= >?@AB >?CCC 4'&'D'E)F%'&($ -K$(,'.,T$D)U"'%D)4"RR,++$$3 6 -48G9:6!:94;<7 >?@@A >?CCC ;&,+$D)-+'+$3 * :6!:94;<7 >?HIA >?CCC 4'&'D'E)F%'&($E);&,+$D)-+'+$3

J,%$(+"%)6&D$K$&D$&($ 6 L6-M9*7849M6N-94;<7 >?OPC >?CH@ 4'&'D'E);&,+$D)Q,&5D"RE);&,+$D)-+'+$3

6 *7849M6N-9LNFM >?@>P >?COI 8/D,+"%)6&D$K$&D$&($ 4'&'D'E);&,+$D)Q,&5D"R * M6N-9LNFM >?HO@ >?CHB !!!"!#!"$%&'()*')+&,!-!#!-*./%(/0'$./

Although all of the paths highlighted in the parsimonious and intermediate solutions have high consistency scores, coverage scores vary between 0.319 and

0.576 for paths specific to at least two cases. How much coverage is enough? To explain this much regulation in six out of ten countries, with between two and four conditions, attests to the novelty of this research. We would expect higher coverage scores when testing intuitive causal relationships or confirming previous research.

However, the discovery of new conditions to explain roughly half of an outcome is a feat that deserves attention.

In the next chapter, I elaborate on the findings of QCA, namely the paths to regulation for those countries that eventually regulated the focal corporate governance practices. I discuss the inter-case comparison of relevant conditions, and their composite configurations—or paths—as well as the intra-case specificities that plausibly account for the portion of the outcome unexplained in the QCA.

114

Chapter 4

Paths to Regulation Expanded

4.1 Review of Paths to Regulation

The results of the Qualitative Comparative Analysis (QCA) identify the key, causal pathways of regulation of the select corporate governance practices that are specific to certain country-cases. This chapter serves to elaborate on those cases with reference to their causal paths. Toward this end, a richer comparative case analysis is possible, especially when taking into account the manifest counterfactuals: those countries that never regulated these practices, and why not all of those countries that did regulate necessarily followed the paths of their peers.

How does this qualitative data support the QCA? In this chapter, I first review the paths to regulation of each corporate governance practice measured in the preceding chapter. These include specialized board committees, director independence, and auditor independence. Additional practices are found in

Appendix C.

I then discuss the pertinence of these conditions across cases, draw the practices together by country and entertain ways to improve on the limitations of this study. I conclude by offering some generalizations about the regulation of corporate governance practices and point to new areas of inquiry based on these findings.

115

4.1.1 Regulation of Specialized Board Committees

Canada, France, and the United States follow the causal path comprised of highly developed capital markets and cumulative regulation by other countries, plus either of two other conditions prior to regulation: the prevalence of companies voluntarily adopting specialized board committees, or the occurrence of related corporate scandals. These paths account for nearly half the outcome of regulation.

Below I elaborate on the causal conditions in all three countries and present additional conditions unique to each that may account for the remaining portion of the outcome unexplained by the QCA in Chapter 3.

The cumulative average shares traded as a percentage of Canada’s GDP between 1989 and 2005, the year it regulated specialized board committees, was

55.5%. 115 of the 116 largest Canadian public companies had already established specialized board committees before regulation. One Canadian company,

Bombardier Inc., typifies its compatriots in having specialized board committees voluntarily. In 1996, the earliest year for which the company’s data are available, its annual report lists four board committees—executive, compensation, audit, and pension fund—and their respective members, on one page in a section on the company’s contact information toward the end of the report. By 2005, Bombardier reported the addition of corporate governance and nominating committees, as well as more information on every committee, namely their responsibilities and chairs.

Committee information is featured much more prominently, in a distinct section on corporate governance that appears much earlier in the annual report. 116

In addition, five well-publicized, related corporate scandals occurred in

Canada within eight years prior to regulation. These included conflicts of interest among board committee members at BRE-X Minerals in 1997 and Repap

Enterprises in 2002, lavish pay schemes without board oversight at Royal Group

Technologies in 2003 and Conrad Black’s Hollinger International in 2004. Canadian

Imperial Bank of Commerce (CIBC) was also directly implicated in the Enron in the

United States, which concerned lax oversight among board committees35.

Canadian regulation takes the form of government recommendation that listed companies adopt specialized board committees. In 2005, the Canadian

Securities Administrators issued National Policy (“NP”) 58-201, “Corporate

Governance Guidelines” along with National Instrument (“NI”) 58-101, “Disclosure of Corporate Governance Practices,” which establish that listed companies should maintain specialized board committees from June 200536. NP 58-201 provides guidelines of corporate governance whereas NI 58-101 sets forth reporting requirements. Boards should include a nominating committee composed entirely of independent directors (Guidelines 3.10-3.14) and a composition committee

(Guideline 3.15-3.17). Further, required disclosure on the National Instrument’s related Form 58-101F1 “Corporate Governance Disclosure” stipulates, “if the board

35 Only CIBC was featured among these scandals that was also on the list of Canada’s largest listed companies voluntarily reporting specialized board committees.

36 Had the wording of this regulation been “must” or “has to”, or other similar language indicating necessity, the fuzzy set coding for the Canadian regulation would have been 1 instead of 0.75. 117 has standing committees other than the audit, compensation and nominating committees, identify the committees and describe their function.”37

Canadian regulation also followed initiatives by provincial securities regulators in 2004. The Canadian Securities Administrators had solicited comments from 19 individuals representing companies, industry associations, pension fund managers, as well as TSX Group, the parent corporation of the Toronto Stock

Exchange. Seven commenters specifically recommended national harmonization of corporate governance guidelines. One anonymous comment suggested that compensation committees be “responsible only for incentive-compensation plans and equity-based plans that are subject to board approval” (Comment number 29 in

Schedule B of NP 58-201) with which the regulators ultimately disagreed.

France’s cumulative average of shares traded as a percentage of its GDP between 1989 and 2008, the year it regulated specialized board committees, was

76.3%. Of the 79 largest French public companies surveyed, 71 (89.9%) had already established specialized board committees before the 2008 implementation of the

European Union directive into French law. The food company, Danone, was an early adopter of specialized board committees that featured prominently in its annual report. A section on corporate governance in the company’s 1998 annual report indicates the duties, membership, chairmanship, and fees associated with each of its

37 A related policy, Multilateral Instrument 52-110 “Audit Committees,” established in January 2004, as enacted or adopted by the securities regulatory authority in each province except British Columbia, requires that if a company does not have an audit committee, then audit committee criteria apply to the company’s entire board of directors. 118 three committees. Further information on each director includes birthdate, number of shares held in Danone, and membership on boards of other companies. The relevant section appear earlier in annual reports of subsequent years, and entire pages are devoted to each specialized committee even though this information was not yet regulated disclosure. The number of meetings held by the committees, attendance, items covered, are all disclosed in addition to the general responsibilities and membership of the committee of earlier reports. By 2008, an additional committee, the “Social Responsibility Committee” appears as well.

Unlike Danone, the French media, aerospace and automobile conglomerate,

Lagardère Group, did not report any particular committees in its supervisory board prior to 200038. Thereafter the company reports having four members of the supervisory board in an audit committee and their general duties and emoluments.

There is no reference as to why the company only started reporting then, nor much other information as to its motive. In 2005, no additional specialized committees appear. The board declared in the 2003 corporate governance report that despite the recommendations of the AFEP and MEDEF—two business associations that promoted corporate governance standards—the addition of a nominations or a remunerations committee was not “opportune,” a position the board maintained through 2008. Turning to the French corporate scandal included in the causal path, the notorious ouster of chairman and chief executive of Vivendi, Jean-Marie Messier, led to the creation of a corporate governance committee at the firm and tightening

38 The information contained in the French and English versions of the Danone and Lagardère annual reports are consistent with each other. 119 of oversight by the other specialized board committees the company had since at least 1997.

French regulation results from the transposition of a European Union directive into national law that requires the presence of specialized board committees. Title VI, Article 32 of Act of July 3, 2008 authorizes the government to use administrative orders to adopt the legislative measures for transposing EU

Directive 2006/43/EC of May 17, 2006, a.k.a. “Statutory Audit Directive,” Article 41 of which requires the appointment of an audit committee at listed companies, with the exception of certain securities issuers and credit institutions. No other national

French law requires specialized board committees at listed firms, nor prescribes responsibilities thereof for those companies that do have such committees. France has the particular characteristc of having its regulation stem from a supra-national source, i.e. the European Union39. This characteristic, not shared by Canada and the

United States, implies the presence of a condition that not only spans regulatory levels, but also plausibly accounts for the portion of the outcome that is unexplained by causal path found in the QCA.

The United States was highest among the three cases in terms of its capital markets development. The cumulative average of shares traded as a percentage of

39 Article 41 is transposed into French law at the end of the focal time period, i.e. 2008. Implementation of Article 41 on audit committees of the EU’s Statutory Audit Directive occurs in Germany after 2008 (see §324 of the Bilanzrechtsmodernisierungsgesetz of May 25, 2009). The United Kingdom implements the Directive for effect in late 2008 (see the Disclosure Rules and Transparency Rules article 7.1 of 2008). Because the German and British regulations take effect after the focal time period, they are not included in the analysis. 120 its GDP from 1989 to 2006, the year it regulated specialized board committees, was

191%. Proportionally to their Canadian and French counterparts, slightly fewer

American public companies had disclosed specialized board committees before the

2006 regulation by the SEC: 263 out of 316 (83.2%)40. The United States was clearly member in the set of countries with prevalence of voluntary disclosure of specialized committees for all years from 1997 onwards41. America’s iconic General

Electric Company, for example, had specialized board committees since at least

1993, well in advance of the 2006 regulation. Its 1998 annual report listed seven board committees: Audit, Management Development and Compensation,

Nominating, Public Responsibilities, Finance, Operations, and Technology and

Science, although these last three disappear by 2008.

The United States also had its share of corporate malfeasance. Dennis

Kozlowski was to Tyco what Jean-Marie Messier was to Vivendi: culprit of unauthorized bonuses and lavish spending on all things corporate and personal using company funds. Tyco had specialized board committees since at least 1997, five years before the scandal gained media coverage. WorldCom’s chief, Bernard

Ebbers, took corporate excess even further, driving the company out of business and drawing further attention to the role of specialized board committees in oversight of management. The Enron scandal that came to light in 2001 implicated multiple

40 316 American companies in 2006 had available data for analysis in 2006, the year of regulation, although 338 companies were the maximum potential number over the entire time period, 1989 to 2008.

41 Recall that the prevalence of voluntary practice is measured from 1997 onwards owing to data availability. 121 areas of corporate governance in addition to specialized board committees42 .

HealthSouth and Cendant corporations also suffered from runaway CEO fraud and financial deception: board members failed to raise significant opposition to these untrammeled chief executive officers and renewed interest in board committee appeared among shareholders and regulators alike.

In the United States, 17 CFR § 229.407(b)(2) stipulates that from 2006, firms must disclose whether their boards have audit, nominating and compensation, or similar committees, and if so, must adhere to multiple requirements regarding shareholder communications and timeliness of disclosure. 17 CFR § 240.10A-3, pursuant to the Sarbanes-Oxley Act of 2002, also establishes standards for the audit committee, namely members’ independence, certain exemptions for foreign issuers

(and, like French law, for certain securities issuers) 43 , and responsibility for retaining and remunerating external auditors. 17 CFR § 229.407(b)(2) allows reporting of this requirement either in its annual proxy statement or on the company’s website. Section 407(e)(1) further requires that where a compensation committee is absent from the company’s board, a statement identifying the directors that assume compensation committee functions be provided.

The American regulation for disclosure of specialized board committees is more heavy-handed than its Canadian counterpart, but like the Canadian

42 The events associated with Enron led directly to the Sarbanes-Oxley Act of 2002, which sought to rectified related deficiencies in accounting deficiencies.

43 Further exemption to the audit committee requirement is provided by § 270.32a- 4 for management investment companies. 122 regulations, is rooted in domestic deliberation to a greater extent than similar

French regulations. Four other countries—China, Germany, India, and Japan—also regulated the presence of audit committees at listed firms but each country followed its own path. None of these four were in the set of highly developed capital markets countries in the years of their respective regulation, underscoring the importance this condition has for regulating this particular corporate governance practice.

Among these four, only China had prevalence of companies voluntarily disclosing specialized board committees as well as the occurrence of related scandals.

India and Japan did not follow the same causal path as did Canada, France, and the United States in the regulation of specialized board committees, but their regulatory actions form the third causal condition: cumulative regulation. The

Securities and Exchange Board of India in 1999 established guidelines in response to the growth of employee stock option schemes. The 1999 SEBI guidelines specify compensation committees were required on Indian, listed companies’ boards.

India’s Companies Act of 1956, since revised, introduced a provision in its 2000 amendment for companies44 to have an audit committee. Section 292A of the Act allows Indian company boards to develop their own terms of reference for audit committees, it does stipulate a minimum of three directors in its membership, two- thirds of which shall be other than executives. This regulation falls squarely in the realm of India’s corporate law, and points to related regulation at Indian stock exchanges by the Securities Exchange Board of India:

44 Both listed and unlisted companies with paid up capital of at least 5 crores of rupees, approximately US $1 million. 123

“It may be noted that the Listing Agreement of the Stock Exchanges also require Listed Companies to constitute an Audit Committee. As per the provisions of the Listing Agreement, the Audit Committee should have a minimum 3 Directors. The committee should consist only of Non - Executive Directors with majority being Independent. However, in the Companies Act, the Audit Committee is permitted to have a maximum of one thirds as Executive / Whole Time Directors.”

Japan’s commercial code was similarly amended to require the inclusion of nomination, compensation, and audit committees. From 2003, Japanese companies had the choice of retaining their incorporation under either the traditional system of overlapping governance functions throughout the firm or converting into companies with distinct board committees and an external auditor, borrowing Western notions of separated board director and auditor functions. Two years later, the Companies

Act consolidated into one legal document this and other provisions of the commercial code governing listed, or joint stock, companies. There is dissimilar language between the Indian and Japanese laws concerning specialized board committees, and only Japan’s requires the same three committees—nomination, compensation, and audit—as Canada and the United States came to require.

4.1.2 Regulation of Director Independence

The path to regulation of director independence disclosures applies to

Canada, the United Kingdom, and the United States. It is described as having the presence of four causal conditions: stock market listing rule for companies to disclose their criteria and compliance with board director independence, combined with the prevalence of companies voluntarily disclosing their director independence 124 in the absence of regulation, plus stock exchange ties, and cumulative regulation by peer countries.

One year prior to the Canadian government’s regulation in 2005, the Toronto

Stock Exchange (TSX) began requiring companies to disclose whether a majority of its board directors were unrelated:

“An unrelated director is a director who is independent of management and is free from any interest and any business or other relationship which could, or could reasonably be perceived to, materially interfere with the director’s ability to act with a view to the best interests of the corporation, other than interests and relationships arising from shareholding” (TSX Guideline 2).

The TSX also suggests optional, "enhanced" disclosures to describe in greater detail every relationship between the company and its director and each director’s status as unrelated or related to the company. Guideline 12 further recommends structural features of board independence, including separate board and management roles, and the inclusion of a corporate governance committee within the board. The TSX guidelines result from the Joint Committee on Corporate

Governance sponsored by the Canadian Institute of Chartered Accountants, the

Toronto Stock Exchange, and the Canadian Venture Exchange. Its 2001 Saucier

Report (named for the committee’s chairwoman, Guylaine Saucier) built on the earlier recommendations of the 1994 Dey Committee report, precursor to the TSX’s first corporate governance guidelines. Like the Saucier Report, the TSX guidelines are not full listing rules because companies are recommended but not required, to comply. The Joint Committee advocated especially a non-regulatory approach to

Canadian corporate governance, in favor of corporate self-regulation by disclosure: 125

“While there may be a place for regulating some aspects of corporate governance, our view is that disclosure is a much better approach than attempting to regulate behaviour, if one is seeking to build a healthy governance culture (…) First, disclosure can provide examples of good practice that can assist boards that are looking for ways to become more effective. Second, a requirement to disclose against guidelines can modify behaviour by forcing boards to focus explicitly on their roles and responsibilities and how they are being discharged” (Saucier Report 2001: 10).

