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Keywords:

  • Corporate Governance;
  • Internal Controls;
  • Insider Systems;
  • Civil Law Systems;
  • Scandanavia;
  • Shareholders

ABSTRACT

Manuscript Type: Empirical

Research Question/Issue: It is proposed that informal governance mechanisms such as social control, in the form of norms and corporate networks, may complement formal governance mechanisms, such as laws, in providing investor protection.

Research Findings/Results: A comparison of stock markets and investor protection for Denmark, Germany, Italy, Sweden, the UK, and US shows that the Swedish stock market is larger and more vital than would be expected from an evaluation of its formal investor protections. Subsequent analyses show that Scandinavian business standards are of the highest level, with the UK, the US, and Germany close behind, and Italy last. Comparison of owner networks using small world methodology show that whereas Germany has the most connected network, Sweden has a far tighter one than Denmark, Italy, the UK, and the US, being the least connected network of all.

Theoretical Implications: The findings suggest that social norms upheld in a close network may complement formal investor protection, but perhaps not substitute for it. Thus, more research on the importance of informal governance mechanisms is called for in addition to the study of formal ones.

Practical Implications: The results of this study strengthens the idea that there may not necessarily be one ideal corporate governance system, but that such systems develop historically according to path-dependent antecedents, with time finding their own balance. As such, the recent diffusion of Anglo-American corporate governance norms may prove upsetting to these systems, as their values may clash with already existing ones.