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 © 2011 Dennis Bogusz All rights reserved 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 i 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 ii References 170 Appendix A Coding of Firm Practices 186 Appendix B Coding of Legislatures 193 Appendix C Additional Corporate Governance Practices 228 iii 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 iv 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 v 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 vi 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