Further, the Saucier Report does not propose a test for director independence, like the New York Stock Exchange, nor includes precise criteria for director independence like the London Stock Exchange. Earlier TSE45 guidelines provided a director independence framework of “outside” and “unrelated” (synonymous with

“independent”) directors, which the later Saucier Report revised. Although the Joint

Committee refrained from recommending rules identical to those in the United

States, it did cite specifically the United States, as well as the United Kingdom— though no other countries—as models for improvement of Canadian corporate governance.

In addition to the TSX listing rule, voluntary disclosure of director independence was prevalent at Canadian companies. 113 out of 116 the largest public Canadian companies were disclosing director independence criteria prior to the government’s 2005 regulation. The presence of a third causal condition in the path to regulation of director independence was also necessary: stock exchange ties.

44 of 116 Canadian companies (37.9%) listed on the Toronto Stock Exchange were

45 The Toronto Stock Exchange was abbreviated as TSE before it became a for-profit company in 2000. The following year, it acquired the Canadian Venture Exchange, and adopted the new abbreviation, TSX. 126 cross-listed on the New York Stock Exchange in 2005, the year of the first regulation, and one year following the stock market listing rule. Canadian companies, among others in this study, have the most cross-listings on the exchanges in the other countries, especially in the United States. This structural characteristic is enforced by the comments in the TSX rules as well as in the government’s regulations.

The Canadian government’s regulation, found in National Policy 58-201, suggests under Guideline 2.1 that from 2005 listed companies disclose the identity of independent directors, and provide a description of those directors who are not independent46. Guideline 3.1 of the same Policy further recommend that the majority of the board be independent, especially the board’s chair as per Guideline

3.2. The purpose of the Policy is unabashedly influenced by foreign, namely

American, sources, and reiterates the “comply or explain” principle to which the

Policy adheres:

“This Policy provides guidance on corporate governance practices which have been formulated to: achieve a balance between providing protection to investors and fostering fair and efficient capital markets and confidence in capital markets; be sensitive to the realities of the greater numbers of small companies and controlled companies in the Canadian corporate landscape; take into account the impact of corporate governance developments in the U.S. and around the world; and recognize that corporate governance is evolving. The guidelines in this Policy are not intended to be prescriptive. We encourage issuers to consider the guidelines in developing their own corporate governance practices.”

46 I coded these guidelines 0.75 instead of 1.0 because they are not fully required, rather encouraged, by the government: “The guidelines in this Policy are not intended to be prescriptive. We encourage issuers to consider the guidelines in developing their own corporate governance practices.” 127

The official Canadian meaning of director independence stems from Multilateral

Instrument 52-100 regarding audit committees, and refers to “any direct or indirect relationship which could, in the view of the issuer’s board of directors, reasonably interfere with the exercise of a member’s independent judgement” including former employees, executives, auditors, and other paid consultants to the company, or the immediate family members thereof.

I discuss later in this section the role of the fourth causal condition, cumulative regulation, as it applied to all three cases. Next, I turn to the causal path—comprising the stock exchange listing rule, voluntary practice, and stock exchange ties—and the outcome of regulation in the United Kingdom and in the

United States.

The London Stock Exchange adopted in November 2003 the Combined Code on Corporate Governance, Section A.3.1 of which identifies board independence criteria and disclosure that boards should have, including previous employment or other material relationship with the company, significant shareholdings, or familial ties to the company, or “has served on the board for more than nine years from the date of their first election.” The Combined Code further recommends that boards of large companies, defined as those being in the FTSE 350 index, be composed of at least 50% independent directors. Further, at least one independent, non-executive director of all boards should be senior independent director. British companies with a primary listing on the London Stock Exchange must comply with the 128

Combined Code on Corporate Governance or explain why they do not, taking an approach like that of the Toronto Stock Exchange.

This “comply or explain” principle originates in the 1992 Financial Aspects of

Corporate Governance Report, or “Cadbury Report” named for the authoring committee’s chairman, Adrian Cadbury47. Although less elaborate than the latter day recommendation of the Combined Code, the basic definitions of director independence of the Cadbury Report are clear:

“We recommend that the majority of non-executives on a board should be independent of the company. This means that apart from their directors’ fees and shareholdings, they should be independent of management and free from any business other relationship which could materially interfere with the exercise of their independent judgement. It is for the board to decide in particular cases whether this definition is met. Information about the relevant interests of directors should be disclosed in the Directors’ Report” (Recommendation 4.12 of the 1992 Cadbury Report).

As for voluntary disclosure of director independence, fully 100% of the 137

British companies were likewise disclosing their compliance with board director criteria by the 2007 regulation in the United Kingdom. That they were doing so is testimony to the strength of corporate and market norm-making prior to the British government’s regulation of the same corporate governance practice. Two British companies exemplify voluntary disclosures regarding director independence prior

47 The Combined Code also includes recommendations from other government- commissioned reports, including the Hampel and Greenbury reports. These focused on directors’ remuneration, however, not director independence. Conversely, the report from Derek Higgs does include recommendations on director independence that figure in the 2003 Combined Code. The Combined Code was amended in 2005, 2006 and 2008, but did not alter guideline A.3.1 regarding director independence. 129 to regulation48. British bank, Barclays, began reporting director independence in

2001. In earlier reports, since 1997, no mention of director independence appears despite reference to the recommendations of the Cadbury and Greenbury Codes, which were yet to become part of the Combined Code, concerning other features of

Barclays’ corporate governance apart from director independence. In a section entitled “Corporate Governance Report” (page 24 of 316) of its 2005 annual report, however, the bank discloses that ten of sixteen of its directors are independent, as well as non-executive. It also reported that the board gave particular attention to one director for having served the longest among his peers, nine consecutive years, and decided to retain him as independent director. The company refers specifically to the Combined Code, described earlier, as well as to its own “Charter of

Expectations,” which provides additional measures to help ascertain director independence. These measures are entirely subjective, such as whether a director challenges others and defends their viewpoints for the good the organization, or whether a director can evaluate the information provided by management. This section within the 2005 annual report is more prominent than in the 2001 version, which appears much later and provides less detail, i.e. compliance with the

Combined Code but without further detail of each director’s independence.

Another illustrative example of a British company disclosing that it did not comply with the Combined Code’s director independence criteria and explaining how so, is

48 Examples of Canadian and American companies voluntarily adopting director independence criteria before their related regulations are similar to those in the aforementioned sub-section on specialized board committees. 130 engine maker, Rolls-Royce. An early adopter of voluntary disclosure, the company has been reporting its compliance with the Combined Code since 1998. In 2006, the first year of regulation in the United Kingdom, Rolls-Royce disclosed that it was not fully compliant with the Combined Code’s criteria for director independence. A particular director had been serving on the board for ten consecutive years, one more than suggested in the Combined Code. The company acknowledged this fact, identified other areas in which the director was considered independent, and justified the lengthy tenure:

“The Board believes strongly that in a long-term, complex and technologically advanced business, it is essential that non-executive directors have the opportunity to acquire, over a number of years, the experience and knowledge of the business and the sectors within which the Group operates.”

Fifteen of the 137 British companies (10.9%) had cross-listings outside the

United Kingdom in 2007, albeit none on the Toronto exchange and only two on the

New York Stock Exchange. Among exchanges in other countries in this study were nine companies cross-listed in Frankfurt, three in Tokyo, and one in Paris. That

London is a capital markets magnet is no surprise; however, the fact that relatively few British companies list outside the United Kingdom has a counterintuitive effect on the regulation. On the one hand, it is plausible that the quantity of cross-listings of British companies matters less for influencing national regulation than which companies those are or their target markets for additional capital. On the other hand, it is also plausible that these cross-listings matter not only for influencing

British regulation but also for those of the countries in which these cross-listings 131 occur. As will be discussed later in this section, the ties to Frankfurt reinforce claims by the author’s of Germany’s corporate governance code that British practice— regulated and otherwise—directly influenced German corporate governance.

The British regulation is found in Chapter 46, section 173 of the 2006

Companies Act (for effect in 2007), which sets out the duty for companies to exercise independent judgment: “(1) A director of a company must exercise independent judgment. (2) This duty is not infringed by his acting—(a) in accordance with an agreement duly entered into by the company that restricts the future exercise of discretion by its directors, or (b) in a way authorised by the company's constitution.” The Financial Services Authority also established in 2008 the Disclosure and Transparency Rule 7.1, which requires at least one member of audit committee to be independent49. Compared to the Canadian and American regulations, the British regulation of director independence is the most broadly defined.

In the United States, the New York Stock Exchange’s Listing Rule 303A.01, applicable to listed companies from 2004, states simply: “Listed companies must have a majority of independent directors.” Rule 303A.02 elaborates in much greater detail several tests for director independence:

“(a) No director qualifies as "independent" unless the board of directors affirmatively determines that the director has no material

49 The added requirement that audit committee members be independent earned the United Kingdom the corresponding coding of 1 for the outcome. Had this additional requirement not been made by the Financial Services Authority, the coding would have been 0.75, commensurate with the 2006 Companies Act deferral to companies to prescribe their own director independence criteria. 132

relationship with the listed company (either directly or as a partner, shareholder or officer of an organization that has a relationship with the company). Companies must identify which directors are independent and disclose the basis for that determination.”

Subsections (b)(i) to (b)(v) stipulate further when a director is not considered independent, i.e. when employed—or when a family member is employed—by the company within the previous three years, or received compensation in excess of

$120,000 in the previous twelve months from the company, or is employed by the company’s internal or external auditor, or has been an executive officer of another company while being on that company’s compensation committee in the previous three years, or has made payments to the company in excess of the greater of $1 million or 2% of revenues.

The NYSE listing rule followed the 2002 recommendations of its own

Corporate Accountability and Listing Standards Committee, the creation of which was suggested by then SEC Chairman, Harvey Pitt. Other organizations voiced similar prescriptions for director independence, but none were combined into a single code as in the United Kingdom. The Conference Board Commission on Public

Trust and Private Enterprise 50 went further than the NYSE’s commission, for example, by proposing in 2003 that not just a majority of directors be independent,

“substantial majority”. The Business Roundtable, conversely, has traditionally offered a more tepid attitude toward formalized rules and regulations, deferring to

50 The commission, composed of industry, academic, and political leaders, is independent of the Conference Board and supported by the Pew Charitable Trusts. 133 companies and their boards the primary judgment of director independence criteria and compliance:

“If a particular director is not deemed sufficiently independent, the board may nevertheless conclude that the individual’s role on the board remains highly desirable (as in the case of an inside director) in the context of a board composed of a majority of directors with the requisite independence. The overall result should be a board that, as a whole, represents the interests of stockholders with appropriate independence” (Statement on Corporate Governance, September 1997).

The Business Roundtable’s position remained unchanged in its subsequent statement on corporate governance in 2002. These two organizations represent contesting opinions of board independence criteria that did not successfully influence the final listing rules at the NYSE in either’s favor.

262 out of 316 American companies voluntarily disclosed their director independence before the 2006 regulation51. Fourteen of these companies (4.4%) had cross-listings outside the United States in 2006, including eleven companies cross-listed in Toronto, and one each in Frankfurt, London, and Tokyo. Importantly all of these exchanges are in countries that regulated director independence, of which two had corresponding stock exchanges listing rules as well.

51 Although I did not formally model prevalence of voluntary compliance and disclosure with director independence as a precedent to stock market listing rules, voluntary practice is still pervasive prior to the appearance of the listing rules in every focal case. 105 of 116 Canadian companies voluntarily had independent directors by 2004, the year of the Toronto Stock Exchange’s related listing rule. In the United Kingdom, 125 out of 137 companies behaved likewise in 2003, the year the London Stock Exchange formerly adopted the Combined Code’s recommendations as listing rules. Over 85% of American companies were also voluntarily disclosing their director independence in 2004, two years before the New York Stock Exchange requirement. 134

The same regulation that applied to specialized board committees in the

United States, 17 CFR § 229.407, applies to director independence. Article (a)(1)(i) allows a public company to establish its own “definition of independence that it uses for determining if a majority of the board of directors is independent in compliance with the listing standards applicable.” So although companies may have their own criteria for director independence, the regulation defers to the stock exchange, i.e. the New York Stock Exchange, which does have related independence criteria52.

The article extends the director independence criteria to companies with or without specialized board committees. Exemptions can be made, but must be disclosed, for companies required to have a majority of independent directors on the board or meet independence criteria on specialized board committees.

Four other countries influenced Canada, the United Kingdom and the United

States in the condition to which I refer as cumulative regulation. This condition of cumulative regulation includes only those countries having regulated director independence regardless of their causal paths to regulation. They comprise, in reverse chronological order: the effect of German and American regulation on the

United Kingdom; the effect of Canadian and Japanese regulations on the United

States and the United Kingdom; and the effect of China on Canada, the United States and the United Kingdom.

52 If this study included companies listed on other American exchanges than the New York Stock Exchange, or included other corporate forms, I would have to modify the fuzzy set coding of this outcome to accommodate additional, related independence criteria, according to each corporate form and exchange. 135

China was first to regulate director independence in 2003. The China

Securities Regulatory Commission (CSRC) issued Notice 116, Article 3 of which stipulates broad independence criteria, especially for separate board director and executive positions53. Its subsections 5 and 6 also separate the roles between board directors and company executives. Article 4 requires a minimum one-third of the board to be independent. Additional, negative qualifications of independent directors are also part of the CSRC’s Code of Corporate Governance, including limitations on share ownership. Article 123 of the Company Law, revised in 2005, also formalized the requirement for independent directors: “A listed company shall have independent directors. The concrete measures shall be formulated by the

State Council.”

China bypasses the path that the other countries in this study take but is still the first to regulate this practice. One argument is that Chinese policymakers have an objective to use monitoring by the capital markets to transform governance structures of listed Chinese companies (Chen 2007). Another argument takes a different view: “The Chinese government has never, however, had much faith in market solutions. Its approach to corporate governance has been no different (…)

53 This noticed applied to all securities companies, asset management companies, and all companies launching initial public offerings (IPO). “As from January 1st, 2004, an issuer applying for IPO shall be a joint stock limited company of at least three years from the day it was established. Waivers will be granted to a joint stock limited company restructured from a state-owned enterprise on an integral basis, a joint stock limited company derived from a limited liability company on an integral basis, or an issuer approved by the State Council to be exempted for the term requirement in the preceding paragraph.” It also followed a CSRC opinion issued in 2001 on the establishment of independent board directors. 136

Now it is requiring independent directors without any real effect” (Clarke 2006:

217). An UNCTAD 2006 survey of 80 Chinese listed companies reported that 98% of the board directors were independent compared to 88% of the sample OECD countries’ boards. Nevertheless, concentrated ownership, particularly by Chinese various state agencies, persists despite the required introduction of independent directors into Chinese boards (Clarke 2006, Feinerman 2007). The problem with supposedly outside directors is that some are just retired senior executives of other

SOEs54.

A legal advisor at the China Corporate Governance Program in the

International Finance Corporation’s Beijing office, formerly a legal adviser to mainland companies listing in Hong Kong, concurs: director independence is

“window dressing.” The CSRC can check up on how board members vote

“anonymously”, even an abstention, and pressure them. Few members veto anything the chairman wants either. Further, companies will do anything to get an

IPO including the pursuit of separate ownership and management, because they do not want to be controlled by the state.

Absent from the Chinese qualifications however, are limits on related party transactions of the board directors found in the New York Stock Exchange’s 2003 corporate governance rules, a primary source of the Chinese rules (Wang 2008).

American director independence qualifications, although unregulated at first in the

54 Based on interview with a senior representative of the China Corporate Governance Center in Beijing, an organization similar to the IRRC/ISS of the United States. 137

United States, were imported and adapted into the Chinese regulation, and “re- exported.” The particular motives by Chinese policymakers and companies may help explain how China chartered its own path to regulation of director independence.

The next two countries to regulate were Canada and Japan in 2005. Recall that Canada’s regulation is treated as an outcome, as well as a causal condition for other countries’ regulation. In Japan, the Company Act 2005 Article 400 requires a minimum of three members per committee, all of which must be "outside directors," the definition of which is found in Article 2(xv):

"’Outside Director’ means a director of any Stock Company who is neither an Executive Director (hereinafter referring to a director of a Stock Company listed in any item of Article 363(1), and any other director who has executed operation of such Stock Company) nor an executive officer, nor an employee, including a manager, of such Stock Company or any of its Subsidiaries, and who has neither ever served in the past as an executive director nor executive officer, nor as an employee, including a manager, of such Stock Company or any of its Subsidiaries.”

The distinction between “outside” and “independent” has historically been more than semantic in the Japanese case, but since the corporate governance reforms that took effect in 2003, “outside directors are expected to play a role more akin to that expected of independent directors in the U.S. federal securities law” (Clarke 2006:

165).

Next to regulate were Germany and the United States in 2006. In Germany, the Corporate Governance Code’s article 5.4.2 states:

“To permit the Supervisory Board's independent advice and supervision of the Management Board, the Supervisory Board shall 138

include what it considers an adequate number of independent members. A Supervisory Board member is considered independent if he/she has no business or personal relations with the company or its Management Board which cause a conflict of interests. Not more than two former members of the Management Board shall be members of the Supervisory Board and Supervisory Board members shall not exercise directorships or similar positions or advisory tasks for important competitors of the enterprise.”

The term “shall” include implies the “comply or explain” principle described earlier.

France was cotemporaneous with the United Kingdom in the regulation of director independence and is therefore not included in the cumulative regulation condition for the three cases that followed the causal path.

China, France, Germany, and Japan also regulated director independence disclosures but did not follow the same causal path as did Canada, the United

Kingdom, and the United States. China was not a member in the set of highly developed capital markets when it regulated in 2003 nor did its main stock exchange have a corresponding listing rule. It did, however, have prevalence of disclosing this practice prior to regulation. France, Germany, and Japan all regulated and were susceptible to influence by other regulating countries. None of these three, however, had related listing rules, and only France had prevalence of voluntary practice and was clearly in the set of highly developed capital markets.

This highlights the point that the QCA does not offer the final word on the effect of the conditions, but points to the causal paths that cut across different cases.

Stock exchanges in Toronto, London, and New York came to predict—rather than pre-empt—regulation of board director independence. The Toronto and

London exchanges require that companies disclose whether their board directors 139 meet independence criteria, or explain why they do not, whereas New York has a firm requirement. Companies in all three countries had prevalence of voluntarily disclosing information about their directors’ independence in advance of regulation in each country. Several companies were also tied to exchanges outside their home country of incorporation, meaning that they are listed on at least one of the other exchanges among the focal countries. Almost 40% of Canadian companies were cross-listed in New York in 2005, representing the strongest unidirectional tie among the exchanges. Canada, the United Kingdom, and the United States regulated director independence between 2005 and 2007, by which time four other countries had also regulated, albeit through different causal paths each. The stock exchanges listing rules and ties compound the firms’ voluntary disclosure of director independence criteria as a condition preceding regulation in these countries. This underscores the fact that private actors in the markets set the standard for this particular governance practice, unsurprisingly in three institutionally similar countries—Canada, the United Kingdom, and the United States—but more surprisingly, their regulation was influenced by other regulating countries that did not follow the markets in the same causal path, nor are institutionally similar.

I do not elaborate on the effect of having independent directors on boards, a related debate in other literatures. Share performance, for example, is inversely correlated with the proportion of independent directors on boards of financial institutions (Erkens et al. 2010). Shipilov et al. (2009) find that Canadian companies variably adopt director independence between 1999 and 2005, the year I observe 140 the arrival of regulation (0.75 in Canada for both practices). This coincides with their first wave of diffusion of the underlying institutional logic, followed by a second wave comprising specific criteria for evaluating director independence.

“The fundamental mechanism driving mimetic adoption in the second stage of diffusion is uncertainty, i.e. later adopters rely on the clues received from early adopters to reduce their uncertainty about the merits of this practice. This model explains diffusion of a single practice, or a group of practices that spread simultaneously, but it does not explain the drivers of diffusion for multiple waves of practices that are connected by the same institutional logic. Our theory and findings show that such practices extent the hold of an institutional logic through path-dependent adoption” (Shipilov et al. 2009: 875).

Their analysis stops short of explaining, however, the shift from the adoption of practice, and attendant institutional logics, to regulation. I welcome their findings that board interlocks insufficiently predict voluntary adoption of independent board directors in a second wave, and that cross-listing of Canadian companies on the New

York Stock Exchange plays a causal role in the adoption of American practice at

Canadian firms, but I challenge their inclusion of the multi-wave diffusion to add the role of regulation in defining or altering the institutional logic. Canada regulated director independence just prior to the United States, albeit at a slightly lower degree of criteria-setting, allowing Canadian companies to comply with their own director independence criteria.

The Canadian and British exchanges adopt the “comply or explain” approach, while the American approach is discernibly more rules-based. TSX and NYSE both had listing rules on director independence by 2004; Canada regulated board independence only one year later, the United States by 2006. The United Kingdom 141 took the longest—three years—from LSE’s first adoption of the Combined Code’s recommendation for director independence criteria to state-based regulation.

There is patent overlap of stock exchange criteria for board independence and specialized board committees.

4.1.3 Regulation of Auditor Independence

The presence of voluntary practice, combined with the presence of stock exchange ties and the presence of left-leaning legislatures, is the causal path specific to Canada and the United Kingdom.

The prevalence of voluntary practices among the companies of these two countries again figures as a causal condition as part of the path to regulation. In

Canada, 88 out of 116 companies had already adopted auditor independence criteria and were disclosing these prior to the 2005 regulation. Research in Motion, the Canadian company that manufactures the BlackBerry, referred to its

“independent auditors” in its 2001 annual report without any specific qualification to their independence. The company’s 2002 management information circular is the first to disclose auditor independence: “The Audit Committee has discussed with the Company’s co-auditors, Zeifman & Company LLP and Ernst & Young LLP, issues about independence and have received written disclosures from these firms confirming such.”

As I describe in the earlier subsection on director independence, stock market ties play a causal role in the regulation of auditor independence as well. 142

Again, the ties—in terms of home country of companies’ incorporation—are unbalanced between the Toronto and London stock exchanges. Only two Canadian companies were cross-listed on the London Stock Exchange in 2005, the year the path was modeled on Canada’s regulation. These companies were CIBC (Canadian

Imperial Bank of Commerce) and Thomson Reuters, the same two Canadian companies with London listings identified in the path to regulation of director independence.

Just two Canadian companies were listed on the London Stock Exchange while no British companies were listed in Toronto. This points to a gap in the role of this condition. The Canadian companies plausibly adhere more to standards set by the New York Stock Exchange where they have a stronger presence, measured by cross-listing. It is also possible that the two key Canadian companies influence enough of the behavior of their compatriots. One shortcoming of the stock exchange ties condition is that it might not explain the extent to which ties on other exchanges is causal. If two Canadian companies cross-list on the London Stock Exchange, are their ties equally strong to produce a meaningful bond in coproducing the regulation, as do twenty Canadian companies on the New York Stock Exchange?

With real, not just estimated, data, we might better explore the strength of specific ties.

Again left-leaning legislatures play a causal role in the outcome yet for other cases in the regulation of this practice. In Canada’s 2004 House of Commons, the left held the majority according to the following: the Liberal Party held 135 seats, the 143

Bloc Québecois held 54, and the New Democratic Party held 19. Meanwhile the

Conservatives held 99 seats.

In Canada, National Policy 52-110 sets auditor independence criteria. A

"Companion Policy", 52-110CP, was amended in 2005 to expand the definition of auditor independence and includes the derivation of the rule as directly from the

SEC and the NYSE listing requirement.

All 137 British companies were likewise disclosing their compliance with auditor director criteria by the 2006 regulation in the United Kingdom. British retailer, Tesco, has been a longtime provider of information on its auditor’s independence. As early as 1999, the company’s auditors furnished information on its independence criteria in Tesco’s annual report that year: “Our responsibilities, as independent auditors, are established by statute, the Auditing Practices Board, the

Listing Rules of the London Stock Exchange and our profession’s ethical guidance.”55

By 2005 the company reported:

“The engagement and independence of external auditors is considered annually by the Audit Committee before they recommend their selection to the Board. The Committee has satisfied itself that PricewaterhouseCoopers LLP are independent and there are adequate controls in place to safeguard their objectivity. Such measures include the requirement to rotate audit partners every five years.”

55 The statue to which the auditors make reference here, however, do not relate to independence criteria. The mention here is to demonstrate only that auditor independence was a disclosed item in the company’s annual report. Reference to auditor independence was made by both Tesco and its auditor, PriceWaterhouseCoopers. 144

None of the British firms in the population were cross-listed on the Toronto Stock

Exchange56. As per the final condition in this path, left-leaning legislature, the 2005

British House of Commons was majority left: the Labor Party held 355 of the 372 leftist seats in contrast to the 269 seats held by various right-leaning parties, the largest number of which, 198, held by the Conservative Party.

Regulation in the United Kingdom stems from the Companies Act (2006)

Section 1151 identifies auditor independence requirements. An auditor is considered independent if:

“he is not an officer or employee of the company, or a partner or employee of such a person, or a partnership of which such a person is a partner; he is not an officer or employee of an associated undertaking of the company, or a partner or employee of such a person, or a partnership of which such a person is a partner; and there does not exist between the person or an associate of his, and the company or an associated undertaking of the company, a connection of any such description as may be specified by regulations made by the Secretary of State.”57

Two other countries, Germany and the United States, regulated this practice following different paths. Germany’s path is found in the intermediate solution of the QCA but has low coverage, reducing the explanatory power of the path for this case. In Germany, it is the absence of both voluntary practice and stock market ties that combines with the presence of left-leaning legislatures to regulate in 2001.

56 Nine were cross-listed in Frankfurt, three in Tokyo, two in New York, and one in Paris. BP was the British company with the most cross-listings outside the United Kingdom.

57 The Secretary of State is authorized to registered auditors who qualify as independent and make this information publicly available under sections 1239 and 1240 of the Act. 145

Although the United States has presence of voluntary disclosure of auditor independence criteria, it did not have a left-leaning legislature in the year prior to regulation. Further, its main stock exchange, the New York Stock Exchange, was more the target of other listed firms than a base from which American firms cross list on exchanges outside the United States.

An alternative conceptualization of stock exchange ties could refer to the joint ownership of the exchanges themselves. Although I did not employ this concept for this study, future research on stock exchange ties might explore what appears to be a growing trend in exchange mergers. The New York Stock

Exchange’s 2006 merger with Euronext (which includes the exchanges of

Amsterdam, Brussels, and Paris) may have portended further consolidation of global stock exchanges. In early February 2011, the London Stock Exchange announced its merger with the Toronto Stock Exchange only to be outdone by

Deutsche Börse’s announcement to merge with NYSE Euronext.

Of the originally selected audit-related governance practices, only the disclosure of auditor independence returned a conclusive path to regulation. The other audit-related practices, disclosure of fees paid to auditor for both audit- related and extraneous services, are regulated for causes beyond the scope of this study. Further, there was little comparison to make among the cases for fees paid to the external auditor for non-audit fees: only China regulated this disclosure among the other countries. For the regulation of audit fee disclosures, both Canada and

China regulate this practice by 2008. The lack of conclusive paths in the QCA, 146 however, suggests a likely overlap with areas of regulation beyond corporate governance, especially tax and accounting law. Even if the compilation of regulations in these areas were feasible for this study, we cannot assume that the same conditions used to measure the path to regulation of corporate governance practices would apply to that for regulation of the disclosure of auditor fees in accounting standards and tax laws. For these reasons, a separate study of the causes to regulation of audit fee disclosures is warranted.

4.2 Discussion

The causal conditions used to trace the paths to regulation of these corporate governance practices highlight phenomena across diverse cases. Although the conditions cannot be considered independently causal, nor should their relevance be overplayed outside their configurations, several observations about them each stand out.

The presence of stock market listing rules is an especially important condition for the regulation of director independence in Canada, the United

Kingdom and the United States. These rules are market based, developed by the exchanges, and are additional to the basic requirements set previously by the securities regulators for the purpose of listing on the exchange. Importantly, the exchanges required director independence disclosures prior to the American,

British, and Canadian governments requiring the same disclosures. 147

Voluntary practice is the most pervasive and actor-oriented condition across the regulatory paths. Its presence was part of the path to regulation of specialized board committees, director independence, auditor independence, and general corporate governance disclosures in five countries: Canada, China, France, the

United Kingdom, and the United States. This demonstrates the pervasiveness of voluntary corporate practice preceding regulation across countries of dissimilar institutions, historical capital market development and political-legal makeup. The absence of voluntary practice was part of the path to regulation of the disclosure of two types of executive compensation, base pay and stock options, in both Germany and the United States. This highlights the point that QCA offers over comparative methods, e.g. multivariate regression, by including the absence of a condition as a co-factor in the outcome58. Although the other conditions that I hypothesized would join in configurations that led to regulation—and they are indeed partially causal across select practices—only voluntary practice by firms appears in the paths for all regulated practices analyzed.

The presence of scandals related to specialized board committees similarly played a causal role in the path to regulation in the United States, but not in other countries. Nor did the presence of any other kind of scandal play a causal role in the regulation of the other governance practices. This finding directly challenges the hypothesis that scandals are a necessary precursor to regulation: the opposite holds

58 In addition to the highly developed capital markets, stock exchange ties, left- leaning legislatures, and cumulative regulation are also conditions that are notably present in any causal path in which they occur, never absent. 148 true for the majority of governance-related practices. One implication is that only systemic crises, not the accumulation of scandals at individual firms, might prompt regulatory response. Another is that regulation is not the government’s only response to scandals, but that criminal law or other legal remedies suffices as a response.

As for the coding of the scandals, I did not mark an end time per se. It is possible, therefore, that a scandal loses salience before regulatory response. The potential limitation is not, however, that I may have overcompensated for the role of scandals on regulation, rather that I might have under-accounted for the damage done to particular actors, which in turn might be an additional condition for regulation. Further, collusion between government officials and market actors may be masked in the path to regulation. Other outcomes from scandals apart from regulation, or modifications to regulation, are certainly plausible: removal of key culprits from their responsibilities, punitive measures, retribution for victims, and similar sanctions. The reporting of scandals in some countries without a strong, vibrant, independent media, e.g., China, could also compromise the quality of this condition. A narrower selection of cases, or an in depth analysis of a single case, could reveal greater detail of scandals and any causality to subsequent regulation better than a macro-level comparison like this one can.

Stock exchange ties were another important, market-based ingredient to the regulation of director independence and auditor independence. Companies with cross-listings on stock exchanges in Toronto, London, and New York were the focal 149 point for this condition. Ties were not balanced among these three exchanges, however. Canadian companies were largely cross-listed on the New York Stock

Exchange in the path to regulation of director independence, but few American firms listed in Toronto or London. Nor were transatlantic ties particularly important for the regulation of auditor independence: just two Canadian firms were cross-listed in London yet no British firms were cross-listed in Toronto. The condition measures the cross listings of firms form one country on the exchanges from all the other countries. As such, Canadian firms unsurprisingly have among the highest cross-listings outside Toronto. So, too, do Australian firms outside Sydney, yet Australia did not regulate director independence. The findings from the stock exchange ties reflect more than just the conventional wisdom that London and New

York are premier capitals of finance, but that both these stock exchanges have profound influence on governing finance. The exchanges act not only as agents on behalf of securities regulators to require minimum standards for listed companies set forth by extant regulation, but also acts as author of additional government regulations. It is perhaps no coincidence that the stock exchange ties are part of the regulation of the two forms of independence—director and auditor—and that this notion of such independence is an American governance export.

The lack of full panel data on the stock exchange ties is a glaring limitation, even though I was able to use the adjusted data to ascertain year-specific cross listings, and found that at least for the regulation of director independence in

Canada, the United Kingdom, and the United States, as well as for auditor 150 independence in Canada and the United Kingdom, the presence of stock exchange ties was a necessary condition in the causal path. I raise an important point for future research: that not only the ties of the exchanges via the cross-listings of firms as I have analyzed here, but also the mergers of stock exchanges themselves, could precipitate the homogenization of listing rules as well as financial regulatory reform.

The political party composition in British and Canadian legislatures, particularly the left-leaning parties, is crucial in the regulation auditor independence disclosures. The key observation about this condition is that its absence, i.e. the presence of a right-leaning legislature, does not combine with other conditions to cause the regulation of any of these corporate governance practices.

One would not expect that countries with right-leaning legislatures to be particularly enthusiastic about regulating markets, especially when the behavior is already normative or sanctioned by other market actors. This finding might initially appear as intuitive, but at least one caveat and one major implication are in order.

The caveat is that left-leaning legislatures did not regulate the compensation and auditor independence disclosures without other key conditions. Therefore the application of this condition to the analysis of other regulations must weight carefully the configurations of other conditions that bear upon left-leaning parties in legislatures. The major implication is that politics indeed matters to the regulation of market behavior, especially amidst contemporary debates in Western economies about financial regulatory reform as well as in non-democratic regimes like China. 151

Other political characteristics could advance these initial findings about the interplay between left-leaning legislatures and regulation. Insulation of political influence among the regulators would be a worthwhile measurement.

Appointments and advancement in the ranks of regulatory agencies are not immune to political influence. Likewise are the pressures to regulate—or not regulate— when new legislation does not directly require state agencies to act. Which key actors make key regulatory changes within these state agencies, and their individual political leanings, are other refinements to regulatory processes that could extend the findings of this study. Tangentially related as well is the political independence of the judiciary, which was beyond this study’s focus, could also reinforce or repeal certain regulatory measures. Despite the findings, we lack greater insight as to the legislative or regulatory history that an entirely qualitative study of archived documents and firsthand interviews with legislators and regulators could impart. A single case study or a two-case comparison might explore in greater detail the individual paths that regulation took in a particular governance practice. It could also include the role of law in extra-regulatory mechanisms that still bear on the regulation and its potential repeal, limited application, and other unintended consequences.

Membership in the set of highly developed capital markets was another crucial condition on the path to regulation for Canada, France, and the United States.

It should come as little surprise that a significantly high portion of a country’s GDP coming from the capital markets is key for regulating corporate governance 152 practices. However, more informative is the finding that this condition applies to countries that are dissimilar is many traditional accounts of their governance of market behavior. Like the other conditions, highly developed capital markets cannot be read as independently causal, but its causal role across institutionally disparate countries demonstrates the influence of markets on regulation. The major implication of this condition is that when combined with others, it demonstrates the importance of markets on making regulation.

Similarly, the cumulative regulation by some countries has an effect on the regulation of others. The effect is evident only in the regulation of the two board- related practices: specialized committees and director independence. Canada,

France, the United Kingdom, and the United States are discernibly influenced by regulations of like corporate governance practices in other countries such as China,

India, and Japan. This finding demonstrates the importance of conceptualizing alternative governance structures in which the aggregate conditions precedent to regulation may vary across cases, but the common factor of regulation itself— versus the absence of regulation—is itself a cause of some countries’ eventual regulation.

Corporate governance codes were another possible causal condition, but only three countries have corporate governance codes that concern specifically the focal practices. One can refer to these codes as “national” but they are not so much an extension of state policy, as they are occasionally commissioned by the government and directly implicate the stock exchanges within national borders and 153 without necessarily coinciding with state regulation. In China and Germany, the government sponsored national commissions whereas in France, it was business associations that drafted earlier corporate governance reports that eventually merged into a single code. The addition of a national corporate governance code as a separate causal condition would have posed several problems. The first is potential duplication with regulation, in which case there is a conflation of causal condition and outcome of regulation. The second is that I already include the specific role of each code as supplemental cause of regulation where plausible.

Another problem is that the codes, or specific provisions thereof, occasionally form the stock exchange listing rule. In the United Kingdom, for example, there is an explicit overlap between the listing rules of the London Stock Exchange and the

Combined Code. Beyond the national level of corporate governance codes, the EU has no specific code of corporate governance and EU directives are considered separately under regulation when transposed into national law. Nor is there is a truly international code of corporate governance that countries have agreed to and instated into national law somehow. The OECD Principles of Corporate Governance come close to such an international code, but they are not regulation, or any other specific policy per se, rather an agglomeration of member countries’ respective standards, including some regulations, and as a matter of coordinated policy, deliberated and agreed to as principles in the OECD. It was for this coordination that I employed the OECD Principles in part as a case selection tool, both for countries and for corporate governance practices. 154

I did not include shareholder groups, or their agents, as a causal condition for lack of available data. Moreover, shareholder advocacy groups tend to exert corporate governance standards via proxy voting, which has traditionally been a particular feature of American institutional investing, and limited to those listed firms with dispersed ownership. Shareholder proxy proposals are non-binding in the United States, and although legally binding in the United Kingdom and much of

Europe, minus the Netherlands. They are far less frequent than in the United States and, in Continental Europe, pertain specifically to corporate governance matters, and not other matters such as asset allocation, capital structure, and general meeting items found in American proposals (Cziraki et al. 2009).

There might be yet other conditions that functionally equate to the corporate governance practices I traced along paths to regulation. For comparative cases such as these, the challenge is to locate those that are indeed comparative, or provide strong exceptions to single cases that warrant a different analytical lens for seeking causality.

In this study I show that the selected conditions still configure in precise ways that explain between a third and a half of the outcome of regulation, based on coverage scores, for the six target governance practices in seven of the countries analyzed. Despite that diversity, I can offer no explanation as to the regulation of specialized board committees and director independence in Japan. Its approach to corporate governance reforms of the past decade can be described as selective adaptation of American practices (Nakamura 2010). This uneven approach to 155 adopting imported governance practices might explain the low rates of voluntary practice at Japanese firms, precluding it from the causal path that explains the outcome in other countries. The Japanese government’s recent reform of corporate law, moving away from bank-centric governance to a slightly more Anglo-American, dispersed ownership structures, might be too early to be conclusive.

The point of locating the causal paths to regulation is not to explain the outcome of regulation in every country that ultimately regulated. Rather, it is to make better causal inference for those that did. Like Vogel (1996), I consider differences among regulatory regimes not just in kind, but in degree. Fuzzy sets captured the nuance between compulsory regulation and regulation that allows companies leeway to comply with regulation or explain their non-compliance.

Although I do not evaluate the degree of corporate compliance nor regulatory enforcement, tasks best left to policy analysts, I do take comparative regulation research forward.

I selected the largest of capital markets over the past twenty years. An extended temporal period would not necessarily improve the research because of the significance of accelerated development of the capital markets since the 1990s, the regulation of executive compensation in the United States notwithstanding. In fact, at least two cases, China and India, would not have appeared among the selected cases because of their lack of developed capital markets in an earlier time spans. Of course had I expanded instead the number of country-cases, even over the chosen temporal period, I would likely capture even greater diversity of regulatory 156 paths. Countries on the initial list of candidate cases, such as Brazil, China, Czech

Republic, Indonesia, Italy, South Africa, Spain and Turkey to highlight but a few, would provide even greater diversity to the comparative analysis. However, feasibility was the crucial factor in limiting the cases to ten countries, which were home to more than 1500 listed companies that required substantial time to code for evidence of voluntary practice over the twenty-year horizon. Thirty potential additional countries would have more than doubled the additional companies to code for evidence of voluntary practice, plus the additional causal conditions and regulations.

I selected companies on the basis of their home jurisdictions, so I may not have captured the corporate governance reporting requirements of all foreign companies listed on the exchanges in countries I examined here. Requirements can run in two directions: of companies listed abroad to report to their home country of incorporation which governance codes they comply with (CSRC), exemptions for foreign incorporated companies listed locally (NYSE, UK Combined Code). The EU

Directive 2006/46 sought to coordinate compliance with at least one corporate governance code for companies listed on any regulated exchange in the EU otherwise it was possible to have dual requirements or none at all.

As per the measurement of the outcomes, there is also the possibility that I overlooked statutes and regulations that apply to only one industry or subset of firms, e.g. banking, energy, or utilities. Despite my search for voluntary practices transformed into regulations that apply broadly across industries, any industry- 157 specific laws not cross-referenced to corporations and securities laws, would have been omitted. Although possible, this oversight is unlikely.

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Chapter 5

Conclusion

5.1 Summary of Findings

The regulatory variety of capitalism proposed here demonstrates how market actors move beyond mere self-regulation to influencing formal regulation.

Firms are crucially important on this path by voluntarily practicing behavior before it becomes regulated. When firms do not voluntarily, or self-regulate, lawmakers can successfully push regulation if their legislatures are composed predominantly of left-leaning political parties. Firm scandals play a similar, but less pervasive role, as voluntary practice. They occasionally nudge countries along the path to regulation but their absence does not impede left-leaning lawmakers from regulating.

In addition, the stock exchanges on which firms list shares establish rules that also influence regulation. These rules are either prewritten regulations in countries traditionally considered lenient to free markets. The lack of certain exchange rules, conversely, is among the catalysts to regulation in more state- centric economies.

The aforementioned conditions pertain to market actors, yet market attributes also help the evolutionary process of regulation. Stock exchange ties, measured as aggregate cross-listings, matter especially for regulation of two related practices of American origin. Capital market development, as measured by the total 159 shares traded as a percentage of GDP, is commensurate with regulators’ deferral to market actors in the formulation of rules that regulators subsequently formalize.

Last among the causal conditions, the cumulative regulation in certain countries affects the later regulation in other countries. This condition is especially noteworthy for stemming from countries that may ultimately follow divergent paths to regulation. Many paths—precise combinations of conditions—across all the cases were indeed possible, but only few led to the observed regulations.

As expected of research in previously unexplored terrain, this study has particular limitations. First, there are no well-established models for measuring and comparing determinants of regulation beyond small numbers of cases. I chose QCA for its ability to approximate large N comparisons of multivariate regression while preserving some of the richness that smaller N, qualitative research offers.

Second, the coding of the conditions and outcomes presented specific challenges. Whether sets were binary, as in the stock exchange listing rules and left- leaning legislatures, or fuzzy transformations of either original data, i.e. voluntary practice, scandals, exchange ties, or of secondary data, i.e. capital markets development, I demonstrate the versatility of coding and calibration based on theoretical knowledge. Although I do not measure regulatory enforcement or corporate compliance in the coding of the regulations, I do measure the difference in degree of a regulation’s origin—state or market—while avoiding the extremes of crisp sets and fine-grained degrees of fuzzy sets. Leuz (2010) similarly assesses differences between rules-based and principles-based standards, the latter giving 160 more discretion to firms, such as what I found in the “comply or explain” principle.

Schneiberg & Bartley (2008) likewise recommend modifying simple binary outcomes of practice or policy adoption to account for local framing and interpretation. Toward this end, my analysis of evolutionary regulation answered their call for research that “considers the interplay of multiple regulatory dynamics and forms, including the possibility that there are mixed and contradictory dynamics in play (…) Furthermore, multiple forms of regulation often intersect, raising questions about the extent to which they undermine or reinforce one another” (Schneiberg & Bartley 2008: 51). Further, I included both temporal and sequential characteristics of the data directly into the models, a major contribution to QCA. Together, the data and analytical method offer replicability and opportunities to extend this study’s findings to additional countries and markets.

Third, other changes in corporate governance are unfolding that are beyond the scope of this study. Some companies may eschew public listing entirely and opt for private ownership, shedding disclosure of their governance attributes. The rise of state-owned enterprises, particularly in recently emerged and emerging economies, are swinging the pendulum back from privatization to nationalization.

The findings might thus be limited in application to certain other corporations or other governance arrangements like hedge funds or private equity. Nonetheless, the findings are salient for explaining the diversity of voluntary practices that could be regulated in other areas apart from corporate governance. 161

Plato argued that morality comes from full disclosure, and although I would not rely on corporate disclosure as evidence of morality, I did rely on them for evidence of voluntary practice. I hesitate to argue that disclosures can prevent corporate malfeasance or that corporate disclosures can be taken at face value.

However, they are the most feasible and comparable data when assessing over 1500 companies for which I provide original statistics on the voluntary adoption of corporate governance practices. Further, regulators are among other organized groups that are interested in companies disclosing more of their governance practices, among other disclosures. The findings of this study should therefore inspire similar examinations into other areas of corporate disclosures.

As to the aftermath of the regulated governance practices analyzed here, several related questions arise. Did specialized board committees and director independence requirements fundamentally change board deliberation? What explains the increase in executive compensation levels? Did new types of compensation result once disclosures of other types became regulated? Despite the salience of the corporate governance practices I examined, which others merit an analysis of causation? Although I do not examine companies’ compliance with the regulations, nor do I offer a policy analysis, I do elucidate a social process that perhaps eludes—or perhaps encourages—actors in both states and markets.

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5.2 Significance and Implications

In response to the title question of this dissertation—corporate governance or corporate governments—I argue that the evidence indicates prominent corporate influence of regulation. In this manner, governments appear more corporate in that they merely duplicate regulation of extant business practice.

Precise configurations of conditions that lead to this outcome vary across practice, but the general finding is that different countries can follow similar paths to this type of regulation.

Yet another answer is possible. Governments are perhaps not the harbingers of regulation that legal systems have historically served. Rather corporate governance is expanding in definition from traditional notions of control related to separate ownership and management to control beyond corporate and political boundaries. This expanded notion of corporate governance possibly includes what

Hunter refers to as “a conceptualization of power that is circular rather than subject-verb object unidirectional, networked rather than hierarchical, and multidimensional beyond the state, encompassing nonjuridical zones such as market forces or culture” (Hunter 2008: 6). The most important implication of this study, therefore, is that corporate governance no longer refers simply to governance of firms, but also governance by firms.

This dissertation is a cautionary tale in regulation more broadly as well.

Regulatory reform can be defined as “institutional change explicitly mandated or endorsed by governments” (Hall and Thelen 2009: 20). The findings of this study 163 corroborate regulatory reform as indeed mandated or endorsed by governments, and extends the origin of that reform to other institutions and to firms in particular.

Further, the reconceptualized notion of corporate governance has more serious implications. There is increased fragmentation in the global regulatory architecture—perhaps created purposefully—from which private actors who have sufficient resources can benefit and deploy the resulting uncertainties created in asymmetric regulation to their advantage. Regulators caught in this game might be further torn between conflicting demands of their own constituents, e.g. companies versus consumers.

This point overlaps with the notion of governance failure, whereby the dialogue of corporate governance has been too narrowly focused, or that regulatory networks fail to regulate holistically. Framing regulatory response as a response only to market failure, and not also to the failure of governance masks both risks and benefits that gaps in governance structures can provide (Whitford and Schrank

2011). Although I have exposed a particular form of regulatory capture in this study, it would misleading to think that private parties are the sole agents in such capture.

For Sabel & Zeitlin, regulation “increasingly takes the novel form of contestable rules to be understood as rebuttable guides to action even when they are also taken as enforceable sovereign commands. By the same token, these developments challenge the related assumption that deliberative processes produce at most a monitory, ‘soft’ complement to ‘hard’ state-made law” (Sabel & Zeitlin 164

2010: 5). This form of governance, what they term “directly deliberative polyarchy” in which diversity is a micro-level learning source and means for achieving certain objectives, is evident in my findings that corporations, foremost among market actors, provide regulators the template for formal rules. Likewise, this form of corporate governance is akin to the polyarchic system that Sabel & Zeitlin consider

“as a form of experimentalist governance in the pragmatic sense” (Sabel & Zeitlin

2010: 6). Clearly no single corporation or regulator writes the focal regulations in any of the regimes I examined, but each can use uncertainty in governance structures strategically (Stark 2009). I show that voluntary firm practice is on the one hand a response to uncertainty: adopting certain governance practices either deliberately pre-empts regulation or anticipates regulation of the same practice. On the other hand, and failing regulatory pre-emption, firms can provide regulators the template for future regulation. Firms can have perhaps other incentives, but the previous institutional isomorphic accounts do not suffice. I also show that regulators likewise utilize uncertainty strategically when regulating before or after other regulators.

Several contributions to the comparative institutionalist and regulatory research also emerge from this study. First, this study avoids both under-socialized accounts of individual firms, and over-socialized accounts of countries. The classic

VoC typologies suffer from several problems that I identify in chapter 2. A critical review of the traditional country clustering using time-series data from 1980-2005 in 21 OECD democracies reveals flaws in the operationalization of corporate 165 governance by Hall and Gingerich (2004) (Ahlquist & Breunig 2009). My findings support the dynamism of economic institutions aggregated at the country-level over a similar time frame, which also contests the notion that institutions must be stabilized in order to be recognized. I eschewed ex ante clustering of countries by their institutional attributes, favoring instead a selection of countries for comparison based on the size of their capital markets, itself determined by the capitalization of listed companies. This research challenges the notion that the aggregation of institutional factors can be neatly grouped into the classic LME/CME types, while holding that politics and history are still necessary—though not always sufficient—for institutional change. The regulatory variety of capitalism I propose cuts both ways: it comprises paths to common outcomes despite variety, and different outcomes despite common conditions.

Second, I redress the VoC literature by identifying causal mechanisms in institutional change, including a range of causal factors of capitalist variety both between and within regulatory regimes. The use of QCA builds on the comparative capitalism literature and advances the method for use in future comparative research across the social sciences. In it, I examine mechanisms, both exogenous and endogenous, for regulatory change, while underpinning that corporate governance—as traditionally understood—as subject to constant negotiation.

Third, I advance a reconceptualization of corporate governance. The implications of this new corporate governance have far reaching implications than simply the disclosure of board attributes and what executives and auditors are paid. 166

Another implication of this research therefore calls into question the extent to which states directly regulate economic activity and the extent to which regulation is a symbiosis between state and market actors. Within that relationship, regulation can arise following diverse paths. I have identified paths to regulation of a particular form of economic behavior, corporate governance, as traditionally conceptualized, but the implication hardly resides in this area of inquiry alone.

This study patently reflects Zumbansen’s view of corporate governance and regulation through a transnational lens:

“The transnational lens allows us to study [regulatory] regimes not as entirely detached from national political and legal orders, but as emerging out of an reaching beyond them. The transnational dimension of new actors and newly emerging forms of norms radicalizes their semi-autonomous nature in the following way: regulatory spaces are marked by a dynamic and often problematically instrumentalized tension between formal and informal norm-making processes” (Zumbansen 2009: 31).

He further argues that in lieu of a coherent set of regulation theories, various concepts of self-regulation, soft law, best practice—among others—suggests “an irreversible trend away from ‘government’ to ‘governance’”, to which I offer corroborating evidence.

Further, practices may diffuse faster when mandated by single sources, such as states, than when legitimated by social influence. The spread of corporate governance practices has causes in both legitimacy and efficiency (Aguilera and

Cuervo-Cazurra 2004). Indeed I make no claim that all voluntary practices necessarily lead to regulation, nor do I attempt a normative argument that they should. Besides, regulation of originally voluntary practices may not lead to the 167 intended outcomes. Further, we also have evidence of the necessary absence of voluntary practice as a causal condition for regulations concerning executive compensation disclosures.

Seen through a wider lens in sociology, this research informs inquiries into expertise: how it is developed, spread, and contested among regulators and corporate chieftains. An incipient inquiry specifically on expertise and how its implications for governance arrangements (Quack 2010), will grow on the empirical findings of this study. In a similar inquiry into power structures, the socio- linguistics of corporate communication stands to benefit from this study’s data.

I share with political scientists the significance of the regulations analyzed here as a perpetual nexus of contestation between states and firms, and that the social processes that define this nexus implicate comparative political science and international political economy. Like Vogel (1996), I show that national patters matter for policy formation, although I stop short of policy analysis.

Lastly, I have given particular attention to an evolving form of legal regulation theory that accounts for extra-juridical sources of law. I focused specifically on the overlap of corporate law, securities law, and corporate governance. My contribution joins that of (Shaffer 2009), among others, that business shapes law through both public ordering, including legislatures, and private ordering. Future research on lex mercatoria will surely benefit from this analysis.

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5.3 New Regulations, New Paths

New questions that arise from this study include: under which conditions should firms pre-empt regulation and what degrees of self-regulation can prevent imposed regulation? From a corporate strategy angle, one might analyze how can firms better write their own rules. From a public policy angle, conversely, how can regulatory agencies better anticipate firms’ self-regulation, or the enactment of new regulation, as well as firm compliance? Similarly how can policy analysts better evaluate extant regulation and propose new regulation given my insight as to the regulatory process?

Regulation is ultimately a social process. The choices of public and private actors in the economy to control others—to govern—have political, legal and of course, economic characteristics. Yet we cannot owe an account of their behavior to institutions or structures alone. We must instead unpack the process of regulation at different levels and by different actors. This study attempted to explain such regulatory process and opens the door to future research. Comparative case studies with additional countries and additional governance practices are one extension of this study. Another is to compare regulation of other practices, such as environmental sustainability and consumer protection, or corporate social responsibility more broadly. Analyses of single cases or many more could both further enhance the findings from QCA, and compare the method itself to other methods. 169

There is a silver lining to this cautionary tale. Policymakers and regulators are not bereft of a significant role to play in the new corporate governance. They need to take advantage of the same opportunities that transforming governance structures in the global landscape present to corporations: deployment of uncertainty as a resource, experimentation, and non-hierarchic routes to the development and enforcement of regulation. If corporations are increasingly assuming more authorship of the very formal rules to which they will abide, regulators can at the least assume more editorship.

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Appendix A: Coding of Firm Practices

Five of the ten selected countries are non-Anglophone, yet the majority of their companies publish annual reports and similar items in English. Given this linguistic diversity, I adopted a mixed language approach to the coding of the source data, to the extent feasible. I primarily used the English language versions of French and German annual reports. To avoid the possibility that more governance information might be disclosed in one version over another, I randomly alternated reports in the native language and English and found no discernible differences in the disclosures59. I relied exclusively on the English versions of Japanese annual reports, which were widely available for the companies and years sought after.

Seventeen companies out of 355 had reports in Japanese only and were excluded. In the case of Chinese annual reports, however, I deferred foremost to the original simplified Mandarin versions, which almost always contained more information than the English translations. 39 out of 93 Korean companies had reports available in Korean only. I enlisted the assistance of a native Korean speaker for translation and coding of these and for comparison with the English versions. None of the

Indian companies required knowledge of Hindi as their reports were available in

English-only or dual-language versions. Canadian filings were also available in

English, even if French versions were occasionally available. All American,

59 Two French companies had minor discrepancies between their original and translated versions of their annual reports: Dassault Systèmes and Essilor International. Specifically, audited financial statements appeared in the original French versions, which contain more detailed information than in the translations. 187

Australian, and British annual reports and similar items were unquestionably available in English.

Translations typically include a note that only the original language versions are legally binding, which for purposes of this research matter less than whether disclosures about corporate governance practices at a given firm are made at all.

Where there was a conflict in disclosures between Korean and translated versions of Korean company reports, the Korean version prevailed60.

Linguistic issues aside, four companies were misreported in Thomson ONE as being registered in their respective home countries when in fact only the headquarters were, but the legal seats were elsewhere61. Other companies that may have merged with, or were acquired by, other companies or were reincorporated within their original jurisdiction, reappear under their new names.

When a company’s fiscal year ends on a date other than at the end of a calendar year, i.e. December 31, I still code its report in the same calendar year. An annual report or other source document dated June 30, 2003, for example, is included in

2003 as is a report dated December 31, 2003. Most American companies’ proxy statements are filed in the calendar years following their company’s fiscal year. I

60 Mergent occasionally provided Korean “auditor reports” in lieu of the company’s annual report. In case of any shortcomings in disclosures or discrepancies, the longer, more complete annual report prevailed.

61 These exceptions included Lihir Gold Ltd. And Oil Search Ltd., both New Zealand companies listed in Australia; Deutsche Pfandbrief Bank was a German company that reincorporated in Ireland and did not have at least five years of market capitalization data while still a German company; Amdocs of the United States likewise did not appear as being registered in the United States, rather in Bermuda. These four companies were therefore excluded. 188 ensure that I code disclosures in their related fiscal/calendar years, not the years of the filing dates.

Occasionally in Mergent, companies in earlier years appear that do not match those on my firm list. For example, Challenger Financial Services Group, an

Australian company, appears in my firm selection list as having market capitalization data available on Thomson ONE Banker from 2004 to 2008 inclusive.

Mergent, however, provides annual reports from this time period in addition to earlier years. To the extent that the company name is the same, I report these earlier years in my coding of firm practices. In the case of this company, I recorded the last available year, 2002, of data while it was supplied under the same corporate name. Reports for the years 1998 to 2001 were also available, but under now inactive corporate entities of different names. As these were not part of the initial firm selection, I exclude this extraneous data.

When a company’s annual report was missing for an interim year, i.e. data was available in the years immediately preceding and following the missing year, I copied the values of the previous year’s disclosures. Rarely does a company’s disclosure in its annual report or proxy statement appear in one year but disappear in the following. If the disclosure resumes in the subsequent year, however, I treat the omission as an anomaly and count if as it were disclosed in the interim year.

Occasionally annual reports and proxy statements were available in years even when Thomson ONE indicated no market capitalization data available. In such case,

I proceeded to code and include per company/year the available data. 189

Executive Compensation: Base Salary, Shareholdings and Stock Options

Remuneration is synonymous with salary, pay, compensation, and emoluments. In Canadian companies, the tendency is to refer remuneration with directors and compensation with senior management and executives. In Korean companies, the salary and pay (월급 , wolgeup and 봉급 , bonggeup respectively) are used interchangeably. Disclosures of executive remuneration are found in notes to the financial statements of annual reports, in separate “Remuneration Reports” in more recent Australian and British reports, or as a “Summary Compensation Table” in the reports of US firms. Among Indian companies in the late 1990s, total remuneration for all directors – including executives – were occasionally reported in annexes to financial statements; these are not counted. Only disclosures of separate totals for executives and (senior) managers were coded as 1 when disclosed.

Many Australian and Chinese companies in earlier years report compensation in bands for top executives. The bands indicate upper and lower levels of compensation and include the number of executives earning compensation within each band; I coded these as 1. Another earlier compensation reporting technique across all countries, except Australia and the US, is to disclose total compensation for all top executives. Likewise I coded these as 1. France, Germany and India occasionally report the same for the executive shareholdings and all countries at one time did the same for executive stock options.

Shares, or equity-based, compensation can be awarded as part of both short- 190 and long-term incentive plans. I include as disclosed any reports that no shares or equity-linked compensation was awarded to executives. The same holds for stock options, Stock Appreciation Rights (or Proprietary Rights in Australia), and in many

US Long Term Incentive Plans, for inclusion in this practice as well. An imported compensation mechanism to China, stock options (长期权, chángqī quán) and stock appreciation rights (股票增值权, gǔpiào zēngzhíquán) were translated literally from

English into Chinese whereas stock options were phonetically transcribed into

Korean as seutok opsyeon (스톡 옵션 ).

In many companies across the different countries and years, there is mention in the financial reports of aggregate shares or options granted to all employees, or just to board directors. This disclosure does not warrant inclusion in my analysis; the grant of shares or options must be clearly indicated as to the benefit of executives, some of which may hold board membership. In the coding procedure, I count either numbers of shares and options granted or their nominal or marked-to- market (reported) value. Other forms of compensation, e.g., bonuses company car, retirement benefits, loans, etc., are not included. For both shares and options: board or shareholder approvals for grants, allocations, deferred payments, and other reserve funds for shares and options for executives are not counted unless the specific benefits and recipients are identified in a particular year.

191

Auditor’s Remuneration

Often referred to as auditor remuneration in Australian, British and Indian companies, as auditor fees in the US and Canada, auditor compensation in Japanese companies, and as honoraires des commissaires aux comptes in French companies or as Honorar für Dienstleistungen des Abschlussprüfers in German companies.

Occasionally included as a distinct item with any corporate governance section but more often included as a note to the financial statements. When a Canadian company indicates that auditor remuneration details are available upon written request, then I code as 0.

General Corporate Governance

In France, corporate governance is sometimes called “gouvernement d’entreprise” instead of “gouvernance d’entreprise.” In Germany, the terms Corporate

Governance Vergütungsbericht or the Declaration of Compliance

(Entsprechenerklärung) with the German Corporate Governance Code interchangeably appear. See Chapters 3 and 4 for discussion of this coding scheme particular to Germany.

Even though I mention in a footnote in Chapter 1 about not avoiding conflation of corporate governance with corporate social responsibility, several

Japanese companies in the early to mid 2000s did just that. The exact descriptions of the board structures, i.e. presence of committees, would be relabeled within a 192 year. On some occasions, these sections of reports were even entitled

“CSR/Corporate Governance.”

In the US, companies in the earlier years coded here occasionally disclosed having a governance committee on the board. That disclosure counts only for specialized committee, not for general governance disclosure unless there is an attendant governance statement that specifies the company’s corporate governance actions taken by the committee. This statement must also refer to the company’s corporate governance principles, policies, charter, guidelines, or those of another body, stock exchange, etc., to which the company specifically adheres. In earlier years, American annual reports occasionally entitle sections on the board of directors and executives “corporate governance.” If no substance is given beyond this labeling convention, I do not count this is a disclosure of corporate governance. 193

Appendix B: Coding of Legislatures

Table B.1 lists the legislative chambers per country analyzed and how bicameral legislatures were weighted in the coding for left-right political party composition.

Table B.1 List of Legislative Chambers

!"#$%&'(%)*+',#-)%./('- !"#$% &%'#($%)*+,(-),./*!($01,// 2(1,% 234*5(,

0#$%&'(%)*+',#-)%./('-*$1/".'2*%-*!"#$%&'(%) !%$%6% 5(3/,*(7*!(88($/ 9,18%$: ;3$6,/'%0 <$6#% =(4*>%?"% @$#',6*2#$06(8 5(3/,*(7*!(88($/

0#$%&'(%)*+',#-)%./('-*$1/".'2*%-*-/$3 !"#$%&'() !"#$%&'(* A3/'1%)#% 5(3/,*(7*B,-1,/,$'%'#C,/ >,$%', D1%$E, A//,8?)F,*&%'#($%), >F$%' G%-%$ >%$0##$ >"30##$ @$#',6*>'%',/ 5(3/,*(7*B,-1,/,$'%'#C,/ >,$%',

194

Table B.2 lists the codebook for political parties in all legislatures and their corresponding QCA crisp scores.

Table B.2 Political Party Codes !"#$%&'#()*$"$(+* ,+-) .,/&01+#) 23$#)4)&5(67$ 25 8 5(67$ 5 8 ,)*$)#95(67$ ,5 8 ,)*$)# , 8 ,)*$)#9:);$ ,: < :);$ : < 23$#)4)&:);$ 2: < =*-)>)*-)*$ = 8 '$7)# ' 8 ?"1"*1% ? 8 @*(-)*$(;("AB)C&D*"E"(B"AB) F 8 @*";;(B("$)- @ 8 8&5(67$C&<&:);$ 195

Table B.3 lists the political party composition of all ten legislatures, weighted by chamber, and their corresponding crisp set scores.

Table B.3 Composition of Legislatures and Scores

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196

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198

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."/0%01*/2 .)&1)$%2 9:)&*;)2"82 !&05<24)%2 !"#$%&' ()*& !+*,-)& .*&%' 3&0)$%*%0"$ 4)*%5 6"%*/27)8% !+*,-)&5 41"&) !"##$%&'()*+,(-) ./0( 12 ./0()3+4&5+6')7839:) ;<(,/#/)./0( = *,/'&4/%(&+6)#+>",&(- 3&?@( AB T''/#D6U/) 3+66-)0",)(@/)3/C$D6&5)73*3:)) ./0( 1EF HFWAO V+(&"%+6/ G"5&+6&'()*+,(-)7*G:) ./0( HE I%&"%)0",)J,/%5@)K/#"5,+5-)7IKJ:) !/%(/,L3&?@( 1A2 M+,&"$')3&?@() 3&?@( 1E AOOE H=WBA A !/%(,&'()I%&"%) !/%(/,L3&?@( == !"##$%&'()*+,(-) ./0( AH K/#"5,+(&5)+%4);$,"C/+%)3+66-) !/%(/,L3&?@( 12 GU%+( N%4/C/%4/%(') N%4/C/%4/%( O HEWR2 3+66-)0",)(@/)3/C$D6&5)73*3:)) ./0( OB G"5&+6&'()*+,(-) ./0( FA I%&"%)"0)3/C$D6&5+%')+%4)N%4/C/%4/%(') P(@/, EF !"##$%&'()*+,(-) ./0( 12 ./0()3+4&5+6')7839:) ;<(,/#/)./0( = *,/'&4/%(&+6)#+>",&(- 3&?@( AB T''/#D6U/) 3+66-)0",)(@/)3/C$D6&5)73*3:)) ./0( 1EF HFWAO V+(&"%+6/ G"5&+6&'()*+,(-)7*G:) ./0( HE I%&"%)0",)J,/%5@)K/#"5,+5-)7IKJ:) !/%(/,L3&?@( 1A2 M+,&"$')3&?@() 3&?@( 1E AOOH HFW1= A !/%(,&'()I%&"%) !/%(/,L3&?@( HO !"##$%&'()*+,(-) ./0( AH K/#"5,+(&5Q)G"5&+6)+%4);$,"C/+%)3+66-) !/%(/, 1E GU%+( 3+66-)0",)(@/)3/C$D6&5)73*3:)) ./0( OE HFW21 G"5&+6&'()*+,(-) ./0( FH I%+((+5@/4) I%+00&6&+(/4 R =&*$1) I%&"%)"0)3/C$D6&5+%')+%4)N%4/C/%4/%(') P(@/, E= !"##$%&'()*+,(-) ./0( 12 ./0()3+4&5+6')7839:) ;<(,/#/)./0( = *,/'&4/%(&+6)#+>",&(- 3&?@( AB T''/#D6U/) 3+66-)0",)(@/)3/C$D6&5)73*3:)) ./0( 1EF HFWAO V+(&"%+6/ G"5&+6&'()*+,(-)7*G:) ./0( HE I%&"%)0",)J,/%5@)K/#"5,+5-)7IKJ:) !/%(/,L3&?@( 1A2 M+,&"$')3&?@() 3&?@( 1E AOO= HFW1= A !/%(,&'()I%&"%) !/%(/,L3&?@( HO !"##$%&'()*+,(-) ./0( AH K/#"5,+(&5Q)G"5&+6)+%4);$,"C/+%)3+66-) !/%(/, 1E GU%+( 3+66-)0",)(@/)3/C$D6&5)73*3:)) ./0( OE HFW21 G"5&+6&'()*+,(-) ./0( FH I%+((+5@/4) I%+00&6&+(/4 R I%&"%)"0)3/C$D6&5+%')+%4)N%4/C/%4/%(') P(@/, E= !"##$%&'(' ./0( 2= 3+4&5+6Q)5&(&S/%)+%4)?,//% ./0( 22 T''/#D6U/) 3*3 ./0( AEB FOWHH V+(&"%+6/ G"5&+6&'(' ./0( 1HB IKJ !/%(/,L3&?@( AA2 I%+((+5@/4 I%+00&6&+(/4 H AOOF !/%(,&'()I%&"%) !/%(/,L3&?@( HO =RWEE A !"##$%&'()*+,(-) ./0( AH K/#"5,+(&5Q)G"5&+6)+%4);$,"C/+%)3+66-) !/%(/, 1E GU%+( 3+66-)0",)(@/)3/C$D6&5)73*3:)) ./0( OE HFW21 G"5&+6&'()*+,(-) ./0( FH I%+((+5@/4) I%+00&6&+(/4 R I%&"%)"0)3/C$D6&5+%')+%4)N%4/C/%4/%(') P(@/, E=

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224

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225

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226

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227

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228

Appendix C: Additional Corporate Governance Practices

Regulation of Executive Base Pay

Table C.1 presents the scores of the causal conditions and the outcome for each country-case as per the regulation of executive base pay, which has five causal determinants.

Table C.1 Scores for Conditions and Regulations: Executive Base Pay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

One path, prac•scan•ties•LEFT•high, is possible in the complex solution, with a consistency score of 1.0 and coverage of 0.218. The parsimonious solution reduces to a single path of prac•LEFT with an improved consistency score of 0.886 and coverage score of 0.337. An intermediate solution, modeled without SCAN, is simply redundant of the parsimonious solution. Total coverage of each solution is identical to the raw/unique coverage and total consistency is identical to solution consistency because only one path per solution returns in the minimization. See

Table C.2 for these results. 229

Table C.2 G/+>6(+"(.&3*%/+,"-("N(;'&7*+,1&(O/6&(G/8 ./0( 4-,5*&( )"%*+,"-( !"#$%&'()"%*+,"- !"1&2/3& !"1&2/3& !"-6,6+&-78 !"*-+2,&6 $2/7967/-9+,&69:;<=9>,3> ?@ABC ?@ABC B@??? D&2#/-8E(4)F

G/26,#"-,"*6H I-+&2#&J,/+&()"%*+,"- $2/79:;<= ?@KKL ?@KKL ?@CCM D&2#/-8E(4)F

What this path reveals is that left-leaning legislatures, in countries without the prevalence of voluntary practice, are fairly determinant—almost 40%—in regulating executive compensation disclosures. Consider the two countries to which this path applies: Germany and the United States. These countries had left- leaning legislatures in the years prior to their respective regulation. Membership in the set of countries with highly developed capital markets at the time of regulation is irrelevant. More on each of these countries’ paths is explained in Chapter 4. Two countries that eventually regulated executive base pay disclosures, Australia (a highly developed capital market with a related listing rule) and India (a not highly developed capital market without a related listing rule), did not have left-leaning legislatures just before their regulation of this practice62. Another two, China and

France, both had prevalence of voluntary base pay disclosures and left-leaning legislatures prior to regulation, but none of the other causal conditions as produced in the complex, parsimonious, or intermediate solutions.

62 The condition, LEFT, is lagged by one year. 230

Germany’s regulation increases modestly from 0.75 in 2001 to 1 in 2006, so I rerun the minimization with its later scores, only two of which change. Germany moves from outside the set of countries with prevalence of voluntary disclosures of executive base pay among its firms (0) to those that do (0.8619); it also moves into the set of countries with highly developed capital markets (from 0.3262 to 0.6845).

Unsurprisingly, the same complex, parsimonious and intermediate solutions return from this minimization, only with slightly lower coverage. The complex solution’s coverage decreases to 0.143, and that of the parsimonious/intermediate solution to

0.221, albeit at higher consistency of 1. Germany is still off the causal path that includes corporate scandals, failing now to appear in any of the revised solutions, leaving the low coverage scores of these paths to apply to the United States alone.

This path that applies to Germany and the United States introduces the importance of the absence of conditions in configurations. It is when voluntary disclosure of executive base pay is absent that left-leaning legislatures in Germany and the United States regulate the disclosure of executive base pay. This demonstrates a key advantage of QCA over multivariate regression, which would have not captured as readily the inclusion of a ‘missing’ variable.

Germany’s 2000 Bundestag was composed of a majority of right-leaning parties from 1990 until 1997. Although left-leaning parties regained majority control of the Bundestag from 1998 to 2008, the composition of interest for the causal condition was in 2000: 36 seats were held by the Party of Democratic

Socialism, 47 by the 90 Alliance/Greens, and the Social Democratic Party had the 231 largest number, 298, seats of any party in the Bundestag that year63. The right- leaning parties split 43 seats between the Free Democratic Party and 245 for the

Christian Social Democrats. The legislature held this composition from 1998 to

2001.

The German Corporate Governance Code maintained article 4.2.4 that executive base pay, as all forms of executive compensation, “shall” be disclosed.

“The recommendations of the Code are marked in the text by use of the word "shall". Companies can deviate from them, but are then obliged to disclose this annually. This enables companies to reflect sector and enterprise-specific requirements. Thus, the Code contributes to more flexibility and more self-regulation in the German corporate constitution. Furthermore, the Code contains suggestions which can be deviated from without disclosure; for this the Code uses terms such as “should” or “can”. The remaining passages of the Code not marked by these terms contain provisions that enterprises are compelled to observe under applicable law” (Foreword, German Corporate Governance Code of 2001).

This 2001 coding coincides with the “comply or explain” principle in force at that time, and for which the causal path is determined. That article changes in 2006, however, to reflect statutory requirements for disclosure: “The total compensation of each member of the Management Board is to be disclosed by name, divided into non-performance-related, performance-related and long-term incentive components, unless decided otherwise by the General Meeting by three-quarters majority.” The principle for disclosure effectively changes from “comply or explain” to simply “comply.” Nevertheless, it is the earlier, 2001, coding that I use as the first regulation for executive base pay disclosures because the Corporate Governance

63 The 2000 party alignment in the Bundestag is a causal condition of the 2001 regulation. 232

Code, although not statutory law, was the result of a government commission.

There exists a legal foundation to the Code, made by an amendment to the Stock

Corporation Act (article 161), which refers directly to the Code’s provisions, but which does not force companies to explain when they are non-compliant with provisions in the Code, only to disclose any non-compliance.

A prominent professor of corporate law at Frankfurt University, and author of the 2001 Report of the Government Commission on Corporate Governance, which documents the official recommendations to the government, provides key insight into the origin of the code. Prior to his commission to draft the recommendations, there were two previous corporate governance codes: the ‘Frankfurt Code’ and the

‘Berlin Code’, reflecting a mix of public and private interests. Then Chancellor

Gerhard Schröder wanted to install a government commission for corporate governance by consolidating these earlier initiatives. The purpose of the unified

Code, according to the professor, was to explain they two-tiered board structure and co-determination to foreigners. An important goal was less to regulate and more to explain. The inclusion of both suggestions and recommendations was added later by the Commission, a compromise among dissenting members.

This professor sees the Code now attempting to do things that are best left to the law: “disclosure doesn’t belong in the Code.” It also tries to achieve things under market pressure as if there were mandatory law, according to him. Nor does he believe that big supervisory boards, usually composed of twenty people, are good at setting pay levels. Such laws in Europe will work less effectively than in the US, 233 according to the professor, because countries can change home jurisdiction. A current member of the Commission for the Corporate Governance Code, contests this point. Disclosure of executive pay, for example, changed in the Code’s Article

4.2.4 from “should” to “shall” even though more than half of the thirty DAX companies did not want to see this change. Politicians found it easy to target these companies. Another Commission member, and Chief Executive of Porsche, threatened the Commission that if disclosure were to be required, he would call his friend “Gerhard” (as in then chancellor, Gerhard Schröder). Disclosure was therefore not to be required initially. For the professor, disclosure had to be required by law for the sake of transparency.

The two agree that some elements of the Code are becoming increasingly legally binding. Article 161 of the Stock Corporation Act is one example. Another is

Article 289 of the Handelsgesetzbuch (HGB), which as of May 2009 increased the disclosure requirements of listed companies’ corporate governance practices and executive compensation, albeit following the temporal period of this study. The

OECD Principles, though non-binding, are also being cited in German courts.

EU rules could plausibly transform corporate legal forms, but no big companies are thinking of doing this, according to the professor. The corporate form, Societas Europaea, for example, does not do away with Germany co- determination, but would create a smaller supervisory board. Allianz AG reincorporated as Allianz SE, which reduced the number of supervisory board 234 members from twenty to fourteen, and gave foreign members, particularly from

France and Italy, voting rights in addition to their consultative roles.

Another original member of the commission, currently of the Hans Böckler

Stiftung in Düsseldorf, and formerly on the Mannesmann Supervisory Board since

1994 (and then of Vodafone Deutschland, after its acquisition, until June 30, 2007), believes that the only way to force companies to comply with these provisions is to make them binding under law; the Code does not necessarily enforce. This commissioner disagrees with a questionnaire format to assess companies’ compliance, criticizing the check-box style of the questionnaire and, more importantly, that the Vorstand and the Aufsichtsrat can agree together to not disclose. He says there are some clauses where companies simply lie. The markets do not always sanction non-compliance either.

In 2009, this changed in German corporate law based on an EU directive discussed elsewhere in this chapter. Currently shareholders, including employee representatives, approve executive compensation, but there is disproportionate voting structure. Vodafone’s parent company basically set the standard for

Germany.

According to the author of “Corporate Governance in Deutschland und

Großbritannien,” based on a 2007 dissertation that focuses primarily on comparative legal history and board structure, there is a development of divergent systems of corporate governance between the United Kingdom and Germany. Two recent bills have been introduced that refer to the Code’s Article 4.2.2 regarding 235 executive compensation. This is currently done with the remuneration committee of the management board (Vorstand). This author asserts that the purpose of the

Code is simply to explain German corporate governance to foreigners, not to actually require much of German firms, and that there is persistent divergence of corporate governance in Europe because there are too many systems. “Stabilization does not require standardization.” He favors more legal changes because the Code has not often had a positive effect, whereas the law would be more effective than a voluntary code. He also does not think there is much differentiation among political parties regarding the Code. At best, the SPD might make laws faster.

A similar path occurs in the United States. From 1988 to 1990 the Democrats held a majority of seats in the United States House of Representatives with 260 out of 435 seats. Senate Democrats also held a majority during that time with 55 out of

100 seats. The overall left-leaning majority (57.4%) in the American federal legislative branch was used to calculate the 1991 “first” regulated disclosure of executive base pay in the United States. The caveat in the coding of this condition, like that for the outcome, is that the history of regulated compensation disclosures predates this study by several decades. In the 72nd Congress (1931 to 1933),

Republicans held a slim majority of 48 Senate seats while the Democrats held 47. In the 73rd (1933 to 1935), however, the Democrats regained control of the Senate with 59 seats, reducing the Republicans’ seats to 36. In the House of

Representatives, Republicans held a slim majority of 218 seats against the

Democrats’ 216 in the 72nd Congress. As in the Senate, the Democrats regained the 236 majority in the House of Representatives in the 73rd Congress with 313 seats while the Republicans held 11764. This political shift is indivisible from the aftermath of the Great Depression and the emergence of the New Deal, which created the US

Securities Exchange Commission and executive compensation disclosure in the

United States. Although the 1991 figures were used in the QCA, the results would be unchanged if the 1933 figures were used instead.

The United States has a longer history of regulating the disclosure of executive base pay, among other forms of compensation, than any of the other cases.

It is also the lone exception to regulating executive compensation disclosures before the focal time period of this study. Although basic executive compensation disclosure has been required since 1933, substantially revised rules did not appear until 1992. Schedule A, item 14 of the original 1933 Securities Act required the disclosure of remuneration paid to officers of the company, “naming them wherever such remuneration exceeds $25,000” during the current or preceding year. In 1938 the Securities Exchange Commission had promulgated its first requirements for executive compensation disclosures in proxy statements. Over the years, several mandates have appeared that continued to add or modify executive compensation disclosure. In 1992, the SEC made sweeping changes to the forms of such disclosures by requiring detailed contents of summary compensation tables paid to executives during the three previous fiscal years. These tables required companies

64 The left-leaning Farmer-Labor party held one seat in both chambers during the 72nd Congress, and one seat in the Senate plus five seats in the House of Representatives during the 73rd Congress. 237 to disclose, of course, more than just executive base pay and shareholdings. The re- baptized regulation, 17 CFR § 229.402 requires “clear, concise and understandable disclosure of all plan and non-plan compensation awarded to, earned by, or paid to the named executive officers” of the principal (chief) executive officer, the principal financial officer, the other three most highly compensated officers of the company.

The regulation was revised again in 2006 and 2008, but not to materially affect the coding of the outcome in this study.

Australia, China, France, and India also regulated the disclosure of executive base pay but through different causal pathways. Australia is in the clear membership of all conditions except left-leaning legislatures. This was in effect the exact opposite course of the other regulators, especially its prevalence of voluntary executive base pay disclosures. China has widespread disclosure of executive base pay and a certain left-leaning legislature, at least in nominal terms. France similarly had a left-leaning legislature leading up to its 2005 regulation of executive base pay, but presence of voluntary disclosure of executive base pay. India began regulating disclosure of executive compensation in 2000, although it did not have prevalence of voluntary practice among firms nor did it have a left-leaning legislature. At least one other condition had to combine in a causal pathway; of those, only Germany and the United States have the necessary absence of voluntary pay disclosures at the time of their regulation.

Germany and the United States regulate companies’ disclosure of executive base pay when companies do not previously disclose such information and when 238 these countries had left-leaning legislatures. France joins Germany and the United

States to regulate companies’ disclosure of executive stock options; the casual path similarly includes the absence of voluntary disclosure and left-leaning legislatures prior to regulation, as well as the absence of corporate scandals related specifically to executive stock options. In these two types of executive compensation, the absence of certain conditions, namely voluntary practice or related corporate scandals, is still causal. When combined simultaneously with the presence of left- leaning legislatures, they explain between one-third and one-half of the regulation in up to half of the regulating countries.

The disclosure of executive shareholdings had a similar causal path comprising the absence of voluntary disclosure and left-leaning legislatures, as well as the absence of cumulative regulation by the other countries in this study. This is partially because the United States precedes the other cases in the required disclosure of executive compensation, which also precedes the focal time period of this study. The path to regulation of executive shareholdings is unique to this single case. The United States is also the only country that regulates prior to this study’s intended period of analysis. However, the same conditions hold for the United

States in both the original year of regulation, 1933, as well as the start of the temporal period of this study, 1990.

Further research on the full legislative history linking party agenda to regulation might elucidate precise efforts by elected officials of left-leaning parties in Germany and the United States to enact related legislation. There is also a 239 potential gap between such legislation and the regulation of executive compensation disclosures by state agencies to enforce and monitor corporate disclosures of this, or other, kinds. Nevertheless the salient findings of this analysis demonstrate that the presence of majority left-leaning parties in legislatures combines with the absence of firms’ voluntary disclosure of executive compensation to lead to regulation.

Regulation of Executive Shareholdings

Unlike its related form of executive compensation, base pay, shareholdings do not follow any causal path of sufficient coverage. The scores for the outcome and conditions appear in Table C.3.

Table C.3 Scores for Conditions and Regulations: Executive Shareholdings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

Listing rules and corporate scandals had sufficiency and necessity scores of 0 each for the outcome and were excluded from the QCA outright. The remaining 240 conditions were used in the minimization procedure that resulted in the solutions in

Table C.4.

Table C.4 Paths to Regulation of Executive Shareholdings ./0( 4-,5*&( )"%*+,"-( 9"+/%( 9"+/%( !"#$%&'()"%*+,"- !"1&2/3& !"1&2/3& !"-6,6+&-78 !"*-+2,&6 !"1&2/3& !"-6,6+&-78 $2/7:+,&6:;<=9:>,3>:7*#2 ?@AAB ?@AAB ?@CCC 4)D ?@AAB ?@CCC

E/26,#"-,"*6()"%*+,"- ./0( 4-,5*&( )"%*+,"-( ;<=9:7*#2F ?@BAA ?@?CG ?@HHH 4)D ?@BAA ?@B?L +,&6:7*#2 ?@AAB ?@??? ?@AGI

J-+&2#&K,/+&()"%*+,"- $2/7:;<=9:7*#2 ?@BAA ?@BAA A@??? 4)D ?@BAA A@???

The complex and intermediate solutions provide the only paths with good consistency scores. However, coverage is particularly low, explaining less than 25% of the outcome, and for a single country. Even adjusting for Gemany’s modest increase in outcome in 2006, from 0.75 to 1, and the related scores for the conditions that year, no improvement to the consistency and coverage scores occurred. The same paths, case (United States) and consistency scores resulted, but with slightly lower coverage for the complex solution, i.e. 0.106 down from 0.112, and in both the intermediate and parsimonious solutions, i.e. 0.200 down from

0.211.

It is possible that yet other conditions would better explain the regulation of executive shareholding disclosures. It is further possible that this particular form of compensation varies too greatly in its outcome to be accurately measured in current form. For example, shares can be held in myriad ways and for multiple reasons that just as a form of compensation. Other regulations as to minimum amount of shareholdings for certain executives, e.g. family-held companies, could sit opposite 241 maximum thresholds for executive share ownership. In the United States, the regulated disclosures date back early in SEC history, so are perhaps unique among the other cases. Although this particular form of shareholder compensation does not follow a logical path to regulation for any other cases, a similar form of equity- linked compensation for executives does in the next section.

Regulation of Executive Stock Options

Table C.5 presents the scores of the five causal conditions and the outcome for each country-case as per the regulation of executive stock options.

Table C.5 Scores for Conditions and Regulations: Executive Stock Options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

A similar finding in the regulation of executive stock option disclosures occurs in that for executive base pay. Specifically, the role of left-leaning legislatures is prominent in this practice but in combination with different causal conditions. The complex solution comprising the sole path with a sufficiently high consistency score, prac•scan•ties•LEFT•high indicates that indeed the absence of the other causal 242 conditions, when combined with left-leaning legislatures, leads to regulation. The parsimonious solution includes both prac•LEFT and LEFT•high. Despite the few number of cases with nonzero values for SCAN, it is not an easy counterfactual to eliminate. TIES are, however, easy counterfactuals to eliminate in the intermediate solution because they were eliminated in the parsimonious solution. A single path with a sufficiently high consistency score comprises the intermediate solution, as indicated in Table C.6.

Table C.6 E/+>6(+"(.&3*%/+,"-("Q(<'&7*+,1&()+"7R(S$+,"-6 ./0( 4-,5*&( )"%*+,"-( 9"+/%( 9"+/%( !"#$%&'()"%*+,"- !"1&2/3& !"1&2/3& !"-6,6+&-78 !"*-+2,&6 !"1&2/3& !"-6,6+&-78 $2/7:67/-:+,&6:;<=9:>,3> ?@ABC ?@ABC D@??? =2/-7&M(N&2#/-8M( ?@ABC D@??? 4)O E/26,#"-,"*6()"%*+,"- / $2/7:;<=9F ?@GBH ?@DBD ?@IDB =2/-7&M(N&2#/-8M( ?@PJG ?@HHG ;<=9:>,3> ?@CIC ?@?HJ ?@IAH / 4)O

K-+&2#&L,/+&()"%*+,"- $2/7:67/-:;<=9 ?@GBH ?@GBH ?@IDB =2/-7&M(N&2#/-8M( ?@GBH ?@IDB 4)O

!!!"!#$%&'%!(!)*)+,!-$."/0&!(!)*1+2

France, Germany, and the United States share the path, prac•scan•LEFT. Again, the presence of left-leaning legislatures, combined with the absence of voluntary disclosure of stock options by companies, and even the absence of related governance scandals, explains a considerable portion of the outcome, almost half in the regulation of executive stock option disclosures.

A similar revision to Germany was made for the regulation of executive stock options as for executive base pay. As I explain in Chapter 4, the changes in German regulation apply to both types of executive compensation. The later, 2006, values for Germany’s casual conditions remain the same except for HIGH, which increases 243 from 0.3262 to 0.6845. This particular change results in Germany’s removal from the causal path in the complex solution that returns from this revised minimization.

Consistency remains the same and coverage decreases slightly to 0.266. Results for the parsimonious and intermediate solutions, both of which do apply to Germany, improve slightly. The parsimonious solution has only one path, prac•LEFT, instead of two, and with coverage of 0.5 and consistency of 1. The intermediate solution, prac•scan•LEFT, has identical scores. As in the original minimization for this practice, the absence of voluntary practice and stock option scandals combine with the presence of left-leaning legislatures to lead to regulation.

To engage an additional thought experiment, I re-evaluated the paths in the

QCA for all of the governance practices after recoding China’s legislature. In the original coding, I had considered China’s legislature to be 100% left-leaning for all years owing to the nominally communist majority in the People’s National Congress.

However, it is plausible that Chinese communists are capitalists in practice, so I recoded the legislature as 0.5 for maximum ambiguity in fuzzy set terms, as well as

0 for entirely right-leaning. The regulation of executive stock options is the first governance practice in which any change to the paths was found. Specifically, the same path for American and German regulation, prac•LEFT, results in the intermediate solution with slightly higher unique coverage (0.201 up from 0.171), which is negligible. No change to the results of the complex or parsimonious solutions occurred. A new path in the intermediate solution emerged, however.

Applying again only to German and the United States, ties•LEFT was an alternative 244 path, with raw coverage of 0.365 and consistency of 0.800. This implies that that absence of stock market ties between American or German exchanges and all others combined with the presence of left-leaning legislatures to lead to the regulation.

The difference between these paths in the revised intermediate solution is not statistically significant. Even when I recoded China’s legislature as 0 to indicate

100% right-leaning, the same paths returned with even lower coverage and consistency scores. Moreover, the original has a higher consistency level suggesting that the recoding of China as having an ambiguously centrist legislature is insignificant to the original QCA model. This experiment should not suggest that

China’s legislature is insignificant as currently coded, rather that the original coding as predominantly left-leaning combines with the values of its other conditions to have little impact on the path to regulation in Germany and the United States.

The concurrent absence of voluntary disclosures of executive stock options, and the lack of related executive stock option scandals, combines with a left-leaning legislature to produce required disclosures in France, Germany, and the United

States. This path explains nearly half the outcome of regulation. Below I discuss the paths and suggest other causes that possibly explaining the remaining portion of the outcome unexplained in the QCA.

The absence of executive stock option scandals was co-requisite for regulation in France, Germany, and the United States. Left-leaning legislatures in these countries were unfazed by the lack of stock option scandals or the lack of voluntary disclosure thereof: they drafted legislation to require disclosure of 245 executive stock options nonetheless. Their regulation might be considered more preemptive of the very types of scandals that regulators—or at least those authorized by left-leaning legislatures—assumed possible.

The left-leaning legislatures and regulations for both Germany and the

United States apply equally to the executive base pay disclosures as well as to that for executive stock options.

In 2001, the French legislature’s political makeup was handsomely left leaning. The Socialists held 250 seats in the National Assembly. The Rally for the

Republic (RPR) held 140, the Communists 36, and various radical and green parties together held 33 seats to round out the left-leaning block in the chamber wherein the center-right Union for French Democracy (UDF) held only 113 seats. Meantime in the Senate, the RPR held 96 seats, the Socialists 83, and Republican, Communist, and Citizen held 23 for a total of 202 seats while the center-right held just 72, split

53 between the Centrist Union and 19 for the Democratic and European Social Rally.

The regulation in France is found in Articles L.225-102-1 of the commercial code, which requires full disclosure of all forms of compensation per recipient executive.

Australia, China, and India regulated this practice before 2008 but each followed a different path. Australia and China had widespread prevalence of voluntary disclosure of executive stock options, though India did not. Of the three, only China can be considered as having left-leaning legislatures prior to regulation but because of its prevalence of voluntary disclosure, does not follow the same path as France, Germany, and the United States. 246

There is great similarity between the causal paths and outcomes, as well as their cases (except for France), in the two executive compensation-related practices.

Both can be sufficiently described as the absence of voluntary disclosure of these two types of executive compensation and the presence of left-leaning legislatures in the years prior to regulation. Germany and the United States follow the same path in regulating disclosures of executive base pay; France joins them in the regulation of executive stock option disclosures.

I did not analyze all forms of executive compensation. Nor could I map the causal path of the regulation of executive shareholding disclosures across the cases.

Other forms of compensation are perhaps more elusive and less comparable across countries and companies. Certainly some of these regulations were created in response to companies remunerating their executives in financially creative ways.

Further, there is some variation as to what companies are willing to disclose and the responses such disclosures can generate: disclosures have not reduced total executive compensation in any of the cases!

Balanced panel data for cross-country executive compensation over this time period is elusive, although a few points are known generally. From 2000 to 2006, equity-based pay among American CEOs increased while base pay decreased sharply, and other advanced economies have tentatively converged towards a similar pay structure (Fernandes et al. 2009). Stock options, which were previously illegal in Japan until 1997 and in Germany until 1998, have become a widespread form of executive compensation. Samples of British firms in the FTSE 350 index 247

(141≤N≤328) between 2002 and 2008 indicate that turnover of compensation consultants correlates positively with increased executive compensation (Goh &

Gupta 2010); samples of American firms across different industries in 1993

(N=218) and in 2002 (N=232) indicate that the frequency of compensation committee meetings and overall board size are positively correlated with transparency of executive compensation disclosures. My study stops short of comparing base pay and equity-based compensation, i.e. shareholding and stock options, but the evidence suggests that regulated disclosures have had varying success in keeping pace with new forms of pay. French law has had a prescriptive requirement for disclosing all forms of executive compensation regardless of form, whereas American regulations for decades reacted to the emergence of diverse forms of pay, incrementally honing the specificity of compensation disclosures. I looked at corporate governance scandals, as reported in the media, as a causal condition. The absence of scandals related to stock options is a co-factor in the regulation of stock option disclosures. On a related point, Core et al. (2008) find no support in the media’s negative reporting of CEO compensation—even if this is not necessarily ‘scandalous’—as altering CEO compensation levels.

Disclosure of executive compensation, of both base pay and stock options, was regulated in Australia by 2004, albeit not through the causal path that France,

Germany and the United States share. Australia took similar steps to the United

States by first consolidating states’ regulatory oversight of securities at the national level (1991), then developing broad regulations for listed companies under 248 enhanced powers for regulation (2001) 65 , including required disclosures of executive compensation (2004). Yet Australia’s regulation occurs well after the

United States and cannot be explained by the causal path that describes American and German regulation of executive compensation disclosures. Other causes unique to Australia and the United States are plausible. Among common law countries,

Australia and the United States have exceptionally high portions of their securities regulators’ budgets devoted to enforcement coupled with criminal sanction (Coffee

2007). This particular feature of their regulatory environments could be either condition or outcome, depending on the direction of causality, but it certainly sets these two cases apart from the others.

Hill (2005) argues that in the post-Enron era, it is the law that drives corporate governance norms in the United States whereas previously it was the norms driving the law. She cites other evidence that in Europe, calls for independent directors might be resisted because concentrated share ownership prevails; likewise in Asia, the “outside” director might prevail over the UK/US-style

“independent” director. “[O]ne development in Australia that has strengthened the enforcement of directors’ duties is the increasingly strategic use by the Australian

Securities and Investments Commission (ASIC) of the civil penalty regime as a regulatory mechanism” (Hill 2005: 402). Seldom used previously, the 2001

Financial Services Reform Act strengthened the ability of ASIC to prosecute market misconduct. The Corporate Law Economic Reform Program (Audit Reform and

65 See the Australian Securities and Investments Commission Act 2001. 249

Corporate Disclosure) Act 2004 (also known as CLERP 9), following the HIH and

One.Tel scandals, strengthened ASIC’s hand by requiring a lower standard of proof for offense than criminal prosecution66.

“Previously, executive remuneration had been viewed as a classic corporate governance problem, necessitating a range of regulatory techniques to reduce or eliminate managerial self-interest, such as fiduciary duty liability, use of independent directors, remuneration committees, or greater shareholder control. Under the new paradigm, however, executive remuneration was not seen as a corporate governance problem, but as a solution—it was recast as a corporate governance technique in its own right” (Hill 2005: 409).

My results on the regulation of executive compensation disclosures in France and

Germany echo Hill’s argument about the Australian case. The Australian scandal that I included in this study, HIH, was key in corporate governance reform. CLERP 9

(as opposed to earlier sets of CLERP reforms) “was explicitly aimed at addressing the failures that had been exposed by the collapse of HIH. It was reactive more than proactive” (Haines 2009). She further points out Australian corporate governance shifted from self-regulation to co-regulation, i.e. the government with professional accounting bodies, no longer just these.

Based on my findings across the different corporate governance practices, I concur with Hill’s thesis that regulatory outcomes across countries, even those nearly identical in legal reform, could still be vastly different in interpretation and enforcement. My overall findings likewise contribute to the related debate about the convergence of capital markets despite persistent regulatory divergence.

66 I document these scandals in the Australian case in chapter 2 as well. 250

Regulation of Fees for Audit Services

The problem of limited diversity—when logically possible configurations have no empirical cases—is especially acute in the QCA of fees for audit services.

Only two countries came to regulate the disclosure of audit services, Canada and

China, and no configurations of causal conditions explain the outcome in these two cases. The scores in the sufficiency/necessity matrix in Table 3.14 partially explain why. Values closer to 1 for conditions indicate degree of importance in either sufficiency or necessity (Goertz 2006). Not one condition, however, is causally sufficient and only membership in highly developed capital markets is causally necessary.

Table C.7 Sufficiency / Necessity Matrix of Causal Conditions: Audit-Fees !"#$%&'$( !"#$%&'() *+,- .!/0 ,0/1 -+2, *23- 4+54 067! 067! 8 9 8 9 9 8 9:;9; 8 4+54 9:8<= 9:9=9 9:>>? 9:88= 9:;@< 9:<@= 8 9:9?9 *23- 9:A;9 9:B99 9:=?@ 9:B99 9:;9@ 8 9:>9? 9:B99 -+2, 9:8<= 9:8?> 9:==> 9:88@ 8 9:;9A 9:=;> 9 ,0/1 9 9 8 8 9:;=8 8 8 9 .!/0 9:B99 9:88A 8 9:88; 9:;@@ 9:;;< 9:>;< 9:88; *+,- 8 8 8 9 8 8 8 9 !"#$%&'() 8 9:

Further this governance practice, and the limited regulation thereof, possibly overlaps with another large area of law, namely tax law and accounting rules and standards, which have plausibly other overlapping conditions apart from the ones specified for the other governance practices.

251

Regulation of Fees for Non-Audit Services

Similarly, fees for non-audit services have no feasible solution sets. Table C.8 indicates overlapping necessity scores for voluntary practice and left-leaning legislatures, yet none of the conditions is causally sufficient. Moreover, China is the only country to regulate the disclosure of fees for non-audit services.

Table C.8 Sufficiency / Necessity Matrix of Causal Conditions: Non-Audit Fees !"#$%&'$( !"#$%&'() *+,- .!/0 ,0/1 -+2, *23- 4+54 4+54 67689 67:;< 67=>? 67;;= 678=> 67<>8 ; *23- 67:66 67<66 679?= 67:66 6786= ; 67>:? -+2, 6 67:9@ 67>68 67;;= ; 6786@ 679=? ,0/1 6 6 ; ; 6789; ; ; .!/0 67;:9 67:8= ; 67;:9 678:< 67?:< 67>?@ *+,- 6 ; 67998 6 67=@> ; 679;: !"#$%&'() ; 6 ; 6 6 ; 67868 )&$&**%+(

Because only one country regulates this practice, there is no cumulative regulation condition specified for this practice. Fees for audit and non-audit services have no explanatory paths in this fsQCA, and so have reached the end of their proverbial roads.

Regulation of General Corporate Governance Disclosure

Table C.9 presents the scores of the causal conditions and the outcome for each country-case as per the regulation of general corporate governance disclosure.

Like director independence, the regulation of general corporate governance disclosure includes six causal conditions in the complex solution, albeit different conditions. 252

Table C.9

Scores for Conditions and Regulations: General Corporate Governance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

Table C.10 indicates the complex, parsimonious, and intermediate solutions.

Interestingly, it is the absence of five conditions, combined with the presence of one—stock market listing rule—that leads to the outcome in the complex solution.

However, that outcome is only in India, which was also the first among its peers to regulate general corporate governance disclosure. The parsimonious solution contains two paths, LIST•prac and left•high, both of which only to India, but the difference between these paths is not statistically significant.

The easy counterfactuals to eliminate for deriving the intermediate solution are, of course, SCAN, LEFT and CUMR. This elimination brings back the importance of voluntary firm practice into the resulting intermediation solution. In the first path, list•PRAC•HIGH, which applies to China and France, it is the presence of voluntary practice when coupled with highly developed capital markets, and the absence of stock market listing rules, that leads to the outcome. Conversely, for 253

India it is the presence of stock market listing rules combined with the absence of voluntary practice that produces regulation.

Table C.10

G/+>6(+"(.&3*%/+,"-("=(M&-&2/%(!"2$"2/+&(M"1&2-/-7&(R,67%"6*2& ./0( 4-,5*&( )"%*+,"-( 9"+/%( 9"+/%( !"#$%&'()"%*+,"- !"1&2/3& !"1&2/3& !"-6,6+&-78 !"*-+2,&6 !"1&2/3& !"-6,6+&-78 :;)9<$2/7<67/-<%&=+<>,3><7*#2 ?@ABA ?@ABA ?@CDE ;-F,/ ?@ABA ?@CDE

G/26,#"-,"*6()"%*+,"- :;)9<$2/7H ?@III ?@?EA ?@CCA / ;-F,/ ?@IEA ?@JCB %&=+<>,3> ?@I?? ?@?IC ?@JEB /

;-+&2#&F,/+&()"%*+,"- %,6+,-/O(P2/-7& ?@E?A ?@CQE :;)9<$2/7 ?@III ?@III ?@CCA N ;-F,/

!!!"!#$%&'%!(!)*+,-!.$/"01&!(!)*234 !!!5!!#$%&'%!(!+*6+-!.$/"01&!(!)*37,

The paths in the complex and parsimonious solutions highlight the problem of highly limited diversity in QCA. India is the only country to which these paths apply. More important, however, is the need to identify intermediate solutions. In this instance, this identification revealed two paths (although not statistically significantly different) that include more conditions than the parsimonious solution would have us believe are causal, and that apply to more cases. The consistency and coverage scores for the intermediate solution, as a whole as well as in its component paths, is a welcome improvement over either the complex and parsimonious solutions. Using China’s alternative coding for its legislature, as either 0.5 or 0, there is no change to the complex or intermediate solutions above. A minor increase in the coverage (from 0.200 to 0.310) and consistency (from 0.753 to 0.826) results for 254

India’s path in the parsimonious solution. Otherwise, and like the experiments with the paths in the regulation of disclosures of executive stock options and auditor independence, the recoding of China’s legislature has negligible impacts on the paths to other countries’ regulation. Notably, China does not join the path to regulation of any of these practices when its legislature is recoded.

The regulation of general corporate governance disclosure occurs in half the countries, three of which can be explained by one of two causal paths: the absence of a stock exchange listing rule plus the presence of both voluntary practice and highly developed capital markets, or the presence of a stock market listing rule and the absence of the practice. The latter path applies uniquely to India, which does not make for comparison. The former applies, however, to both China and France. The path to regulation of general corporate governance disclosures reveals common causes yet suggests diversity of corporate governance regulations, and their sources, persists.

The notable absence of stock market listing rules to disclose general corporate governance at firms in China and France is equally important to the subsequent regulation in these countries. This point might serve to reinforce institutional similarities among the Anglo-American countries, whereby non-state capital markets actors play heightened roles in the formation of rules, at least initially. Conversely, countries with more state-centric rulemaking, like China and

France, might be averse to letting stock markets make up their own rules. These countries did not craft regulation on their own, however. China specifically looked 255 beyond its borders for the template of those rules, regardless of whether they were state-originated or market-originated, but without the Chinese government’s backing, the rules would have no meaning. It was a supranational body, the

European Union, that influenced French regulation to require corporate governance disclosure, and was itself largely influenced by a particular member state, i.e.

Germany, to formulate regulations. I only considered stock market listing rules as additional to the requirements already set by securities regulators, and only as conditions for new regulations. Future studies could consider listing rules as an outcome for comparison to other regulations, both extant and new67.

The prevalence of voluntary disclosure of general corporate governance among the companies of each regulating country is a causal condition as part of the path to regulation. In China, all 155 of its listed companies were disclosing at the time of the 2007 regulation. China was barely in the set of countries of highly developed capital markets, compared to the other nine focal, its cumulative percentage of its GDP derived from capital markets was 37.5% in 2008.

The China Securities Regulatory Commission (CSRC) issued Notice No. 28 in

2007 on “Matters concerning Carrying out a Special Campaign to Strengthen the

Corporate Governance of Listed Companies” describing the implementation of a general investigation of corporate governance at listed companies. This campaign of governance improvements required companies to first self-examine their

67 I conducted the QCA using the listing rules as outcome but very low scores of the conditions appeared on sufficiency/necessity matrix and no possible solutions resulted for any of the governance practices.

256 governance weaknesses, solicit public opinion on improvements, and report their rectification steps. Whether the required improvements to Chinese corporate governance were cosmetic, the risk of non-compliance was made clear by the CSRC:

“As to a listed company with problems in its governance structure and the controlling shareholder or actual controller that gravely affects the independency or infringes the interests of the listed company, the CSRC shall keep a close eye on their refunding, share transfer, acquisition and merger, restructuring, etc.”

The CSRC issued Notice 212 in 2007 revising the format for listed companies’ annual reports, implementing a “more than less” principle for corporate governance standards at mainland companies with overseas listings: Article 8 stipulates that these companies must comply with the strictest standards of the exchanges on which they are listed, and publicize such in their disclosures. Section 6, “Corporate

Governance Structure” articles 27 to 31 require multiple disclosures pertaining to director independence, specialized committees, executive compensation, internal control mechanisms and disclosures.

Although the CSRC promulgated its own Code of Corporate Governance for

Listed Companies in 2001, it was largely influenced by the Hong Kong Stock

Exchange listing rules. This juridification of external corporate governance standards in mainland China may have been necessary for the standards to have any salience. As an official of the Shanghai Securities Exchange (“SSE”) Research Center claims, voluntary practices rarely become rules in China; rather the rules come first.

The CSRC’s code originated in the SSE’s 1999 draft code, begun in 1997 and based 257 largely on the OECD’s draft of the Principles of Corporate Governance, as well as on the Combined Code and Cadbury Reports in the United Kingdom, and what

American firms were already doing voluntarily, influenced mainly by institutional shareholders. He claims that the framework is borrowed but that the adaptation process is specific to governance problems in China.

In China, evidence suggests that regulation stems additionally from foreign influence, namely American stock exchange listing rules and British corporate governance codes. A Tsinghua University professor of corporate law notes that many Chinese graduates of American management and law schools came back to

China and used their education as background for drafting Chinese corporate governance. One of them became the deputy director of the China Securities

Regulatory Commission, now head of its international affairs division. According to the law professor: “Their original objective was to transplant and rewrite Chinese securities law.”

71 of 75 French companies were voluntarily disclosing their general corporate governance practices when the state began requiring the same practice in

2008. France was certainly in the set of countries with highly developed capital markets when it regulated general corporate governance disclosure in 2007.

French regulation was a transposition of a European Union directive, as was its regulation of specialized committees. The EU directive was partially influenced by other member countries, namely Germany and the United Kingdom, even though their regulation of general corporate governance each followed alternative paths. 258

The Act of 3 July 2008 amends various aspects of French company law in order to comply with EU law and transpose Directive 2006/46/EC, which requires that companies identify which EU national corporate governance code that they adopt and provide an explanation for any provisions they have chosen not to apply. This also transposed the “comply or explain” principle into French regulation of general corporate governance disclosure.

The presidents of both French business associations, AFEP and MEDEF, commissioned a corporate governance report in 2002, “Pour Un Meilleur

Gouvernement des Entreprises Cotées,” 68 which became the standard French corporate governance code. The result of previous reports in 1995 and 1999, the compiled 2003 version was written by then president of French bank, Société

Générale. It addressed issues not then covered by French law, such as specialized board committee functions and the independence of various market actors impinging on listed companies. The author claimed that the report was intended to provide greater transparency for investors. There was a risk, however, that the addition of a governance practice or recommendation becomes an end in itself:

“Toute norme peut être vérifiée dans le box-ticking,” he claimed, which could preclude more serious inquiry into governance. According to him, the later 2008 version, which was revised by AFEP and MEDEF to include additional recommendations on executive compensation, errs by overemphasizing director independence, which the

68 The primary author later preferred the use of the term gouvernance to gouvernement because, according to him, the latter refers only to the constitution of a company whereas the former refers to that as well as to best practice. 259 author argues has no miracle recipe for achieving. There are so called independent directors, he regrets, who are “admirablement incompétents.”

The German case would have been included in the analysis had it transposed

EU Directive 2006/46 into national law just one year earlier. As for the causal conditions returned, Germany would have been in the set of companies where voluntary practice was prevalent. Although at the first year of regulation, 2001, only

11 of 64 German companies voluntarily disclosed their corporate governance practices, they dramatically increased to 62 companies disclosing out of 64 by 2008, as would be expected with the “comply or explain” principle. Even if Germany had transposed the EU directive just one year earlier, it would not have changed the outcome score of 0.75. The initial coding took place in 2008. However, as a note of refinement for future QCA research involving temporal and sequential conditions, this points to an area of methodological advancement.

An alternate path for India is described, in contrast to the path for China and

France above, as the presence of stock market listing rule and the absence of voluntary corporate governance disclosure. The Securities and Exchange Board of

India (SEBI) commissioned corporate governance committee in 1999, chaired by one of its own board members, Shri Kumar Mangalam Birla. In 2000 the committee requested changes to the listing agreements at both the Bombay Stock Exchange and the National Stock Exchange of India by introducing a new clause. “The Report

On Corporate Governance In The Annual Report Of Companies” otherwise known as

“Clause 49” has a list of suggested disclosures on other practices analyzed here, 260 namely specialized committees and director independence, among others.

Additionally, Clause 49, Annexure 2, item 1 suggests that listed companies file a

“brief statement on company’s philosophy on code of governance.” These non- mandatory items "should be specifically highlighted."69

India’s regulation also comes from SEBI. Its Disclosure and Investor

Protection Guidelines of 2000 requires companies to disclose in their prospectus adherence to general corporation governance guidelines (Section 6.9.5.3) 70 .

Although termed “Guidelines”, they do not adhere to a semblance of the “comply or explain” principle as in other countries’ regulations; SEBI itself calls these

“instructions” in the definitions of terms in the Guidelines. For this reason, I assign the score of 1 for this outcome. In this causal path, it is notably the absence of voluntary disclosure of general corporate governance by Indian firms. In 2000, only

30 of 84 Indian companies (35.7%) voluntarily disclosed their governance, corresponding to a fuzzy set score of 0. The path returned in the intermediate solution, however, has low coverage and applies to only India.

69 Recall that the coding for stock market listing rules takes a crisp set score of 1 for such disclosures suggested, but not required, by stock exchanges, whereas regulation incurs a multi-value score of 0, 0.25, 0.75 or 1.

70 Section 6.5.9.7A, inserted in 2007, specifies further that companies must supply “[A] disclosure to the effect that the issuer has complied with the requirements of Corporate Governance contained in the Equity Listing Agreement, particularly those relating to composition of Board of Directors, constitution of committees such as Audit Committee, Shareholder / Investor Grievance Committee, etc.).” 261

A key insight into the early formation of India’s corporate governance reforms indicates its uniqueness compared to later reforms in other countries.

“Unlike governance reforms in many countries that arise as a result of major corporate scandals, the process of governance reforms in India was initiated by industry leaders. India’s first major corporate governance reform proposal was launched by the Confederation of Indian Industry (CII), India’s largest industry and business association (…) The CII Code was heavily influenced by corporate governance standards found outside of India [and] was a significant step forward for a country not then known for robust corporate governance standards. However, the CII Code’s voluntary nature did not result in a broad overhaul of governance norms and practices by Indian companies. Although the CII Code was welcomed with much fanfare and even adopted by a few progressive companies, many then- believed that ‘under Indian conditions a statutory rather than a voluntary code would be more purposeful and meaningful’” (Afsharipour 2010: 9).